Lady Chicken
“Dear Steve,
I have just under 50k in student loan debt and 8k in unsecured debt. I will have paid off the 8k by June or July of 2009. My credit is horrendous and even though I have am now current on all bills I do have a credit file with a redeemed repo, three charge offs and many 30 plus days late.
I am strongly considering completely paying off all debt within 5 years and going cash for everything else? While I will work to make sure that any credit inaccuracies are removed, I am not going to stress myself out over bad credit. What’s your take should I forego credit completely and cash it just as the olden days?
Lady Chicken”
Dear Lady Chicken,
Surprisingly my answer is, “No”. It is not having or using credit that brought pain and got you into trouble in the past. It was that your liabilities exceeded your ability to pay them of if needed.
We live in a world that is dependent on us have things like a good credit report or good credit score. Those financial measurement tools are used to judge you for banks accounts, loans, a place to rent, car insurance, life insurance, employment, etc. If you end your credit life on a down note then that is the lasting record that will remain.
I remember this radio interview I did once with a station in Alaska. A caller said he had a problem. He hated banks and distrusted them so much in fact that he only lived on cash. He had $25,000 in cash hidden in his cabin and it burned down.
There are some easy ways to achieve both the goal of leaving you with a good credit score and protecting you from the consequences of debilitating credit.
Consider these options:
- Get a credit card but make sure it is a secured card, like these. A secured card generally reports to the credit bureaus to help improve your credit but in case you run into trouble, the deposit that you placed to get the card will pay your balance off and leave you with no residual bill.
- Put money in an old fashioned savings account that is paying you higher interest. While you forge a life where you pay for more things using credit you will not have credit to fall back on in case of an emergency that might be paid for with credit. A savings account will be critical to you in that case. You will need to try to accumulate several months worth of living expenses to protect you.
Good luck on paying off all the debt but remember to start putting money in your savings account now, even while you are getting out of debt. Take a look at the debt snowball approach way to getting out of debt, it’s a good one.
You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.
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You can avoid credit cards totally by just getting a debt card. This way you don’t buy things you can’t afford.
Before getting one of these “bad credit car loans” people should read the contract very carefully. Also they should figure out how much is the car really going to cost them with a 18% or 29% interest rate. A $10,000 car can end up costing you over $20,000 depending on your interest rate.
A lot of these type of loans have clauses in their contracts that state that you cannot increase you monthly payments to pay off the car faster. Also, there may be many other fees associated with these type of loans and you should find out about these fees. Don’t get yourself into a situation that you will regret later.