fix my credit - part 2

Let's say you bring home four thousand dollars a month. That's a pretty good income to a lot of people, but it's not going to buy you six cars and a mansion. There just isn't enough cash flow there. There are some expenses that are unavoidable, (and taxes are one, which is why we said "bring home;" it's income after taxes) such as insurance (although you should insure yourself for most things) food, clothing, utilities, you get the idea. Let's assume that these types of basic needs expenses should consume no more than 30% or so of your income, and the smaller that percentage is, the better. So in our example, that would mean that we need to budget no more than around $1,200.00 a month for all of those things, leaving us with $2,800.00 for everything else.

We still don't have a car or a house yet, or any furniture for that matter, so let's see where the rest of it goes. Very few lenders will allow someone to borrow more than about 48% of their income to buy a house, which means your payment can't be higher than $1,920.00 dollars. But my goodness, that's a LOT of house. Are you sure you need that much house? If you max out your borrowing power for your house you have $800.00 left over to buy furniture, go out to eat, go to a movie, vacation, oh - and get a car.

But you want a nice car (or three) to go in that nice big garage you've got. So you lease, or go to a bunch of "sales" and end up with $750.00 a month in car payments. But you've still got insurance and gas to pay for, but only fifty dollars a month to spend. And you still don't have that big screen TV you want or a couch to watch it on. So you tighten your belt for a month or two and then get a credit card and trade another $250.00 a month of your cash flow to get the house all gussied up. And then, you decide that you need a vacation.

It's obvious that you are already bankrupt. You have more expenses than you can pay for with your income. And the only way out of the situation is to get some of your cash flow back to deal with the rising mountain of debt. The problem is that all of your cash flow is committed to someone else's pocket. You don't have a dime. You've got lots of stuff, but it belongs to other people. Your cash flow has become their cash flow. It's not long before you're missing payment, defaulting on some of the small loans - and before you know it you're credit is a train wreck and you don't have any idea how to fix it.

You may be one of those folks who never made much money at all. I know I was for the longest time. I never had a chance to build a good credit history because I always spent more than I earned trying to have more stuff than I could afford. I never had good credit and lost it, I never had good credit at all - that is, until I got really protective about the cash flow I did have.

I know what some of you are thinking. All I need is more income and everything will be ok. Wrong. You are spending every dime and more right now, more dimes will just fly right out the window after them. You have to change your habits before you can fix your credit, until you do that, more income will just make your problems worse. But you can fix your bad credit, all it takes is a little downsizing and some time.