With millions of Americans digging themselves deeper into debt, credit repair is one of the hottest topics in financial management today. Thousands of books have been written on the topic, but one of the leading books for over a decade has been Financial Peace by advisor Dave Ramsey.
Originally written in the early 1990s, the book was revised in 2003 to include chapters on marriage, single people, children, and families. A multi-millionaire who went from living the high life to being in debt all before age 30, Ramsey now gives financial advice on his radio show and is a frequent guest on talk shows. He holds seminars and counsels people on how to get their credit back into shape and keep it that way.
Credit Repair the Ramsey Way
Ramsey believes that credit cards are one of the most abused forms of payment in the United States. Using a credit card usually:
- Increases the amount of purchase
- Lessens the emotional impact of the purchase, whereas with cash, consumers are more aware of what they're spending
However, for those all ready in credit card debt, it can be difficult to stop the cycle.
He feels that the "debt snowball" is one of the best ways to eliminate credit card debt. While some advisors feel that the credit cards or bills with the highest interest rate or balance should be paid off first, Ramsey believes that singles and couples should pay off the debt with the lowest balance first.
This has several positive effects, including:
- One debt is paid off quickly.
- This early success encourages forward motion.
- Enables the transfer of the monthly payoff amount from the first debt to the payment on the second debt and so on.
Of course, one must also do something very important while paying these debts -- quit borrowing more money. Do not use credit cards or take out loans or lines of home equity while doing this. That will only cause more debt.
Dealing with Collectors
For those who are in serious need of credit repair, the telephone can become the enemy. Ramsey dedicates an entire chapter entitled "Cucumbers, Collectors, and Credit Repair" to those in this situation. Ramsey gives detailed instructions on how to deal with creditors that want to collect:
- Ignore emotional appeals by collectors trying to intimidate; pay necessities first.
- Tape record (using memo button on an answering machine) any harassing phone calls because they are illegal.
- Collectors must sue and win in order to garnish wages and empty bank accounts. Unless you have received notice of an impending court action, consider these bluffs.
Additionally, Ramsey includes sample letters in the book's appendix for people to send to collection and credit agencies regarding consumer legal rights.
For people with credit report problems, Ramsey recommends dealing with it personally, rather than through a credit repair company. He feels you should check your report at least every two years in order to make sure that no errors are on the report. Again, the book features a sample letter that can be sent to the bureau with the inaccuracy.
Keeping Credit Clean
Once you have achieved your credit repair goals, it is important to keep your financial status under control. Ramsey advises against lending or borrowing money to/from family and friends. If you have had trouble with finances in the past, Ramsey feels that having a trusted friend/family member or mentor with moderate financial success looking over your decisions and budget can be a big help. It makes you responsible for your spending, even if you cannot hold yourself accountable.
Ramsey advocates budgeting as the number one source of financial knowledge you can do for yourself. Even if you think you know where your money goes, you need to write it all down. For those with problems going "over budget" in certain areas, he recommends using a cash-based envelope system in order to keep spending under control.
In order to achieve financial freedom, Ramsey gives step-by-step instructions in the chapter "Baby Steps." He feels a clear way to controlling your money is to do the following:
- Pay minimum on debts until at least $1,000 is in savings.
- Pay off all debt (except for mortgage).
- Fund an emergency savings account/money market fund with three-to-six months worth of living expenses.
- Save 15 percent of household income for your future retirement. Revisit your insurance policies to make sure you have what you need.
- Begin college funds for children.
- Pay off the mortgage early.
- Build wealth and give it away.
Ramsey realizes that this is a long process, but no one ever gets rich quick or easily. It takes time and there will be setbacks. However, for those committed to the process, it can happen faster than they may think.
Financial Peace Revisited
Dave Ramsey's book is a best seller for a reason. It gives clear advice in easy-to-understand language. Advocating the "do-it-yourself" way of credit repair, eliminating debt, and controlling finances, Ramsey offers "Peace Puppies" at the end of each chapter summarizing his key points.
Although some people may not care for the Christian/religious undertones of the book, the sound and clear advice Ramsey gives makes the read worthwhile.