Improving Your Credit Score: Change the Way You Pay Your Debts
21 July 2006This post is part three in a series on improving your credit score. Part One dealt with the basics of what a credit score is, how it is calculated, and how you can request a credit report. Part Two gave advice on how to correct errors in your credit report, so that you can fix any problems that aren’t your fault.
This part deals with how to change the way you pay your bills each month to gradually increase your credit score. If your credit score has been damaged from late payments, then this post is for you. There are two basic categories of people for the purposes of this post: those who can afford to pay their bills each month and those who can’t.
What to do if you’ve got enough money to pay your bills:
The short answer is: pay them! If you’ve got enough money to cover your expenses each month, then you’ve got no excuse for failing to pay the bills. However, that doesn’t work for some people because their problem is not the lack of money - it’s forgetfullness. Many people let their credit get damaged by an easily correctable problem - forgetting to pay some of their bills occasionally. You NEED to fix this. It doesn’t look good, and it hurts your score - but worst of all, there’s no excuse for doing it. It’s not that you don’t have the money - it’s that you haven’t gotten organized. How can you stop yourself from going down this spiral?
1) Sign up for autopay for every bill that offers it. This is the easiest solution because there is no way for you to forget, and nearly every major company offers something like this. You do it once, and every month your bank account will be billed automatically for whatever you owe.
If you’ve got more than enough money to pay your bills each month, there’s really no reason not to. Autopay also has the added benefit that you won’t be tempted to spend money that isn’t in your account anymore.
2) If you have bills that you can’t or won’t put on autopay, make a list of them and get into a routine of paying them each month on a certain day. Most of the problems people have with paying off bills come from the fact that they don’t all come in at the same time. You may get your cable bill and remember to pay it, but then you leave the water bill on the table and forget about it until it’s late. If you put the bills all in one place, and get in a routine of paying them all at once, you won’t miss any strays. Keep a checklist to make sure you get them all.
Even if you don’t want to pay all your bills on one day, you should have a last minute “check the bills” day - a day where you make sure everything has gone out paid for the month. As you pay your bills, put the bill itself in a central location with the other bills that have been paid for the month. Run through your checklist, and make SURE you got every one that’s due.
3) Have a cell phone? Use the organizer to set up a reminder. On “bill day” or whenever you need to pay, you need a system to remind you. Most modern cell phones have lots of nifty little features, and one common one is the ability to set a reminder. Do it, and if it makes you reset it, then after you’ve paid the bills for the month, set a reminder for the next month. Put “set a reminder” on your checklist, too - and check it off when it’s done.
What to do if you don’t have the money to pay all your bills:
This situation is the tougher nut to crack. There are lots of things you can do to remedy this in the long run - but in the short run, you need to try to minimize the damage to your credit. If you aren’t paying your bills, you can lower your credit score extremely quickly. Luckily, however, you can usually keep this from happening even if you don’t have enough money to go around by following these tips:
1) Prioritize your bills based on who is most likely to report to the credit agencies. This is similar to what most people with financial problems instinctively understand - the idea of paying the bills for what you absolutely need, first. Everyone pays the power bill - because if you don’t, the lights go out. The car payment or the cable bill are lower down on the list. But you also ought to think about which bill is most likely to damage your credit if left unpaid.
Generally, a credit card, mortgage, car loan, or other debt is at the top of this list. A failure to pay a debt is going to be reported, and most of these companies regularly report whether you pay or not each month. Want to be sure? Request your free annual credit report. You’ll see a list of payments made each month from all the companies that are regularly reporting to the credit agencies. Pay these bills in full each month if you can, because they’re going to report either way.
Normal bills like cable, the phone bill, electricity, water, and the like are usually not reported on a regular basis. In fact, most of these companies will wait several months after disconnecting your service to report you. That’s not a sure bet - some will jump the gun and do it within a month of nonpayment. But you’re much less likely to get reported right away, which will buy you some time to pay them off.
2) Negotiate, negotiate, negotiate. Think the best approach is just to dodge your creditors and not talk to them? Wrong. The best approach is to call them up, explain that you can’t pay, and offer to pay something, even if it is small. Tell them you don’t want to damage your credit, and you want to pay, and ask if they can put you on a payment plan.
Most collection departments will be happy to deal with you. Not happy, exactly - but they know they are much better off if you are paying something than if you disappear on them. It makes their lives easier. So if you call them up, pay $20 on the $80 cable bill, and promise to pay it in full next month, you’re going to be in better shape than if you disappear. Try to get the company to commit not to reporting you if you can.
In fact, disappearing is the fastest way to get reported. If a company can’t get in contact with you, they’re likely to just write off the debt and declare it uncollectable. That usually means one of two things: either they report to a credit agency, or they forward the debt to a collection agency who will - and who will try to make your life miserable to get you to pay.
3) Fix the problem in the long run. If you can’t pay your debts, you have a problem and you need to fix it. You either need to make more money or spend less - and usually it’s easier to spend less. If you constantly find that you don’t have enough money to pay the bills each month, then you can’t expect to keep your credit clean.
For most people in this situation, this means getting rid of your credit card debts, being more frugal, and putting yourself on a strict budget. Those are all complicated subjects in their own right, so start reading up. You can visit the Free the Drones Forums to ask questions or read more.
One Response to “Improving Your Credit Score: Change the Way You Pay Your Debts”
July 21st, 2006 at 5:48 pm
[...] This post is part of a series on how to improve your credit score. Part One dealt with the basics of what a credit score is, how it is calculated, and how you can request a credit report. Part Two gave advice on how to correct errors in your credit report, so that you can fix any problems that aren’t your fault. Part Three dealt with changing the way you pay your debts each month so that you make sure you always pay your bills on time - and minimize damage to your score if you don’t. [...]