Chapter 4: Recovery Methods

Now that you’ve identified which businesses do not work in your financial favor, the next step is to break free from high cost products and services.

Repay Expensive Balances
If you owe money to a lender that is charging high interest and fees, take immediate action to pay the balance. Unfortunately, many of these lenders do not reduce their interest rates to help you pay the debt faster and more efficiently. Therefore, treat these types of debts as a financial priority. Examine your budget carefully and adjust it so you can pay the balances down as quickly as possible. You may be able to add to your payment by:

• Increasing income. Consider working overtime hours, obtaining a second or part-time job, or turning a hobby into income.
• Eliminating or reducing all unnecessary expenses.
• Selling an asset.

If you have a high interest rate credit card, avoid wasting money and dragging the debt out by disregarding the requested payment on your statement. Use the "consistent payment method" instead. The process is simple and efficient:

• Determine a realistic and fixed amount that is greater than the minimum you can pay each month.
• Suspend credit use until you pay the balance in full.
• Pay more when you can – but never go under your preset amount.

Ask your creditor for a rate reduction when you have made several larger than average payments. You may also consider transferring high interest credit balances to a card with a low rate. Lowering the interest rate is often a great idea, but be aware that transfer fees can be about three percent of the transfer. Therefore, if you want to move $10,000 to a card with a lower interest rate, the transfer may cost $300. Before making a decision, check the transfer fees for your card, and then weigh the cost of shifting the debt against the interest rate savings.

After you’ve repaid your expensive loans and credit cards, commit to not relying on them in the future:

• Sign up for overdraft protection with your financial institution. Many people use expensive loans because they overdraw their checking accounts.

• Make savings a priority. Save at least ten percent of your net income until you build three to six months' worth of essential expenses. Even a small nest egg can help you avoid borrowing money for an unexpected expense.

• Obtain the right insurance coverage. You can protect your savings and stem expensive borrowing by having enough medical, disability, liability and other insurance coverage.

• Understand the root of the problem. Are you spending too much because your income is insufficient, or because you splurge on items you can’t afford? Develop a realistic budget so you always live within your means.

End Unfavorable Contracts
If you have just taken out a car title loan, you have the right to cancel the deal within one business day without being responsible for any interest charges. After that, the contract is set and you have 30 days to pay the loan, plus interest.

If you have a rent-to-own arrangement, you have the option to return the merchandise at any time without further obligation. Ending the arrangement early will probably save you a lot of money down the line.

Create a positive credit history
With a long and positive history of borrowing and repaying money, you should be eligible for prime loans and lines of credit. Take action to build a desirable credit history:

• Review your credit report. Many reports contain errors that could make you ineligible for loans and lines of credit with a good interest rate.

• Commit to timely payments. Paying your obligations on time, every time is a sure way to build a good credit rating and is very important to lenders.

• Eliminate debt. Your balances should be less than half of your credit limit, and the lower the better. Also, if you have accounts in collection agencies, you can make a fast improvement to your credit rating by paying them.

• Keep your older accounts active, have a mix of different types of accounts (loans, charge and credit cards), and only apply for necessary credit.

Establish or Reestablish Accounts at a Traditional Financial Service Institution
If you have not yet had a checking account at a traditional financial institution, it is a great idea to open one now. First become a credit union member by opening a share account - with it you can save money for the future, which is an important part of everyone’s overall financial health. Once you are a member you can likely open a checking account and have access to various other money management and investment products.

If you have turned to check-cashing services because you have damaged credit due to a history of bounced checks, get back on track. Contact the financial institution where you owe the money and work out a payment arrangement. You may be required to take a class and/or pay a fee, but in the long run, reestablishing yourself in the world of traditional financial services is your best course of action.