Have you made a major jump in your credit score and would like to share your personal journey? Email reporter Alexandria White at firstname.lastname@example.org if you’re interested in being featured in CNBC Select’s new “Credit Scores: Then and Now” series.
Tiffany “The Budgetnista” Aliche was laid off during the last recession and saw a 255-point drop in her credit score after falling behind on credit card bills and mortgage payments.
Below, Aliche, who is a financial educator and founder of The Budgetnista, tells CNBC Select her credit journey and how she was able to rebuild her credit score after financial hardships caused by a job layoff and recession.
How Aliche’s credit score dropped to 547
The recession caused the school Aliche worked at to close, leaving her unemployed. She was able to receive unemployment, but that only paid for the bare-bones of essentials — but not her mortgage.
In an attempt to save her home, Aliche leaned into her side hustles that consisted of babysitting and tutoring, but that wasn’t enough to stop her from falling delinquent on her mortgage payments.
Next, she drained her retirement account and emergency savings, but after all was said and done, she still needed more money.
After depleting her savings and borrowing money from her ex-boyfriend and friends, Aliche hit a realization.
“You have to acknowledge that there are going to be some bills you’re not going to be able to pay, and I’ve never not paid a bill. I couldn’t wrap my mind around it,” Aliche says. “I was like, ‘OK, if there’s no income coming in except for unemployment, that means I have to say what bill am I not going to pay in order to pay the bills I must pay.'”
Once she accepted this, Aliche came up with a prioritizing strategy, which we explain below.
A 547 credit score on the rebound to 800+
“I came up with a kind of a prioritizing strategy where I said, ‘OK let me list all of my bills and what bills I have to pay to maintain my health and my safety,'” Aliche says.
She explains that the essential bills can be different for everyone. For instance, medication or housing costs may be crucial expenses for you, whereas someone else may be able to forgo those costs.
If you’re not sure whether your housing costs are essential, ask yourself if you need to stay in your current apartment or the place where your mortgage is, since there may be a less expensive option, Aliche says.
Aliche realized she was fighting to keep her condo, but had the alternative to move back in with her parents, which she did for a year. After that, she stayed on her sister’s couch for a while and then rented a room for $500 with a bunch of friends until she was in a better financial standing.
While some of the choices you have to make to get by during uncertain times may not be the most ideal in the short-term, it can add up to significant savings in the long-run. After all, if you pay $1,000 a month in rent and move back home for six months, that can be a $6,000 savings. Keep in mind, this may not equal $6,000 in a savings account if you have no job, but can be $6,000 less in debt.
If you need to pay for essential bills while unemployed and decide to use a credit card, “You should not have any of the non-necessities going,” Aliche says.
Credit cards can be a good way to finance new purchases when you don’t have the money upfront since some cards offer an intro 0% APR period, such as the 15-month period offered by the American Express Cash Magnet® Card (after 12.99% to 23.99% variable APR). See rates and fees. There are also longer periods, such as the BankAmericard® credit card with 0% for the first 18 billing cycles on purchases and balance transfers (after 14.49% to 24.49% variable APR).
But make sure you use these cards sparingly to avoid high interest credit card debt.
Everyone makes mistakes and that’s OK
When you’re rebuilding your credit and finances, you may make mistakes along the way, but it’s important to learn from them. Aliche wound up depleting her savings, falling delinquent on her mortgage and losing her condo, which all hurt her credit score.
And her biggest mistake? She didn’t pivot fast enough to what she calls her “noodle budget.”
Similar to an emergency savings fund, a “noodle budget” consists of only essential expenses. “Your noodle budget is if you had to eat ramen noodles, if you had to live off just the bare-bones essentials, only the essentials — so, no cable, no nails, no hair, no entertainment — just temporarily while you look for a job,” Aliche says.
She points out that you have to make some hard choices. For instance, if you have cable, but can’t afford your mortgage, you should get rid of cable.
But keep in mind, “These times don’t last forever. You find a job, you find new sources of income, but in the meantime, you have to maintain your health and your safety above all else,” Aliche says.
Rebuilding your credit doesn’t happen overnight. It’s more of a gradual process, though slowly but surely you can get back on your feet. Aliche was able to make amends with the lenders that she was late with over time by paying off her debt and becoming current on her accounts. It’s especially important to be current on your accounts since payment history is the single-most important factor of your credit score.
“Once I became current, then my credit score started to rise, and I’m back at 800s now,” Aliche says.
For rates and fees of the American Express Cash Magnet® Card, click here.
Information about the BankAmericard® credit card has been collected independently by CNBC and has not been reviewed or provided by the issuer of the card prior to publication.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the CNBC Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
Martin Lewis issues guidance on using credit cards to build ratings – best deals | Personal Finance | Finance
Martin Lewis regularly urges savers to use caution when utilising debt themed products but at the same time, he acknowledges the need for a decent credit rating to get by financially. Today, the Money Saving Expert was questioned by viewer Miranda on how one can build their credit rating in difficult circumstances.
“What I’d then like you to do is go and do £50 a month of normal spending on it, things you’d buy anyway.
“[Then] Make sure you pay the card off in full every month, preferably by direct debit so you’re never missing it because the interest rate is hideous.
“That way you won’t pay any interest.
“You do that for a year, you’ll start to build that credit history, showing them you’re a good credit citizen.
“Then you’ll be able to move into the sort of more normal credit card range.
“So, bizarrely, to get credit you need credit. What credit will you get? Bad credit, go get the bad credit just make sure it doesn’t cost you.”
Consumers of all kinds may not have the best options at the moment as recent analysis from moneyfacts.co.uk revealed.
In mid-November, they detailed that a number of high street banks have cut the perks and interest on a number of their current account deals.
On top of this, the Bank of Scotland and Lloyds Bank made credit interest cuts of up to 0.5 percent.
Rachel Springall, a Finance Expert at moneyfacts.co.uk commented on the few options consumers and savers currently have available: “Clearly, it is vital consumers decide carefully if now is the time to switch, but if they wait too long, they may well miss out on a free cash switching perk.
“At present, providers will be assessing how they can sustain any lucrative offers in light of the pandemic.
“With this in mind, we could well see more changes in the months to come and if this does indeed occur, consumers would be wise to review whether their account is still worth keeping.”
Should you use a balance transfer to pay off debt?
A balance transfer might be the solution if you have debts and want to gain control over your finances. But whether a balance transfer is right for you will depend on a number of factors.
Things to consider before using a balance transfer
The size of your debt
If you want to apply for a balance transfer credit card, be aware that most providers will allow you to transfer up to 90% of your credit limit.
Your credit limit will be dependent on your own personal circumstances, including your salary, your credit history and your residential status (homeowner or renter).
Be realistic about your debt. For example, if you earn £25,000 per year and you have a debt of more than £15,000, a balance transfer might not be cheapest way to pay the debt.
The time taken to pay the debt
The main advantage of a balance transfer credit card is that many offer an interest-free period on the balance. So, if you can pay off your balance in that period, you won’t accrue any further interest charges.
However, these periods typically range from 18 to 24 months, so if you think you will need more time to pay the debt, you may need to factor in additional interest charges when the interest-free period ends.
Whether or not a balance transfer is the right debt payment solution will depend on your personal circumstances. Check our balance transfer calculator if you want to work out how much a balance transfer could save you in interest payments.
Your credit score
The advantage of a good credit score cannot be underestimated in this situation.
When applying for a balance transfer credit card, the company will check your credit score. Based on this score, they could refuse your application.
Even if you are accepted, if you have a bad credit score they could reduce your credit limit. Ultimately, this will determine the benefit of a balance transfer as a suitable debt payment solution.
If you think your credit score might be a problem, it’s worth checking with the credit reference agencies before applying. That way you can avoid any nasty surprises.
Alternative solutions to balance transfers
You could still use a balance transfer even if the size of your debt is bigger than the credit limit.
Transferring part of the debt would enable you to benefit from any interest-free period, where applicable.
Alternatively, if you have multiple debts, you could consolidate all of your debts so that you can make a single regular payment. If necessary, you could do this using an unsecured personal loan over a period longer than 24 months.
Look at your own personal circumstances with a critical eye. Remember that you need to factor in living expenses when thinking about how long it will take you to pay off your debt.
Balance transfers are a useful method for debt repayment, but be aware that credit cards are an expensive way to borrow money. Take full advantage of any 0% deals wherever possible. Check out our list of the best 0% credit cards.
Some offers on MyWalletHero are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.
Turn credit declines into a win-win | 2020-11-20
The pandemic has left millions of people needing credit at a time when lending standards are tightening. The result is a lose-lose situation—the consumer gets a bad credit decline experience and the credit union misses out on a lending opportunity. How can this be turned into a win-win?
The case for coaching
Let’s start by deconstructing the credit decline process: The consumer is first encouraged to apply. The application process can be invasive, requiring significant time commitment and thoughtful inputs from the applicant.
After all that, many consumers are declined with a form letter with little to no advice on actions the applicant can take to improve their credit strength. It is no wonder that credit declines receive a poor Net Promoter Score (NPS) of 50 or often much worse.
On the flip side, forward-looking credit unions provide post-decline credit advice. This is a compelling opportunity for several reasons:
- Improved customer satisfaction. One financial institution learned that simply offering personalized coaching, regardless of whether or not consumers used it, increased their customer satisfaction by double digits.
- Future lending opportunities. Post-decline financial coaching can position members for borrowing needs even beyond the product for which they were initially declined.
- Increased trust. Quality financial advice helps build trust. A J.D. Power study noted that, of the 58% of customers who desire advice from financial institutions, only 12% receive it. When consumers do receive helpful advice, more than 90% report a high level of trust in their financial institution.
Provide cost-effective, high-quality advice
AI-powered virtual coaching tools can help credit unions turn declines into opportunities. Such coaches can deliver step-by-step guidance and personalized advice experiences. The added benefit is easy and consistent compliance, enabled by automation.
AI-based solutions are even more powerful when they follow coaching best practices:
- Bite-sized simplicity. Advice is most effective when it is reinforced with small action steps to gradually nurture members without overwhelming them. This approach helps the member build momentum and confidence.
- Plain language. Deliver advice in friendly, jargon-free language.
- Behavioral nudges. Best-practice nudges help customers make progress on their action plan. These nudges emulate a human coach, providing motivational reminders and celebrating progress.
- Gamification. A digital coach can infuse fun into the financial wellness journey with challenges and rewards like contests, badges, and gifts.
Virtual financial coaching, starting with reversing credit declines, represents a huge market opportunity for credit unions. To help credit unions tap into that opportunity, eGain, an award-winning AI and digital engagement pioneer, and GreenPath, a leading financial wellness nonprofit, have partnered to create the industry’s first virtual financial coach. To learn more, visit egain.com.
EVAN SIEGEL is vice president of financial services AI at eGain.
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