It’s never good news when money is tight. Maybe you recently lost your job. Maybe you can’t keep up with the cost of living. Maybe you had a medical emergency and the bills are draining your savings. There are countless reasons why the average person could face money troubles, but there are a few tried-and-true principles to employ during these rough situations. If you’re going broke, keep the following don’ts in mind. They will help you avoid compounding pressure and the need for credit repair.
When funds are limited, don’t:
1. Pay off revolving debts.
When you’re running out of money, it’s natural to panic. You may worry about neglecting your bills and racking up large amounts of accruing interest. Consider the following example:
Jeremy is self-disciplined when it comes to paying bills. He has a $3,500 credit card balance with a minimum amount of $152 due each month. Jeremy pays $300 a month to reduce his debt more quickly and to pay off accruing interest. Unfortunately, Jeremy was laid off last month and is worried about paying his bills. In a moment of panic, he considers paying off a large chunk of his debt to prevent accruing interest from inflating his balance.
Jeremy’s intentions are well-placed, but his reasoning is based on fear, not logic. In a case like this, Jeremy should plan the next few months carefully by:
- Updating his budget to determine how much he can spend on debts
- Temporarily reducing his debt reduction efforts. Jeremy should make the minimum payment on his credit card, and, if he can afford it, pay off the interest each month to prevent his balance from growing.
- Focusing on savings. It’s important to stretch your dollar when money is tight. Jeremy should use his available funds for as long as possible.
Now is not the time to focus on retirement. Survival mode requires liquid savings. The more money you have in the bank, the better your chances of overcoming financial hardship and avoiding credit repair. Consider reducing your 401(k) and other long-term contributions until you get back on your feet. A better future requires current stability.
3. Pay full price.
In denial, are we? Going broke will happen quickly if you continue to pay full price for things, and I’m talking about everything from gasoline to groceries to cable coverage. In a pinch, the best way to avoid credit repair is to cut back. Clip coupons, carpool with coworkers, and switch to Netflix in lieu of a regular TV package. Don’t burn the candle from both ends—when you aren’t making money, it’s time to stop spending.
4. Pay your bills late.
You may feel the urge to hoard your cash, but avoiding your bills isn’t the way to do it. If you’re worried about your finances, call your creditors and utility providers to explain the situation. They may be willing to provide a forbearance period or reduce your bill amount (e.g., electricity, water) for a short time. This strategy will help you reign in spending while avoiding credit damage that comes with late payments. Communication is essential.
5. Ignore the problem.
Credit repair is impossible without a bit of reflection. Ask yourself:
- Why am I running out of money?
- What can I do in the next month to get by?
- What can I do to ensure financial stability in the future?
Whether it’s budgeting, finding a new job, or getting your debts under control, ignoring the problem is never the answer. Set your sights on a better future and keep credit repair as a long-term goal. Change requires action.