Paying Down Debt and Rebuilding Credit? Even on a Frugal Budget It’s Possible!
Being a frugalista is more about being creative than it is about minimalism, denying yourself the things you want or even figuring out how to live without the things you need. This is true whether you’re redoing your kitchen or rebuilding your credit. It’s even true if you live in a place that is notorious for being expensive like New York or California.
So how do you rebuild your credit on a shoestring budget?
First: Tackle Your Existing Debt
Even people who take the extreme frugal challenge can amass vast amounts of debt. Heck, it’s possible that you’ve embraced the extremely frugal lifestyle you have now because you built up that debt and now that you’re trying to pay it off–your funds are tight.
If paying off your debt on your own is draining your available funds there are other options—options that can even help your credit instead of destroying it (like bankruptcy would). For instance, you can look into debt settlement programs. Even in states where the cost of living is bordering on the ridiculous, consolidating and settling your debt is a good idea. California debt settlement programs, New York programs, programs based in Chicago, etc—they can help you reduce your interest and allow you to pay off all of your debt via a single, affordable monthly payment. This way you can pay down your debt and still have enough money for living.
PRO TIP: Most of these programs will ask you to cut up your existing credit cards and some might require you to go a predetermined period of time before attempting to build up new credit sources. When you’re ready to do that…
Second: Secured Credit
While debt consolidation and settlement is definitely better for your credit rating than bankruptcy, it can still negatively affect your ability to get unsecured credit for a while. That doesn’t mean that you can’t still build up your credit. With secured credit you can build up your credit right away (as soon as your contract allows you to do so).
A secured credit card is kind of like buying a gift card from the bank. You use your own money to set up a “line of credit” with the bank. You pay an amount of money (most banks will require at least a few hundred dollars to get started). This amount of money is your credit limit. You’re then given a credit card that you would use in exactly the same way as a regular credit card—making monthly payments on the amounts you’ve charged, paying interest, etc. The money you pay acts as collateral—if you miss payments or default, the bank keeps the money you paid in.
Your activity with these secured credit lines is reported to the credit reporting bureaus the same way that unsecured credit is recorded and reported. If you make your payments on time each month and keep your spending under control, you’ll raise your credit score.
While you’re working on your debt consolidation and rebuilding your credit score, make sure that you live as frugally as possible. If you’re careful you can pay down your debt, rebuild your credit and save up for retirement all at the same time.
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