Hector & Mike Gymsplain Debt & Credit Management

On this episode of Financially Naked: Stories from The Financial Gym, our host is Mike Poulin, a DC-based Financial Trainer, and he is joined by fellow trainer, Hector Lopez, who is based in LA. Today, they are going to talk about debt and credit management.

Podcast Notes

• Prior to working with the Gym, Mike worked at a credit union for seven years. Part of this was in the 'debt solutions' department (basically in-house collections).
• For so many, debt is a normal part of life but there are many mysteries around it.
• Collections in general seem to be the biggest mystery and monster when it comes to debt.
• Hector uses the word 'monster' specifically because collections feel like a huge, daunting process.
• Knowledge is power when it comes to debt collectors. Knowing the logistics on the other side will help you be prepared when in this situation.

Practical tips for handling collections:

• Some institutions handle collections in-house while others sell the debt to a third party.
• Each state has its own laws regarding consumer protection, which means the number of calls you receive can vary.
• It can be tempting to ignore calls, but it is better to have a conversation with someone on the other end.
• An unanswered call means they're more likely to keep calling as the laws allow this kind of activity.
• Try to work out an arrangement with the creditor. They're usually happy to get any sort of payment over nothing at all.
• If you have debt, before it goes to collections, paying even $1 keeps the account from going inactive and can help buy a little bit of time.

CREDIT SCORES

• The credit score system in America is relatively new and has many flaws.
• There are three credit bureaus in the United States: Equifax, Experian, and TransUnion.
• While credit score is one aspect of financial health, it is not the most important.
• 35% of credit score is utilization - how much you use on a month to month basis 35% of credit score is payment history. The rest encompasses types of accounts, lengths of accounts, and the number of inquiries.
• Obsessing about your credit score isn't great for either your financial or mental health.
• Once you start focusing on other aspects of financial health, the credit score usually improves over time.
• There are times when credit score is incredibly important, like when you are looking for more credit to buy a home, car, or even renting an apartment. It is a way for banks and lenders to determine whether they think you're a good person to lend money to.
• Even as someone who has worked in the business, Mike feels like there is still some mystery.
• Scores 750+ earn you bragging rights. Anything over that is extra credit. Those 800+ scores come down to time and credit length.

DEBT vs. SAVING

• It is important to build your savings while paying down debt.
• While it can be tempting to throw all of your money at debt for a number of reasons, building an emergency fund will help you truly break the debt cycle.
• You will no longer need to go deeper into debt when something pops up. Your debt payoff journey will not happen in a vacuum, there will be surprise expenses along the way. Having cash saved means you'll be prepared.

BUDGETING

• One way we focus on saving and paying down debt is by looking at spending.
• The traditional idea of budgeting can feel restrictive or limiting, but that's not what we do at the gym.
• We focus on empathy, sustainability, and the WHY. Does the spending reflect your current goals?
• Most debt does not happen overnight, rather over purchases or other expenses over time.
• Our focus is to help clients spend intentionally on their goals and joys and cut in the areas that do not.
• The reason trainers ask about your goals is because that is what they want to focus and plan for. If owning a house isn't your goal, it won't be in the plan. If your morning coffee is important, let's put it in the budget!

RESOURCES MENTIONED:

The only place you should check your credit report is annualcreditreport.com. It is backed by the federal government and you can request one free report each year

READ MORE ON OUR BLOG: Ask a Trainer: What Can I Do to Raise My Credit Score

How to Rebuild Your Credit Over Time

How to Use 0% Interest Credit Cards the Smart Way

Meet The Trainers

Meet Hector Lopez

Meet Mike Poulin