I'm one of those musicians you hear about who's always broke. Despite some outstanding professional success, I have been in financial distress for the past several years since my divorce.
At the moment, I find myself roughly $10,000 in debt, with several credit cards (which were used for food and gasoline) sent to collections for nonpayment. I am constantly behind in my car payments. I'm not sure what interest rate I pay, but I think it's the highest — my credit wasn't very good when I got the loan. Several times, I tried applying to my bank for overdraft protection of $100 to stem cash-flow issues between paychecks, and I was refused. I wind up paying a few hundred dollars a year in bounced check fees.
I have two court-mandated payments each month to make to my credit card issuers. They asked how much I could pay, and I said $20 (or $40 total a month, which is still more than I can afford). As such, they are still charging interest, and the balances never seem to go down. They call to offer me settlements. For example, if I can pay $600, they'll dismiss the remaining $400 of the debt. But I tell them I'm having trouble paying the $20!
As you can see, my financial life is a disaster. And as for the future, I have no savings or retirement plan of any kind. I'm 46, so I know it would be wise to begin planning for my old age. I currently rent a small apartment in Massachusetts. I've applied for financial aid (fuel assistance, etc.), but I'm in that bracket just above the poverty level.
Four years ago (at the time of my divorce), my credit score was 706. I have no idea what it is now. How can I rebuild my credit and reduce the amount of money being wasted in late fees, bounced check fees and credit card debt interest? I would like to buy a home someday. – Sandy
You don't have a credit problem as much as an income problem. The root of your troubles is lack of consistent and adequate cash flow. Fix that, and you have the solution to your crushing debt and poor credit rating. Even more important, however, is that you've got to prepare for your later years while also paying for your current living expenses.
To achieve all this, you're going to have to do quite a bit of hard and possibly unpleasant work. You can do it, though. In fact, you don't have much choice, unless you want to continue to struggle.
Here are some basic steps to see you up the hill.
- Figure out how much you need to survive. Clearly you require enough cash flowing in every month to pay for food, rent, transportation and other necessities. Knowing the total of these expenses is essential, as it will be your earnings baseline. List the monthly cost of everything you need to survive, using realistic and conservative figures. For example, don't put down $50 for groceries when that's simply not possible.
- Find employment that will provide at least that figure. If gigs don't bring in enough cash to cover your crucial expenses, pivot and find something that will. I'm not telling you to give up being a musician. Just play later, toil today. Put every ounce of energy you have into this step. I know that's a very hard pill to swallow, but securing a steady paycheck is the only medicine that cures budgetary ailments. If the job you get pays more than you require for basics, wonderful. Set the difference aside for savings and debt depletion.
- Supplement your income with your passion. After you get a job that brings in at least adequate pay, increase your earnings by doing what you love. I get the impression that you don't have young children or anything else that's holding you back from spending time outside your home, so use your evenings and weekends effectively. Whether you're jamming onstage or teaching others to play an instrument, you should be able to bring in some extra cash. Add it to fund your goals and obligations.
- Deal with your debt. Stop borrowing. Not only will another loan hurt you, but no reputable lender would extend even a piece of copper to you at this point. You've got collection accounts and judgments to contend with. Can you pay them off? With a job it's possible, so after you secure one and accumulate some cash, you might be able to accept those settlement offers or get back on track with payments. However, if you can't find proper employment, you'll have to consider your legal options. Bankruptcy will wipe out those liabilities. Your credit rating is already shot, so I wouldn't worry about how it might affect your scores. In your case, they can only get better.
- Develop realistic goals for the future. Buying a house is a lovely notion, but at this stage it's a fantasy. To qualify for a mortgage you'll need a good credit rating, which requires low debt, an excellent payment pattern and nothing recent in collections. A lender will also want to see that you have a secure job that provides enough income to support the home loan payments, plus a large amount of cash for a down payment. A far better goal right now is to establish a healthy money-management routine. Stop writing checks for more than what's in your account, only spend what you can afford and pay bills on time. When you've done that and have also dealt with your debt (whether you pay or discharge it), start to sock away cash for your retirement.
Overwhelmed? Discouraged? Don't be. Just start at the beginning (a job) and work your way to the end (financial security).
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