Credit Management and Debt Recovery/Rehabilitation
We all face many temptations in life to spend money and go into debt. High car payments, rent or mortgage payments beyond our means, and unnecessary personal loans are just a few of the pitfalls that can lead us into debt. Your students are no exception. However, the more knowledge your students have about spending money responsibly and managing credit and debt, the better prepared they will be to build the lives they envision and achieve their goals.
Share with your students that some forms of debt are better than others. For example, loans for mortgages and education can be good investments for a brighter future, while large monthly payments for a brand new car can create a real burden to someone on an already tight budget. Credit cards make the burden heavier. Help your students learn the difference, and help them see that debt and credit problems don’t have to be a way of life.
With this wisdom, your students will be able to use their financial skills to benefit themselves and their tribes.
Avoiding Bankruptcies, Collections, Repossessions
If your students get deeply into debt, they may think that the solution is declaring bankruptcy. Or, if they can’t make the payments on a vehicle, they may think that having it repossessed will clear them from responsibility.
In both cases, your student will not have solved any problems at all.
Bankruptcy can seem like a good answer to money problems. But, contrary to what many think, it doesn’t just erase debt and let people start over. Because bankruptcy stays on a person’s financial record for years, it can make financial recovery difficult. Although it’s much more difficult, usually the better decision is to help your students face their debts and make plans to repay them.
However, some financial situations are so dire that the only option is declaring bankruptcy. If that’s the case with one of your students, encourage him or her to talk with an experienced bankruptcy lawyer before doing so. There may be tribal programs or lawyers who can assist with this process, especially since your student may not have the funds available to hire a good lawyer.
Your students may have experienced calls or letters from collection agencies asking for payments on overdue loans, credit cards, and other financial obligations. Emphasize to them that they shouldn’t ignore these, but rather keep in contact with the agencies and make arrangements to make smaller payments. Ideally, the best time to arrange for reduced payments is when your student has not yet missed a payment. If they know that they will have trouble paying a debt in the near future, they should contact the creditor and see what other options are available. For example, they may want to try to negotiate a modified payment schedule.
Repossessions might seem like another easy way to get out from under debt for some of your students. They give back the car, stereo, furniture, or whatever, and the debt vanishes, right? Not exactly. Instead, not only are they still responsible for the debt, but the repossession goes on their credit report.
If any of your students are facing bankruptcy, first have them contact the National Foundation for Credit Counseling at 1-800-388-2227. Nonprofit consumer resources such as the NFCC may be able to help your student avoid declaring bankruptcy and help work out payment plans with his or her creditors. Make sure that your students are using a reliable agency and not a predatory lender or fee-based service that actually puts them in more debt.
Ordering a Credit Report and Analyzing Credit Scores
What is good credit? It’s a positive track record of demonstrating that a person pays his or her bills on time and does not have more debt (or access to debt, in the form of unused credit cards) than he or she is able to repay.
The best way to build good credit is to pay household bills, such as rent, gas/electricity, water, and telephone, on time. Loans or credit card statements should also be paid on time every month. With credit cards, it’s best to make more than the minimum payment since just paying the minimum means it will take years—and lots of interest payments—to pay off the debt.
Good credit is a vital tool in today’s economy. Even if your students do all their financial transactions on the reservation, they still need good credit to get loans, qualify for favorable interest rates, buy a house, and so on.
In addition, credit history can be checked legally by employers, and poor credit can mean the difference between getting a good job and being turned down. Landlords can also ask to see credit records before they agree to rent apartments. You may also have students that have very little credit history from the reservation and may not even show up with the credit agencies. You can help build credit for these individuals by helping them document where they have worked, banked, and purchased their utilities, and begin to help them build a reference sheet for their transaction history. You may also have to work with those organizations who do not report any history to the agencies so that someone with a positive payment history or banking relationship can develop a financial management story that can be taken to a new entity for approval.
One way your students can check their credit is to order a credit report and find out the credit score they’ve been given.
Each agency will require the following information from your students:
- Social Security number
- date of birth
- current address
- addresses for the past five years
- maiden name, if applicable
There may be a small fee (usually less than $10) for each credit report, but credit reports are free for people who have been denied credit if they request the reports within a certain time frame.
Here are the three most common credit reporting agencies:
Because the information on a credit report may vary from one agency to another, it’s a good idea for your students to order the report from all of the major credit agencies to give them a full view of their credit profiles. Also, encourage them to order credit reports annually to ensure there are no mistakes.
In the report, your students will find their FICO score. FICO stands for Fair Isaacs & Company, which created the formula from which credit scores are derived. Many lenders use the FICO score to determine how likely it is that a person will pay back a debt on time.
FICO scores take into account payment history, how much is still owed to creditors, how long the person has been using credit, the types of credit used, and how much of the credit is new versus old. This information is compared to that of thousands of other people and assigns the individual a FICO score from 300 to 850. The higher the number, the better the score.
Your students can improve their scores by paying bills on time and using credit cards wisely. The worksheets on Tips for Using Credit Cards, Tips for Building a Good Credit Record, and Minimum Payment Comparison Chart can help your students learn to manage their credit.
Criminal Records
Like a poor credit history or a bankruptcy, criminal records can haunt your students for years. Some job applications ask whether a person has ever been convicted of a crime. Banks and financial institutions investigate applicants backgrounds before approving loans and credit cards.
Some of your students may have minor criminal offenses in their backgrounds. If they are now trying to live a good and productive life, encourage them to speak to others in your classes about their experiences and how their choices have affected their lives. Often, the advice from those who have personal experience holds more weight than from those who don’t. Their experience might influence others not to go down the path of crime.
Debt Recovery
While its easier to not get into debt in the first place, let your students know that even if they have large debts, they can still pay them off and lead a life in which their financial goals are not thwarted by lingering loans.
Help your students by taking small, positive steps. Years of credit-card use and large debts won’t be paid off in a couple weeks, but they can be eventually eliminated if your students stay focused. Here are some first steps your students can take to start the process of getting out of debt:
1. Act now. Ignoring the problem won’t make it go away.
2. Stop using credit cards.
3. Create a plan to get out of debt. The Debt Recovery and Six Steps for Getting Out of Debt worksheets might be good places to start. Help your students create a spending plan at this stage. The Building Native Communities curriculum also covers this topic.
4. Contact creditors. Have your students explain to creditors that they want to pay off debts and ask if they can work with each creditor to take smaller payments now. While not all companies will work with individuals, many will. It’s worth a try. Contact creditors even if they are not contacting your students.
5. Cut expenses. From areas identified in a spending plan or budget, have your students examine which items they can stop buying, and where they can cut back in other areas. Have them use the money saved to pay off creditors’ bills.
6. Sell rarely used items and use the cash to pay off debt. But have your students sell these items personally rather than through a pawnshop, since pawnshops typically try to purchase items for less than they are worth.
7. Try to increase income. Can your students get a second job—or work overtime—and apply the additional earnings to creditors’ bills? Help them consider the effect their absence could have on their families’ well-being and make the best decision after weighing all factors.
8. When one debt is paid off, redirect the payments to pay off another loan.
9. Consolidate loans. Shift higher-interest loans to a single lower-rate loan.
10. Keep only one or two credit cards. Cut up the other cards and call the companies to cancel the accounts. Consider reducing the credit limit on remaining cards.
11. If your students need more help cutting debt, have them contact a nonprofit consumer credit counseling agency such as the National Foundation for Credit Counseling (1-800-388-2227). Nonprofit groups such as this can help restructure debt payments so it’s easier to pay them off. |
