Tuesday, February 10, 2009

Mission #1: Get out of debt

So now that I am "settled" into my new job, I am turning my focus back to getting out of debt. I tried this a few years ago but I wasn't good at it at all. Too much was going on with my life and I was just a mess. But now, all that is over with. So I just want to give you my "steps" on how to get out of debt.

*Update 2016: The real first step should be to join a community aimed at helping you clear up your finances. The best one (by no surprise) is myFico Forums. This site will give you tips, clues, templates, and a ton of information on how to clean up your credit. I joined this site years ago and followed all of the steps and used their templates to send letters to lenders/debt holders. Then I joined Mint and tracked my spending habits to see where I was wasting money. THEN I joint Credit Karma to get my FICO score and to track my progress. The FICO score from Credit Karma is usually off but in your favor, meaning they show a lower score than what your score really is. But this is helpful because you can watch your score change here and use their tools to help clean up your credit.

1. Get a copy of your credit report. You can get one free copy from each of the reporting agencies once a year. The best way to request a free copy is to go here: https://www.annualcreditreport.com/cra/index.jsp
This site is the best. You can request your copies, view them online, or get them mailed to you. It's whatever. Just get a copy. (UPDATE: Request one report at a time. Stagger your request. You get one free per year from each agency, so request one from Trans Union, then in 3 or 4 months, request the next one, then in 4 months, the next one. Work on each report one by one. You will find that cleaning up the first credit report will help you with the second one. And by the time you get to the third one, you should have little or no things to fix or dispute)

2. Verify that your information is correct. And by this, I mean your name, address, SS, birthday...the basics. If you have random addresses that you never used, or different names, chances are some one *might* have stolen your information. You need to let the agencies now this information is not correct and/or that debt does not belong to you.

3. Verify your debt. Go through everything that is listed, and see if that debt is valid or not and whether it's really YOUR debt or not. The good thing about doing this online is if you see something that is NOT yours, you can dispute online. Companies usually have about 30 days to contact you about the debt (UPDATE for clarity: They are suppose to contact you within a month with the information on the debt). If they don't, the debt is removed. So if you see anything suspicious, do this. When I first got my credit report, there were about 5 things that I never did or heard of, I disputed them all and they got removed. They have not reappeared yet. This is the easiest way to boost your credit too.

4. Verify your collections. Look to see what is in collections (if anything) and decide what you want to do. Now you know the limit is 7 years, if you are within a year of the seven years, you could say fuck it. But if you do that, just don't talk to them or answer any correspondence or anything because that can retrigger your debt. You don't want that. Highlight the things that are newer, and work those out. I had two things in collection, both of them were hospital bills for $50. I was so ashamed. If yours are higher, you may want to contact the companies and work out deals. Pay off those collections and get them removed. Collections are the worst. (UPDATE: If any of the outstanding items are medical bills, pay those if you can. Then request for it to be removed. According to the law, medical debt cannot remain on your credit report once you paid it off in full or for an agreed upon amount. Medical debt is the easiest thing to remove from your credit report, but it also doesn't garner any interest like other bills, so you may have to prioritize.)

5. Organize your debt. I think the best method is to start with the highest interest and work to the lower interest items. It is much better to pay off the credit card with $500 at 15% than it is to pay off the $200 at 5%. You want to save money, not spend more money. So organize the debt from highest to lowest and start aggressively attacking the high interest debt. This means double up on payments, sacrifice, hustle...whatever. I have a part time online job (chacha) that I am devoting to paying off debt. And it's great. (UPDATE: ChaCha is dead, but I do work another online part time job that I use to pay for Spotify, waxes, and my lunch. It pays me around $200 a month and it's tutoring kids online.)

6. Save. Open up a separate savings account and start saving up money. I know some people say they can't but you can. Even if it's $5 a week, that's $20 a month, or $240 a year. It's a start. Interest rates aren't great but if you are with a credit union, once you get to $500, you can do a 6 month CD. Put that money into a CD and do it continuously. You can get the interest deposited into your account. (UPDATE: Put your deposits on auto-deposit.)

7. If your credit card is really bad, then open up a SECURED credit card at YOUR bank. You are already established at your bank, and the money to open up your credit card can be transferred from your accounts so you can consider your money in another type of savings account (most secured credit cards put your money in a interest bearing account. it won't be a lot, but it's something). Charge a few things each month, something small that you can easily pay off. Connect the card to your accounts for auto-pay so you don't even have to worry about it. I opened up one with a $500 limit (which means the bank holds $500 of your dollars) and charged $25 to $50 a month.

That's basically it. I don't have too much to say. I mean, I could say cut back on this and that, but it's a recession. You guys already know. But this is the BEST time to get out of debt and I'll tell you why, companies NEED money. They are willing to work out deals with you. Cleaning up your credit now guarantees that when the economy picks back up, you will be ready for it! (UPDATE: Full disclosure when I started with this method, my credit was low 600s. In less than a year with these simple steps, I got it to low 700s. Now it's above 720. My credit card limits have doubled.  Note...my credit score changed just by looking at the reports and working on it. I didn't cut back on spending, I didn't change my whole life, I didn't sacrifice anything. I literally just LOOKED at my report and tried to fix it. I wanted to pay off debt so I got a part time job to do so, but I didn't change my spending habits. This may NOT work for you but this is what I did.)