I'm Getting Deeper And Deeper In Debt... Can You Help?
Ask The DebtBuster: Winter 2003-04By Mike Schiano
Q: I have a job and make okay money, and I don't think I have too many expenses. Yet every month it seems that I spend more than I earn, and I feel like I am getting deeper and deeper in debt. Can you help me figure out how to spend less and earn more?
DebtBuster: I suggest you start by doing an income and expense analysis. This is very important for every family to do several times each year. You can do this at your kitchen table. Just write down your net monthly income from all sources and every one of your expenses. Don't forget all of the incidental expenses, such as your morning coffee on the drive into work or the soda every day at break time. Many people forget about these small expenses but they really add up over time. Every expense by everyone in your family must be included to give you a true picture of your spending. If you have once-a-year expenses, divide them by 12 and figure out what that expense costs you on a monthly basis.
Once you have an idea of your real income and expenses, you are in a much better position to find solutions. Discovering how short you are each month will give you a clue as to what you need to do to solve your financial problems in the short term. Just being $100 short each month can be solved with a combination of a little more income and a little expense cutting. A $500 shortage each month will require a great deal more thought and action on your part.
Try to be unemotional about it. It may require you to get out of your comfort zone and look for a better paying job, have a garage sale every weekend, take a part-time job, or start a small business. You may need to stop spending on things you really like but can't afford right now, like cable TV. A little effort on your part now can put an end to that feeling of "too much month at the end of the money."
Q: It has been a while since I've made payments on my credit cards. If I were to start to repay my debt, how long might it take for me to possibly qualify for a home loan?
DebtBuster: The length of time it takes you to rehabilitate your credit rating depends on how long you have not been making payments to your creditors and how much debt you have. If you haven't made payments in more than 90 days, chances are good that your creditors have written off your accounts and sent them to collection. During this time, your credit would have been badly damaged. However, a $2,000 charge-off is bad but not as bad as a $15,000 charge-off, and easier to repay.
You should communicate with your creditors as soon as possible and explain your intentions of repaying your outstanding debts. At the same time, obtain a copy of your credit reports from the three main credit bureaus - Experian, TransUnion and Equifax - to see what has been reported and make sure it is accurate.
Once you get an idea of the damage to your credit and how much you owe, next you'll need to negotiate an acceptable repayment plan with your creditors, either directly or with the help of a non-profit credit counseling organization. Then, start making your payments on time and at the required amount until the debts are paid off.
Once you clear up these debts, you should be in a much better position to qualify for a home loan. Plus, you will be out of debt, which feels great and looks very positive in the eyes of mortgage lenders.
Not knowing the condition of your credit report today, it is hard to say how much improvement you could make in the next 12 to 24 months. Generally, one to two years of on-time payments will go a long way toward rehabilitating most credit reports.
Other factors also will be considered when you apply for a loan, such as the amount of your income at that time, how long you have been at your job, and the value and condition of the home you wish to buy. So, even perfect credit is not a total guarantee that you will get a loan but it is a major part of the equation.
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Mike Schiano hosts a nationally syndicated radio show about personal finance and is the author of Spend Your Way to Wealth. Have a personal finance question? Visit Mike at InChargeRadio.com or send email to mike@mikeshow.com.