This is a guest post by Don Miller, who writes forÂ CreditCardForum.com, a site where people post questions and get answers related to credit. He knows that credit cards are not appropriate for everyone and operates with that philosophy. However he still enjoys helping and advising those who use them and encourages paying in full.
Living without the burden of debt is liberating, but old habits die hard. You might have fought hard to get out of debt but if you return to your old habits you may once again find yourself living in financial bondage.Â Letâ€™s take a look at how that process will begin and how you can avoid going back into debt.
About the time you get your debt down to a point where itâ€™s manageable, you begin receiving offers for credit cards.Â Debt is a product. It is marketed as a product and it is consumed as a product. Lenders will stop at nothing at trying to find new consumers for their product.
Credit card companies often target consumers who are those who are coming out of a situation just like yours. According to the FTCÂ many companies solicit new credit card customers based on the information in your credit report.
Should You Restore Your Credit?
Thatâ€™s a question that can only be answered by you but there are plenty of people willing to offer an opinion. Some well-known experts will tell you that you donâ€™t need a good credit score â€“ or any credit score at all.Â Others will tell you to use credit responsibly and in moderation.
If youâ€™re honest with yourself you should be able to come up with your own answer. For most people, it makes sense to at least keep an eye on your credit score so that you are prepared for any situations that might come up which require having a (good) credit score. Your credit report can be checked once a year for free on this government website:Â annualcreditreport.com.
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Why Restore Your Credit Score?
One of the main reasons people do decide to rebuild their credit and raise their credit score is to buy a home. Despite the events of the last few years, owning a home is still a significant component of the American dream for many people across the country.
People who emerge from debt often still want to own a home. Thatâ€™s the reality.Â Most people can learn to pay cash for an automobile. Most can pay cash for clothing, home furnishings, and every day items. Most cannot purchase a home with cash.
Manual underwriting mortgage companies can help.
Manual underwriting is when a real person looks at your financial information and makes an assessment of how you pay your bills and decide if you qualify for a mortgage versus a computer and a sophisticated algorithm to make that decision.
However, what if youâ€™d rather try the conventional means to securing a mortgage? Do you need a wallet full of credit cards to restore your credit?
How To Rebuild Credit
If you decide to rebuild your credit, remember that credit was why you were once in debt. This time, build in safeguards to protect yourself from the bondage of debt the second time. Here are a few things to consider if you are looking for alternatives to credit cards that may help you build credit.
Savings Account Loans:
Savings account and CD loans might be a good place to start. These types of loans are most common at smaller financial institutions, but each work nearly identically.
You borrow money using your savings accounts or CDs as collateral. Interest rates are generally low because youâ€™re assuming all of the risk by using your own money.
These loans are a great option for consumers looking to repair their credit. Borrowing against your CD rather than cashing it in prematurely eliminates early withdrawal penaltiesâ€”another advantage of these types of loans.
In order for savings account and CD loans to help rebuild your credit score, they have to report to each of the credit bureaus. Before agreeing to one of these loans, confirm that the bank will report your positive credit activity.
Secured credit cards areÂ another optionÂ to restore and rebuild your credit score and function essentially just like a savings account loan.Â With secured cards, the funds on deposit at your bank become your spending limit on the card (minus fees).
You will never be able to spend more than your account balance, but if you donâ€™t pay your bill in full each month, fees and interest may apply.Â Charge cards require that you pay your balance in full each month as well, and you earn rewards for using the card.Â The major difference between the two types of cards is the cap on the spending limit.
Credit cards are not appropriate for everyone. Be wise and make the decisions that are right for you, and if you decide to live without credit cards, youâ€™ll no doubt be able to do so with help from the tips in this article.Â Advertisers spend a lot of money to tell you why buying their product will make your life better. But remember, living debt free feels way better than spending money on things you donâ€™t need with money you donâ€™t have.
ImageÂ byÂ 401(K) 2013
This post was published by Ben, Content Manager and Writer for Â»Â ReadyForZero.
ReadyForZero is a company that helps people get out of debt on their own with a simple and free online tool that can automate and track your debt paydown.Download