I've never met anyone with a credit problem who planned on not being able to pay her bills. Most people don't sit down and decide how to deceive a bank or a department store credit department. Rather, most credit problems result from one of two circumstances:
- Unforeseen events. Divorce, the loss of a job or unexpected medical bills is all very common reasons for negative credit. Most credit-granting institutions are willing to work with someone who is facing a catastrophic event, although even this is changing as bad loans rise and profits tumble.
- A lack of planning. Sometimes people spend without thinking about how they are going to pay their bills. As their credit grows, the number of unsolicited cards multiplies and their spending increases until they can no longer make their payments. By the time the realization of being in over their heads arrives, good credit is ruined and the borrower is unable to pay her debt, often forcing her into bankruptcy.
Prevention, rather than correction, is by far the best strategy for taking control of your credit. On the job, most people have a strategy for '"here they want to be at some future time; they have a plan and a time table. Couples often have an idea of approximately when they wish to have children and when they would like to be able to buy a house. In the same way, everyone should have a credit plan detailing how much credit they want and to what purpose. A good credit plan should be only l means, not an end. Credit is a tool-not an ultimate goal, as some -consumer credit advocates" would have you believe. It is a means of achieving your broader goals, like financing a car, buying a house, investing in real estate, starting a business, or augmenting your lifestyle. Gathering credit cards simply to be able to spend more is a path to financial destruction.
MAKING A PLAN
Credit planning begins with a budget Creating a monthly budget not only helps you plan for your credit needs but can also help you track exactly how much you spend and where it is spent. Take out your checkbook and your latest credit card statements and add up how much you spent last month in the following areas:
Mortgage payment or rent Groceries Household utilities Car payments Insurance Credit card/other debt payments Entertainment Household (minor expenses) Childcare Gifts Publications Club dues Medical/dental Clothing Miscellaneous Savings Charity
Add up the total that you spent last month in each category. No" take last month's pay stubs and add up how much you made after taxes add in any other income you may receive on a fairly regular basis. Obviously, if your expenses (minus savings) exceed your income, you have a problem. You are either receiving more income than you are showing or using debt to finance your lifestyle. The latter course is a very dangerous one and will eventually catch up with you. In the column next to the one you just made, write in how much you think you should spent in each area. Add up the total; if it exceeds your income (minus saving! Of course), go back and make cuts in discretionary areas. Some thing cannot be cut, like mortgage, rent, or debt payments, so focus on the categories that provide you with the least personal "return on your investment" This will be your blueprint you can now plan how to make use of credit For example, if your clothing budget is $200 per month but there is a sale at your local department store you don't want to miss, you can finance your purchase on your credit card and deduct the monthly payment from that particular column of your budget. If you are in need of a new car, you can restructure your budget to provide for a higher monthly payment. Manage your credit as you would any other asset. It's very difficult to keep a budget, but it is essential in order to keep your credit lines under control. The worst way to use a credit card is on a whim. Never buy anything unless it is provided for in your budget or unless you can rearrange your budget to payoff the item without adding any more expense than what you have already allotted.
If you avoid "negative cash flow," that is, spending more than you make, you will probably never need to use some of the other chapters in this book. If you have already had problems with your credit because of overspending, now is the time to begin budgeting, to insure that you never have the same difficulties.
HOW MUCH IS TOO MUCH?
Credit is a double-edged sword. The more you have, the easier it is to get. If you have too much, however, even if you don't use it, creditors will not lend to you. So how much is too much? Well, obviously, if the total of your potential monthly payments exceeds the income you show, that's too much as far as creditors are concerned. Home lenders will usually limit your debt payments to 40 percent or less of what you make, and in today's economic environment this is a prudent maximum.
When drawing up the payments column of your budget, calculate the maximum you would want to spend on credit card payments and stick to it. This doesn't mean you shouldn't have other lines of credit to use in case of emergency; just don't use those lines of credit. Resist the temptation to think of extra credit cards as "funny money." One woman went .so far as to put one of her two charge cards into a safe deposit box so that she wouldn't be tempted to use it. She wanted it only in case of emergency. You may not need to go to that extreme, but try to keep credit cards "out of sight and out of mind." Get out of the habit of using credit for small purchases. Sit down and decide how you would pay your living expenses and bills if you were to lose your job and not find another for two or three months. In a case like that, if you hadn't saved a lot, you might need to finance your living expenses for a time. Make sure you have those lines of credit available.
