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If your credit rating is poor you are likely feeling trapped on a road toward endless debt. Your credit cards are close to, or may have reached their limit. Your percentage rate on those cards is likely the highest allowed by law and you are paying the minimum each month on those cards. You are trying everything to stay afloat, but your ship is steadily sinking further, as it takes on even more debt.

You may even be taking cash advances from legal loan shark businesses that are popping up (PayDay Loans, Advance America, etc.) in your area. Some cash advance businesses are even operating exclusively online, eliminating their expense of a store front. Cash advance businesses are short-term loans (usually under $1500) that require you to repay the loan by your next payday. The initial finance charge is high and if you’re unable to repay your loan at the end of the agreed upon term, you’ll be charged hefty fees in addition to the initial finance charge. Payday loans are much more expensive than other borrowing options. The average APR (annual percentage rate) on a payday loan is somewhere around 400 percent, however, it’s often as high as 5000 percent.

There are only two ways to get out of debt and eventually improve your credit rating, which will open up a new world of opportunity for you. Pay off your debt, or declare bankruptcy and start over.

Both require work and agreement with your spouse, if you have one, to work together in achieving your goal of becoming debt free.

If you plan on paying off your debt:

Help is available from trusted businesses that can assist in financial planning and repairing your credit. However, if you think about it, much of it can be done yourself without assistance.

Challenge Credit Reports

First, get copies of your credit reports. You can obtain your own credit reports. On these reports you will find a history of your credit, including notifications from companies that have reported your history. What most people don’t know is that some negatives can be removed by simply challenging them – all of them – even if they are true.

Basically how credit repair like this works is you, or attorneys you hire, challenge negative marks on your credit report. The Fair Credit Reporting Act gives you the right to dispute anything on your credit report.

Once the credit reporting agency contacts the creditor to verify the account they have 30 days to respond with verification. If they do not respond the mark is removed. If they do respond you can challenge again and ask for real proof. It can get to the point where they have to provide signed contracts, a list of all payments and bills, etc. What often happens is the creditor does not respond and it is removed. These are often the negatives that have gone into collection. Fail to pay again on existing debt, and the company will submit a new report that will appear on your credit report again.

Credit cards.

If most of your debt is due to credit cards, shop around with other card companies. That means contacting them and asking them to quote you an interest rate. They will usually offer an introductory rate much lower than the one you have currently.

After doing that, and being armed with your offered rates from a new card you are considering, call your current credit card company and request a lower interest rate. Let them know you have been offered a new card from a different company and are offering your company a chance to match the offer before you transfer the balance owed to the new card. Don’t tell them the name of the new credit card company (it will be asked), but be sure to shave an additional point off the quoted rate you tell them you have been offered. Yes, lie to them. Credit card companies hate to lose customers and the money they make off of them. They almost always offer to match a lower Adjustable Percentage Rate (APR).

Apartment Costs.

Renters may want to get serious about looking for a new residence. If you rent and have stayed in the same apartment for years it’s likely you have seen a significant increase in your rent. Landlords know (I used to be one) that long-term tenants stay because they either like the place, or they don’t want the hassle involved in moving. They jack up the rent yearly. Within 4 years you might be paying $100 or more than you originally rented the apartment for. You may actually be paying more for an apartment than you would be paying for a mortgage on a home of similar size. Again, negotiate with the landlord for a reduction of rent.

I can tell you as a former landlord, if you are good tenants that have always paid your rent, smart landlords don’t want to lose you. Doing so means repainting the apartment (if they follow the law), doing repair work from “normal wear and tear” of occupancy, a vacancy of at least a month before they can move in new tenants, and gambling they don’t get deadbeats as new tenants. These are all things you should point out to your landlord when negotiating with him – that he will be losing much more money, that will take years to recoup, when his apartment is vacant for at least a month, than he would lose by lowering your rent.

Mortgage.

Homeowners should think about refinancing for debt consolidation, or a lower interest rate, but it isn’t always a clear cut decision in doing this. Extending a 15-year mortgage to 30 years will reduce your monthly payments, but you will end up paying a higher total of interest over the life of the loan, plus costs are involved in refinancing. A Bankrate.com calculator is available that can help you determine if that decision is right for you, as well as other information about refinancing your home. You can also compare offers from up to 5 lenders at LendingTree.com.

Your car.

Your car payment, if you have one is another nut that needs to be cracked every month. Why people insist on owning a new car, or leasing a car they have no intention of owning has become a curiosity for me, now that I’m a little smarter than I was in my mid-twenties. It may be time to place an ad in the paper looking for someone to take over your lease, or purchase agreement. There are dependable vehicles, without all the bells and whistles, that can be had on the cheap. Look for one and avoid a $200+ payment every month, plus the cost of insurance that requires full coverage, rather than the minimum liability coverage.

Other ways to save money.

Cable “Bundling” doesn’t save you money.

If you have a cell phone you don’t need a land line. Also, shop around for a cell phone service provider with a lower rate. T-mobile is currently offering unlimited everything (data, text, minutes) for $50/month.

Cable TV is over-rated. I cut my cable TV dependency years ago and set up a digital antenna to receive free digital broadcasts mandated by the government when analog broadcasts came to an end.

Sure, I had withdrawals losing SciFi and The History Channel, but my cable bill dropped $80/month because I now only pay for high-speed Internet service, instead of bundling. The initial cost of setting up a good free TV system might run about $300, but it will be paid for in about 4 months and you’ll never have a TV cable bill again. To find out more about free digital TV and setting it up, see my previous article HERE.

Shopping at discount stores can save big money on grocery items, as well as clothing. Most people don’t know that brand name companies also package food under different labels. It’s the same stuff, only no advertising money goes into it. Miracle Whip is labeled, Salad Dressing. Heinz ketchup becomes, Tomato Ketchup. Guldens mustard is sent out as, Spicy Yellow Mustard. Bread is 50 cents cheaper at Aldis, just as a dozen large eggs can be currently purchased for 89 cents. There is a long list of food items that are far cheaper than brand name stores offer, but taste exactly the same.

Personally, I don’t buy new blue jeans any longer at $18 or more at Walmart. Boscov’s is the place I shop for those. I’ve paid as little as $10 for new jeans every bit as good as Wrangler.

Car pool if possible. Gasoline is one of the biggest expenses for most people. If you have a co-worker, or two, or three, that lives near you, make arrangements to form a car pool. Driving less, to get to and from work, will find you with more in your pocket. Remember, it’s not how much you make, it’s how much you have left after your bills are paid.

Cut back on eating out, or ordering take out. It’s cheaper to cook at home and brown bag your lunch, than to eat at McDonalds, or get a pizza. It’s also healthier.

Plant a garden. Just a couple of tomato and pepper plants grown in containers will save you money. Tomato seeds: $1.29. Tomatoes, that taste like cardboard, from the store: $2.99/lb.

Cut back on Christmas. That good feeling you get buying gifts is quickly replaced with regret when the credit card bills arrive the following month. Tell the grownups in your life that Santa had to cut back on the gifts, due to the economy and the rise in shipping costs. Christmas has become a holiday to make credit card companies rich and to keep you in debt.

Put your tax refund toward paying off your credit cards. You don’t need a new iPhone, or bigger TV. Don’t pay H&R Block for doing your taxes when they can be done for free online using automated programs that walk you through your return.

The point to all the above is that spending can be brought under control in cases where debt was caused by our wants, rather than our needs. Do you need a new car, every channel provided by your cable service, name brand food, designer clothes, or are these things you want – to present an appearance of keeping up with the Jones’?

Put the saved money into paying off your debt. In cases where your debt was caused by a huge and unexpected financial burden, it may be that bankruptcy is your only option.

Bankruptcy as an option.

If you haven’t gone into foreclosure on your home, you will be able to keep it. In some cases, even after foreclosure proceedings have begun, a lawyer may be able to save your home. The bankruptcy record from the court is deleted either seven years or 10 years from the filing date of the bankruptcy depending on the chapter you declared.

Chapter 13 bankruptcy is deleted seven years from the filing date because it requires at least a partial repayment of the debts you owe. Chapter 7 bankruptcy is deleted 10 years from the filing date because none of the debt is repaid.

Individual accounts included in bankruptcy often are deleted from your credit history before the bankruptcy public record. Usually, a person declaring bankruptcy already is having serious difficulty paying their debts. Accounts are often seriously delinquent before the bankruptcy.

All delinquent accounts are deleted seven years from the original delinquency date, which is the date the account first became delinquent and was never again current. Declaring bankruptcy does not alter the original delinquency or extend the time the account remains on the credit report.

If the account was delinquent before being included in the bankruptcy, it will probably be deleted before the bankruptcy public record, because the original delinquency date is typically earlier than the bankruptcy filing date.

Bankruptcy doesn’t necessary mean an end to building a good credit rating before it’s removed from your credit report.

While some people who never had a credit problem often tell others how to fix bad credit, I know from experience that bad credit and even bankruptcy can be overcome.

I declared bankruptcy many years ago. While it did give me a feeling of failure because I lost everything, it also gave me a chance to start over and not make the same mistakes that found me in that position.

I now own a smaller home that fits my needs.

I no longer own new cars and will never buy one again (why buy something that loses 20% of its resale value as soon as you drive it off the lot?). I no longer rent an apartment to deadbeats who squat for 6 months. I no longer gamble on stocks that some college grad on Wall Street has been told to dump. I no longer trust a boss that assures me my job in an office is secure.

My scenario was the perfect storm – stupidity and over extending on my part, with the sudden loss of income through no fault of my own.

Now, I find ways to make and save money. My current job pays far less than the one I used to have. My job at that time found me in a suit and tie every day. It paid for a mortgage on a $213,000 home at a 10.375 percent interest rate, power lunches, multiple cars, and luxuries I felt obligated to buy. Though I now earn less at my current job, I actually have more in my pocket after paying bills, than I did back then. It’s what you keep, not what you earn that adds up to financial security.

Like President Truman, who had declared bankruptcy himself early in his life, I was determined to pick myself up, lick my wounds, and start toward a goal.

After my bankruptcy was filed I cut back on everything and re-evaluated my needs versus my wants. I rented, because I had defaulted on my mortgage, losing my home and my status as a landlord, but I began saving and I didn’t use credit cards.

If I couldn’t pay cash for it, I didn’t buy it. Though, not using a credit card did create a problem, eventually.

After a few years and with some decent money once again in my savings account, I approached my bank for a small $1000 loan in order to rebuild my credit score.

Unbelievably, they initially refused me. It wasn’t the fact that a bankruptcy existed, it was that I had no credit score. It wasn’t 400, 200, or even 100. Because I refused to accept credit card offers (and offers were in abundance, because credit card companies know you can’t declare bankruptcy again until the first is cleared) I had a credit rating of, Zero. That’s a big round, “0.” As the loan officer put it, “If you had a bad number, we could work with you, but you have no number at all.”

We sat down and talked. I explained the Catch-22 position I was in. I couldn’t get a loan because I had a “zero” score. I can’t improve my “zero” because I have no credit history in repaying a loan, because I can’t get one.

I had her take a good look at my bank account.

She saw the number of years I had banked with them, the deposits I made, and the fact that I had a good employment history.

I showed her my tax returns that included income from websites and affiliate marketing on the Internet. I told her I was probably the safest loan she would make and the ultimate goal was to rebuild my credit score in order to eventually purchase a home within a few years when the housing market collapsed.

We talked at length about my housing market comment and I can say that she revealed some facts to me that only convinced me more that my own opinion was already known, though the imminent collapse of the housing market was not made public back then – the now infamous NINJA loans (No Income No Job or Assets) was already showing signs of failing, as people were slowing falling behind in payments on homes they should never had qualified for.

“Why should somebody with no debt, who has cash on hand, but with no credit score be denied a loan, when a person who has debt, no cash, and a bad credit score can get one?”, I asked her.

Talking directly to the loan officer, rather than accepting  “no” for an answer can make a difference.

What we came up with was my getting a secured loan with my bank. I used some money from my savings to purchase a CD from my bank and offered that CD as collateral against the loan. A loan that had an interest rate of 14 percent over 12 months (a higher percentage than normal, but I wasn’t going to argue).

Now, if I immediately paid off the loan I wouldn’t get a good mark on my credit history. I would need to make payments for at least 6 months to show a history on my credit report (which typically runs 3 months behind).

The $1000 loan was never touched and was used to pay the loan, itself. At month 7, I paid off the balance. If I recall correctly, the total interest over the six months came to about $48.

I then applied for a $2500 loan and a bank credit card. This time I received an interest rate of 9.5 percent on the loan and it wasn’t necessary to provide collateral. Another 6 months and I paid off that loan. I used the credit card to make no more than $20 purchases each month that I paid in full when the bill arrived, avoiding interest charges on the card.

By the middle of the third year I was approved for a $10,000 personal loan (which I never took) and my credit score was in the low-600 range. By year 4 of only using my credit cards (I now had two) to make minimum purchases each month and making sure I was never  delinquent on any bills, I could get a mortgage on a home with a credit score in the high-600’s.

However, I wasn’t going to buy any over-priced home at a time when I suspected the housing bubble would be bursting and interest rates were high. I waited years for it to happen and then another couple of years for home mortgage rates to hit bottom (I came within 0.25% of nailing it).

My bankruptcy has been removed from my credit history, as the 7-year mark was hit some time ago. My credit score is now over 800 (the home purchase and steady mortgage payments gave it a nice jump) and I still make less than $20 worth of purchases on the credit cards I use each month, paying them off immediately upon receipt of the bill, just to show I’m actively using them, which helps a credit score.

For free information on repairing your credit, CLICK HERE.

As a side note, I don’t believe housing prices or interest rates will rise significantly from their record lows in the next 5 years. In fact, I would venture to predict another downturn in both, after the small recovery experienced over the last 6 months, when homes now being held by banks are released for sale in 2014. If you plan on buying a home, now is the time to begin repairing your credit rating.