Recently I was approached and asked to help design a plan to help fix this person's credit score. He told me his credit score recently dropped from the mid-700's to under 600. The financial situation that caused this has been resolved and his goal now is to fix his credit score. He was confused by the different advice he had been given by several other people. i.e. Transfer the credit card balances to one credit card and cancel the rest, and pay the minimum balance on the credit cards and then pay cash for everything else. He was not aware of how his credit score was calculated. So I explained the guidelines, which are:

• 35% payment history

• 30% amount owed

• 15% length of time for credit

• 10% type of credit in use

• 10% new credit

When I started to ask some questions, such as:

• "How many accounts on your credit report are showing a late payment?"

• "What are the credit limits on your credit accounts?"

• "How much disposable income do you have to put toward your debt?"

The answer to all of these questions was, "I don't know."

At that point, I realized that developing a plan to fix his credit score was putting the cart before the horse. First, I told him that he needed to develop a budget to determine how much money he had to put towards his debt. Second, he needed to get a copy of his credit report. Third, he needed to develop a financial plan, set goals on what he wanted to accomplish. i.e. Have the debt from the credit cards paid off in two years. Then he could look at the different possible ways to accomplish this goal. And finally he could evaluate the different possible ways of accomplishing the goal and pick the one that had the most positive impact on his credit score.

Remember, if you’re not working the system, it’s working you.

PapaJoe

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