In the spirit of “hope for the best, plan for the worst,” we need to talk about a part of your financial future that may be a possibility you don’t want to think about: a financial crisis.
We get it, it’s not something you want to accept – that it could easily happen to you. This makes it all the more important to discuss. Who knows what life event could come to be, such as a lost job, divorce, or injury, that could affect your financial state and credit score. That’s why we are here to give you an outline for a plan of action and way to handle the phases of a financial crisis, for the “worst case scenario” moments in life (just in case!).
Calm the Emotional Storm
A major financial crisis or disaster will undoubtedly stir several visceral emotions within you, as is to be expected. Your financial future and current state of living are in complete upheaval and you just want it fixed soon. As difficult as it can be, take some time and some deep breaths.
You need to let the initial knee-jerk reaction to your financial crisis pass so you can formulate your plan of action with a clear mind. The worst idea would be to make important and life-altering decisions under emotional duress; this has a high risk of making poor choices to relieve uncomfortable emotions in the moment instead of choosing long-term solutions to repair your credit score.
One way to help calm your emotions is by being transparent and communicative with friends, family, and creditors about your situation. You never know what kind of advice others may offer you from personal experience, as well as an ability to see your information from a different point of view. Outside sources could provide just what you need to get started on your game plan for credit score repair.
Get a Pulse on your Credit Score Crisis
Now that you have your emotions calmed and have a clear credit-savvy head on your shoulders, it’s time to get into game plan mode and get a real feel for what state your finances are in because of this crisis.
First, best, and easiest place to start: free credit checks. Your credit report is your financial profile to the world. It will give you the opportunity to determine and financial damage from your emergency. You cannot properly respond to a crisis if you don’t understand all the details of the crisis.
From checking your credit report and credit score, the next financial item to examine is your outgoing versus incoming expenses. This gives you a more day-to-day evaluation of what is going on with your finances. You need to look at your current assets, liabilities, and net worth. It’s all about getting your full financial picture so you can create a recovery plan that will work and stick for your individual situation.
The Game Plan
Now, armed for the task with a level head and full understanding of personal finances, the recovery game plan can be formulated and enacted. The most important thing to remember is that you are dealing with a personal financial crisis, meaning you need to create a game plan that is specific to your needs and situation. No two financial crisis are the same, which makes the first two phases of dealing with a financial crisis so crucial.
A great way to start is by developing new standards for spending for mandatory expenses. Some expenses, like monthly bills, will be in the same ballpark every month, making it easier to budget around them. Set limits on discretionary spending so as not to fall off track and feel like this is extra spending money. All extra income must be devoted to paying off debt and regaining credit control from your financial crisis.
If multiple accounts are heading for collections, try to close out the one with the largest balance to free up additional income to pay off others. Due to what is referred to as prevalence, a factor in determining FICO credit score, the fewer defaulted accounts that are open, the better.
The most important takeaway for mitigating your financial crisis is to stay calm and positive! Overcome the initial emotions, talk it out, plan it out, then act it out. Never feel isolated or that you don’t have outside resources.
