How to Come Back from Credit Disaster

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A reader named Val wrote me after a stint of unemployment left her drowning in medical bills, student loan debt and collection accounts. She was working again, but the pay wasn’t great and she wondered if her credit would ever recover. “I have no idea how to grab hold of my credit score and get it to rise once again,” she said.

Eighteen months later, after educating herself about credit, Val still hadn’t found a better job — but her scores were marching higher. She managed to pay off overdue bills and get collection accounts erased from her credit reports. She applied for — and received — a credit card to help her rebuild her scores. “I still have some medical debt to wipe out, but my car is almost paid off! And I just started paying off my student loans,” Val reported.

Millions of Americans suffered blows to their credit in recent years as unemployment, foreclosures and bankruptcies soared. The damage doesn’t have to be permanent, though, if you know how to bounce back. Here are six ways to fix your credit starting …now.

Budget, Budget, Budget

You can’t repair your credit if you’re still falling behind on your bills. Once your credit crisis has passed, you should start stabilizing your finances. Most important: Your spending should be less (preferably much less) than your current income. Val used the 50/30/20 plan that bankruptcy expert and current U.S. Senator Elizabeth Warren outlines in her book “All Your Worth”: 50 percent of after-tax income goes to “must haves” such as housing, food, utilities, insurance and minimum loan payments; 30 percent goes to “wants” such as clothes, vacations and eating out; and 20 percent is for saving and paying down debt.

There are plenty of other budgeting systems, but they typically share the same goals: to help you move away from living paycheck to paycheck, where you’re vulnerable to every little economic setback.

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Source: Yahoo | Liz Weston

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