If you have more bills than you do money to pay them, and you are being harassed by calls from collection agencies, it’s pretty obvious that you are in financial trouble. These types of problems don’t appear overnight, however, and it’s important to recognize the signs that you might be in financial trouble. This can help you avoid issues such as facing foreclosure or bankruptcy.
Recognizing the Signs of Financial Trouble
Most people will probably realize when they are in the red, but some may be in denial about the extent of the problem. There are a number of things to look out for that will tell you if you’re in financial trouble. Here are some of the major warning signs:
· Having to decide which bills to pay
· Regularly overdrawn on a checking account
· Can only afford to make the minimum payments on credit card bills
· Lacking an emergency cash fund
Some of these behaviors may have stemmed from bad habits, but they can quickly lead to digging a hole for yourself financially. Only paying or having the ability to pay the minimum balance on a credit card can lead to steep interest accrual and years of added debt.
On the other hand, not having an emergency fund is a more subtle sign of trouble. Many experts recommend that you have three to six months’ of income kept in a savings account. An emergency fund is important because it allows you to deal with unforeseen hardships. What happens if you lose your job and it takes months to find a new one? What if a serious medical condition prevents you from working and causes you to rack up large medical bills? Having an emergency fund is very important, and not having one is a sign that you might have some financial problems or are at risk for developing one.
How to Correct Financial Problems and Improve Your Credit Score
If you are struggling to pay your bills, or worse, if you have a negative cash flow situation, something needs to be done to correct the problem. The immediate response a lot of people have is “I need to earn more money.” If there is some way you can increase your income, that would certainly be helpful, but that is not a realistic option for most people. A more realistic solution would be to find ways to cut spending.
Cut Personal Spending
You will have to draw up a budget and make a list of all of your expenses. If your expenses exceed your income, you will need to make some cutbacks. You may have to cut back on some entertainment spending, like going out to dinner or going to movies. Another option may be to cancel your cable or satellite television service. You may have to shop smarter at the grocery store or start clipping coupons. Remember, when you work for every dollar, every dollar counts.
If you are having financial difficulties, your credit score is probably suffering as well. The problem with a low credit score is that it can make getting a loan exceedingly difficult. If you are able to get a loan or a line of credit, the interest rate may be much higher if you have a poor credit score.
Check Your Credit Report
When working to improve your credit score the first thing you need to do is get a copy of your credit report. You are entitled to a free copy of your credit report once per year, and you can get it by visiting www.annualcreditreport.com. It’s important to look over your credit report because it is not uncommon to find mistakes, and these mistakes could be the reason for a poor credit score. The good news is that the burden of proof is on the credit reporting agencies, so if you tell the agencies that there is a mistake on your credit report, they either have to prove that the negative item is legitimate or they have to remove it from your credit report.
More Ways to Improve Credit
In addition to correcting your cash flow problem and removing any mistakes that might be on your credit report, there are some other steps you can take to improve your credit score. One very important way is to pay your bills on time. When you have late payments or accounts in collections, it can have a very negative impact on your credit score.
It’s also important to keep balances on revolving credit accounts as low as possible. Having all of your accounts nearly maxed out will have a negative impact on your credit report while costing you a lot. However, if you are using only a small portion of your available credit, that could have a positive impact on your credit score.
Check your credit report on a regular basis. You will be looking not only for possible mistakes on your credit report but also signs of identity theft. If you are a victim of identity theft it can have a very negative effect on your credit report. Even if your credit card company straightens out the problem with your card, the correction may not have been reported to the credit bureaus. There are services that will monitor your credit report for you, but they can be expensive. Another option is to put a notice on your credit report that you are to be called for confirmation anytime a new account is opened in your name.
Following all of the tips outlined above may not be easy, especially when it comes to making spending cuts, but if you are able to follow these suggestions, you will be able to correct your financial problems and improve your credit score.