It is important to try to improve your credit rating. Paying off debt on time should be seen as a vital part of keeping your financial affairs in order. Often, people will fail when trying to improve this rating because they think that taking out more credit or different types of credit will help. In reality, planning and budgeting are the key to improving your credit rating and many people find this a lot less appealing than taking out another credit card. However, the truth is that there is no substitute for paying your bills on time, and paying them off as quickly as possible.

Budgeting is the Key

Often people lose track of their finances because they’re not managing their money properly. Setting a simple monthly budget will shed light on the actual state of your finances and provide a guide on what you can or cannot afford.

Don’t make purchases on credit, even if you see an item that has been discounted and think that it’s a good bargain. If you put this on your credit card but do not pay the full balance when the bill arrives then, due to interest charges, the item will work out to be more expensive than you think.

Short and long term budgeting are crucial when trying to improve a credit score and get out of debt. Once you make these plans, you need to stick to these budgets and not deviate. Work out what your monthly income is and also your fixed monthly expenses. By doing this, you can calculate what your disposable monthly income will be. These short term measures can allow you to make longer term plans, such as saving up to pay cash for larger purchases such as vacations, Christmas gifts, or furniture. When you quit putting puchases on credit and pay down the debt you already have, your credit score will gradually improve.

Spending Money You Don’t Have?

Although the overall level of personal debt has gone down during 2010, many of us are still too careless with our credit cards. Spending money you do not have is extremely damaging to a credit rating. Credit cards allow people to spend money they do not have because a credit limit is set by a number, not actual money in the bank. People spend 15-20% more when using credit than when using cash, so it is best to pay with cash. Some people take out numerous credit cards and use one credit card to pay off debt on another one. For obvious reasons, this is not a smart thing to do.

Probably the most important thing you can do to improve a credit rating is to pay bills on time. Credit agencies will see it as a big black mark against you if fail to pay bills on time. This will have a very detrimental effect on your rating. If you only pay back the minimum amount required every month it can be difficult to pay off overall debt.

In short, improving your credit rating is a worthwhile goal. Budgeting and being aware of spending habits will help you get there.

We have reviewed 8 everyday items and personal finance products which you may or may not already have in your life, and a guide to help you decide which ones are worth keeping and which are impeding your frugality.

When you are trying to live a frugal lifestyle, it is important to step back and review the items you have in your life, especially since a number of items you thought were helping you be smarter with your money and protect your family could actually be costing you more.

So without further ado, here’s the list:

1 – Protections

Not all forms of insurance and warranty are un-frugal but in some cases you can be paying extra for coverage you don’t need, won’t use, or isn’t worth the value you are paying for it. For example:

• Extended warranties. An extended warranty on a car or electrical item can be as little as $30 to as much as several thousand dollars and is aimed at extending the manufacturer’s warranty in case there is a problem with the item. However, some items are not likely to break down even within the extended warranty period and you can instead save yourself money by choosing the most reliable brands to start with, and using the products the way they were intended to be used. Even if a product does fail outside of the warranty period, you can still try and negotiate with the retailer for repairs or compensation.
• Credit card insurance. You can be paying around $1 for every $100 of your balance for insurance to cover your minimum monthly repayments if you are unemployed, injured, disabled or you die. However, in most cases your life insurance policy will already cover your expenses in case you can’t.
• Identity theft protection. Having your identity stolen can cost you a lot of money not to mention inconvenience however, at up to $240 per year, identity theft protection can cost you even more, especially when there are significant gaps in the protection according to the Federal Trade Commission’s Chairman. Instead, keep an eye on your own finances and read bank statements carefully, keep your letter box locked and don’t give out your PIN to anyone.
• Phone insurance. Yes, you really can buy IPhone 4 Insurance. However, that doesn’t mean it’s a good deal. Losing your phone is annoying and paying up to $96 per year and an extra $25 to $100 deductible when you claim may seem like a small price to pay for the convenience of an automatic replacement. However, this is not generally a frugal way to spend your money as your phone may already be covered under your home contents insurance. Plus, there can be conditions which may exempt you from a new phone in the insurance contract.
• Collision insurance. If you have an older vehicle, you could find a more frugal use for your funds than paying for collision insurance. You can be paying an extra $300 per year for reimbursement of the value of your car in the case of an accident. However, the cost of the coverage is likely to overtake the maximum amount the insurance will pay for so once the cost of the insurance is 10% of the car’s book value, the policy is not worth keeping.

Verdict: Not frugal.

2 – Account and investments which charge fees

Your transaction and savings accounts and investments are supposed to be making it easier for you to manage your money and make every dollar go further. Therefore watch out for these expenses which can eat into your frugality:

• Sales commissions on mutual funds. Load mutual funds can be paying four to six percent in sales commissions to your broker or financial advisor, where no-load funds often perform the same or better for your returns. Therefore, shop around for the best performing no-load mutual funds, and remember that even if funds appear to be on par, load funds will need to offer higher returns to make up for the loss of returns to fees.
• Fees on transaction accounts. If you have had the same transaction account for many years, you may not be aware of the new products on the market. For example, there are many transaction accounts which won’t charge you ongoing monthly fees for holding the account, nor require you to maintain a minimum balance to pay you interest.

Verdict: Possibly not frugal—be sure to figure total return including expenses.

3 – Home Equity Loans

In these difficult economic times, people are often tempted to access the equity in their home to help with expenses and family activities. However, equity release schemes can be very expensive as you only get back a fraction of the house’s value and you are giving up a large portion of your accumulated wealth just for cash flow in the short term.

Instead of using an equity release loan or scheme, consider downsizing to a smaller more affordable home and investing the profits from the sale of your first home.

Verdict: Not frugal.

4 – Coupons

Coupons are often touted as the frugal family’s best friend, however, you can find yourself spending more than normal, or getting a decreased value from your purchases simply to make use of a coupon. Therefore, make sure you avoid these non-frugal coupon uses:

• Retailer coupons. If the coupon is for somewhere you already shop then you can use it frugally, but often retailers give out coupons to attract new customers and you can find that you make impulse purchases, without considering whether the item is good value. Therefore, make sure you compare the products and prices of items before you buy somewhere new. You also often can’t use more than one coupon on the same item so the individual discounts may not add up.
• Buying a new product. Everyone has the brands they know and like, but if you receive a coupon for a new product, you may be tempted to buy it. However, make sure you actually need the items, and consider whether your money could be better spent on a product you know you’ll like, rather than on a new brand of product you may end up throwing away without finishing.
• Buy one get one free. This type of coupon offer is only viable for frugality if you are able to use the extra items before they go bad. If you have a big family or are having a party then stock up, but otherwise these free items could be wasted.
• Other brands are still cheaper at full price. If you have a coupon for a branded product, but the store brand is still cheaper at it full price, you are not spending frugally if you spend more on the same product simply because you have a coupon.

Verdict: Sometimes frugal—but only for products you know you would buy anyway.

5 – Convenience foods

Don’t confuse ease of use with enhanced lifestyle because when you buy the more expensive frozen or pre-packaged foods you are paying more and not only wasting your money, but short-changing yourself on the quality family time you could spend preparing food and meals together. Instead of buying frozen meals for when you’re too tired to cook, spend a day with your children helping you in the kitchen to cook up batches of meals which can be frozen. Rather than buying small containers of yogurt for lunch boxes, buy the larger tub and distribute them into your own smaller containers.

Verdict: Not frugal.

6 – Reusable menstrual products

Guys, feel free to skip this paragraph. OK ladies, I want you to stop and think for a moment about how much you’re spending every month on tampons or pads. Did you even realize there are other options out there? Google “menstrual cups” and you’ll find quite a variety under brand names like Diva, Mooncup, and Keeper. Not only are you saving 10 to 15 dollars each month on disposable products, you’re also stopping all of those products going into landfill. Be sure to read up on these before you buy, however, as they come in different sizes and a proper fit is essential for them to work properly.

Verdict: Frugal.

7 – Beauty products from the kitchen

When we look good we feel good and one of the hardest parts of living a frugal lifestyle can be giving up on beauty products. However, there are a myriad of frugal alternatives right in your own home, such as:

• Enzymes and acids. These features of beauty products are now thought to be more effective at renewing your skin than harsh scrubbing products, and you can find them in natural yogurt. You can make a face mask from just one teaspoon of yogurt once or twice per week and feel refreshed in summer, or warm the yogurt to room temperature in winter.
• Lactic acid. If you don’t want to slather yogurt on your face, use milk or powered milk. You can make a mask out of powdered milk, or simply dip your face into a bowl of fresh milk. The lactic acid is the ingredient in the yogurt which removed dead skin cells and brightens and smooths your complexion. You can even take a milk bath by adding a cup of milk or milk powder to your bath water.
• Probiotics from the inside. Don’t forget to eat some of the yogurt too, or add probiotic capsules to your diet as this helps improve your complexion form the inside by neutralising and removing toxins before they can be pushed out through your skin – prevention is better than cure.
• Fruit masks. Fruits such as kiwi, peaches or papaya can be pureed to create a face mask but remember the acids in the fruits work quickly so don’t leave them on for more than a couple of minutes. For dry skin, try an avocado paste mask.
• Apples. You don’t have to do anything to your apples except eat them – including the skin as that’s where most of the nutrients are found – as apples contain pectin which cleanses your intestines of toxins which would normally be excreted by your skin.
• Basic toner, cleaner and moisturiser. With the natural fruits and acids working on perfecting your skin you will find you don’t need to spend a lot of money on the fancy toners, cleansers and moisturisers. Instead, look for products which don’t have acids or enzymes in them to give your skin a break.
• Aloe Vera. This is a very simple product which can be used to great effect as an eye gel and wrinkle smoother. If you have puffy eyes in the morning it will firm up your skin and it can be used in place of your regular moisturiser several times a week.

Verdict: Frugal.

8 – Lighting

One of your biggest household bills will be for your power and there are a number of ways you can reduce this cost until your whole family gets into the habit of turning off the lights when they leave the room. Using compact fluorescent light bulbs in all of the sockets in your home can save you hundreds of dollars per year. For a longer lasting alternative, LED lights will save you even more money because they are maintenance free and you won’t have to replace them for years.

Verdict: Frugal.

Alban is a personal finance writer at Home Loan Finder, a home loan comparison website.

You’re not alone. Many people face financial crises at some time in their lives. Whether the crisis is caused by personal or family illness, the loss of a job, or simple overspending, it can seem overwhelming. But often, it can be overcome. The fact is that your financial situation doesn’t have to go from bad to worse.

If you or someone you know is in financial hot water, consider these options: realistic budgeting, credit counseling from a reputable organization, debt consolidation loans, or bankruptcy. How do you know which will work best for you? It depends on your level of debt, your level of discipline, and your prospects for the future.

Developing a Budget
The first step toward taking control of your financial situation is to do a realistic assessment of how much money you take in and how much money you spend. Start by listing your income from all sources. Then, list your “fixed” expenses — those that are the same each month — like mortgage payments or rent, car payments, and insurance premiums. Next, list the expenses that vary — like entertainment, recreation, and clothing. Writing down all your expenses, even those that seem insignificant, is a helpful way to track your spending patterns, identify necessary expenses, and prioritize the rest. The goal is to make sure you can make ends meet on the basics: housing, food, health care, insurance, and education.

Your public library and bookstores have information about budgeting and money management techniques. In addition, computer software programs can be useful tools for developing and maintaining a budget, balancing your checkbook, and creating plans to save money and pay down your debt.

Contacting Your Creditors
Contact your creditors immediately if you’re having trouble making ends meet. Tell them why it’s difficult for you, and try to work out a modified payment plan that reduces your payments to a more manageable level. Don’t wait until your accounts have been turned over to a debt collector. At that point, your creditors have given up on you.

Dealing with Debt Collectors
The Fair Debt Collection Practices Act is the federal law that dictates how and when a debt collector may contact you. A debt collector may not call you before 8 a.m., after 9 p.m., or while you’re at work if the collector knows that your employer doesn’t approve of the calls. Collectors may not harass you, lie, or use unfair practices when they try to collect a debt. And they must honor a written request from you to stop further contact.

Credit Counseling
If you’re not disciplined enough to create a workable budget and stick to it, can’t work out a repayment plan with your creditors, or can’t keep track of mounting bills, consider contacting a credit counseling organization. Many credit counseling organizations are nonprofit and work with you to solve your financial problems. But be aware that just because an organization says it’s “nonprofit,” there’s no guarantee that its services are free, affordable, or even legitimate. In fact, some credit counseling organizations charge high fees, which may be hidden, or pressure consumers to make large “voluntary” contributions that can cause more debt.

Most credit counselors offer services through local offices, the Internet, or on the telephone. If possible, find an organization that offers in-person counseling. Many universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service operate nonprofit credit counseling programs. Your financial institution, local consumer protection agency, and friends and family also may be good sources of information and referrals.

Reputable credit counseling organizations can advise you on managing your money and debts, help you develop a budget, and offer free educational materials and workshops. Their counselors are certified and trained in the areas of consumer credit, money and debt management, and budgeting. Counselors discuss your entire financial situation with you, and help you develop a personalized plan to solve your money problems. An initial counseling session typically lasts an hour, with an offer of follow-up sessions.

Auto and Home Loans
Your debts can be secured or unsecured. Secured debts usually are tied to an asset, like your car for a car loan, or your house for a mortgage. If you stop making payments, lenders can repossess your car or foreclose on your house. Unsecured debts are not tied to any asset, and include most credit card debt, bills for medical care, signature loans, and debts for other types of services.

Most automobile financing agreements allow a creditor to repossess your car any time you’re in default. No notice is required. If your car is repossessed, you may have to pay the balance due on the loan, as well as towing and storage costs, to get it back. If you can’t do this, the creditor may sell the car. If you see default approaching, you may be better off selling the car yourself and paying off the debt: You’ll avoid the added costs of repossession and a negative entry on your credit report.

If you fall behind on your mortgage, contact your lender immediately to avoid foreclosure. Most lenders are willing to work with you if they believe you’re acting in good faith and the situation is temporary. Some lenders may reduce or suspend your payments for a short time. When you resume regular payments, though, you may have to pay an additional amount toward the past due total. Other lenders may agree to change the terms of the mortgage by extending the repayment period to reduce the monthly debt. Ask whether additional fees would be assessed for these changes, and calculate how much they total in the long term.

If you and your lender cannot work out a plan, contact a housing counseling agency. Some agencies limit their counseling services to homeowners with FHA mortgages, but many offer free help to any homeowner who’s having trouble making mortgage payments. Call the local office of the Department of Housing and Urban Development or the housing authority in your state, city, or county for help in finding a legitimate housing counseling agency near you.

Note: This is Part 4 of my “Get Out of Debt” Journey series. You can find the other posts in the series here.

My husband and I had finally gotten serious about getting out of debt and had been slowly making progress for several months. Although we faced the usual difficulties that come with living and breathing, we soon discovered that the biggest obstacle was ourselves. Our own enthusiasm and motivation were starting to fade, and we were getting a little sloppy about sticking to our budget. We needed a support system to keep us on track.

At the time, I was participating in an online forum that focused on credit cards and consumer debt. The folks on that message board gave me another set of accountability partners, in addition to our classmates in Financial Peace University (FPU). Having a support group is extremely important to anyone pursuing a long-term goal, whether it’s weight loss, getting out of debt, or getting a college education. The great thing about the online forum was that many of the posters were further along in the process than I was, so I got to seem them do a “victory dance” when they finally paid off that last bill. It was very motivating.

Sometimes I had to post messages to my online friends to psych myself up. Here is one post of mine from 2004 to show you what I mean:

“Before now, we’ve been making extra payments willy-nilly, then slacking off every time something came up. Problem is, something’s always gonna come up. But starting now, we’re getting lean and mean.

No more eating out every time we get tired. We’re putting $100 a month in an envelope for “blow money.” When it’s gone, no more fun and games until next month.

The Dodge Neon needs a new air conditioner. It will have to wait. I only drive five miles to work, and I can stand to be hot for ten minutes. Fixing it will be our reward once the other car is paid off.

The Ford Taurus could use some dent repair and a new paint job. Tough. It can wait until the credit card debt is all paid off.

No more using the Emergency Fund for non-emergencies. I have about $200 in my Paypal account that we can use for Christmas. Any other non-budget items will have to be negotiated at a family conference. According to the snowball calculator, we can be debt free (except the house) in about 18 months. Yippee! Now for the hard part–DOING IT!”

We had a couple of smaller bills that we were able to pay off within a few months. It felt so good that I took one “Paid in Full” receipt and hung it on the refrigerator for several weeks. It made me smile every time I looked at it.

But I also had a much bigger motivator to keep me going.  I’ll tell you about it next time.

To quickly recap Part 1, my family was $25,000 in debt with no savings, and seriously stressed out. Chet and I had enrolled in Financial Peace University, and were excited about the prospect of becoming debt free. 

Our first class got us even more motivated. We met others who were in similar circumstances . . . some a little better, some a little worse. Our instructors had recently completed the class themselves. They explained that the concepts had greatly improved their lives and hoped the same would happen for us.  Then we watched the first video. Dave Ramsey gave an overview of the program, and we learned that our class would consist of seven Baby Steps. Step One was to get $1000 in the bank for a starter emergency fund.

Dave told us we needed to  put $1000 aside within one month. At the time, I thought he was crazy. We could barely pay all our bills, so how could we come up with another thousand bucks within a month? Then Dave told us how to do it. Sell a bunch of old stuff. Work extra hours or take a second job. Cut expenses. Or preferably all of the above.

So we did just that. We had some college textbooks lying around that we sold on Half.com. I took a second job teaching for the University of Phoenix. Chet taught summer school. We got on a written budget and cut back on expenses like eating out. I started clipping coupons and stockpiling groceries when they went on sale.

Within a month, we had scraped up $1000. We were proud to report to our classmates that we had completed Baby Step One. Now we could get serious about attacking the debt. Or so we thought.

To help fill in the some of these little-known gaps, I’m starting a series of posts about how my family actually did it. So without further ado, here is the first installment.

Part 1: How we started

The year was 2004. At the beginning of our journey out of debt, my family consisted of me, my husband Chet, and our three-year-old son “Bub.” We had approximately $25,000 in credit card, cash loans and car debt, and we weren’t happy about it. At the time, Chet and I were both working outside the home, and we were living paycheck to paycheck. We were extremely lucky not to face any serious emergencies at that time, because we had less than $500 in savings.

We weren’t poor. We had good jobs and a 2000 square foot house, but we had a negative net worth anyway. In other words, we were broke.

Credit card minimum payments and car payments ate up about $600 per month of our take home pay. By the time we paid our house payment, utilities, food, and insurance, we had little if anything left over (or so we thought. . .more about that later). Nothing to save for emergencies. Nothing to invest for retirement. No college fund for Bub.

Our paycheck-to-paycheck lifestyle also created an extreme amount of stress. We fought about stupid things like how much to spend on clothing (because we had no money set aside for that, DUH!), whether we could afford to eat out or not, and how much to spend on gifts for family members. An unexpected car repair or a flat tire felt like a bomb exploding and blowing our fragile situation to smithereens. Paying the copay for Bub’s ear tube surgery was a major ordeal that took months to pay off. Our lives might have looked happy on the outside, but the stress we felt was huge.

I began reading The Total Money Makeover by Dave Ramsey and found that many of the ideas made sense. Debt is not a tool, I learned; it’s an unfortunate circumstance that should be avoided. Some of the advice seemed rather shocking at the time. I don’t need to have a car payment? Life insurance is not a good investment? Credit Cards are not a great way to earn airline miles? Fascinating stuff.

Then our church started offering Financial Peace University, a course and support group developed by Dave Ramsey’s organization. Since we approved of Dave’s basic principles already, we figured it was worth trying out. We might learn some interesting tidbits and make new friends. . .and maybe even reduce our debt a bit.

When we arrived at our first class, we thought we were pretty serious about getting financially fit. Turns out, we had no idea what “serious” really meant.

Stay tuned!

Although some people swear they use credit cards as a budgeting tool and don’t overspend with them, I am NOT a big fan of credit cards in any form. Here are a few reasons why I don’t like them:

• Even if you pay them off every month, most people spend 15-20% more with a card than they do with cash.
• You might accidentally miss your due date and get hit with a nuclear bomb in the form of late fees and jacked-up interest rates.
• Even if you always pay on time, credit cards are very sneaky and will often play dirty tricks–like moving due dates, changing terms of service, or “losing” your check to get you to pay late fees or interest.

The only smart use I can see for credit cards, or other unsecured loans for that matter, is to use a balance transfer to lower your rates on credit card bills or car loans you already have. In that case, you aren’t borrowing any more money, just paying less interest on your existing debt. My family did several balance transfers when we were paying off debt, and it helped shorten our payoff time by several months. But if you do get a new credit card, please don’t make any new purchases with it! The object of this game is to pay it off as soon as possible, not dig yourself into a deeper hole.

Don’t get me wrong, people can and do use credit cards responsibly. But credit card companies are often sleazy and play games that I just don’t want to play. They can keep their airline miles and reward points as far as I’m concerned. I’d rather have peace of mind instead.

The consequences of bankruptcy are significant and require careful consideration. Other factors to think about: Effective October 2005, Congress made sweeping changes to the bankruptcy laws. The net effect of these changes is to give consumers more incentive to seek bankruptcy relief under Chapter 13 rather than Chapter 7. Chapter 13 allows you, if you have a steady income, to keep property, such as a house or car, that you might otherwise lose. In Chapter 13, the court approves a repayment plan that allows you to use your future income to pay off your debts during a three-to-five-year period, rather than surrender any property. After you have made all the payments under the plan, you receive a discharge of your debts.

Chapter 7, known as straight bankruptcy, involves the sale of all assets that are not exempt. Exempt property may include cars, work-related tools, and basic household furnishings. Some of your property may be sold by a court-appointed official — a trustee — or turned over to your creditors. The new bankruptcy laws have changed the time period during which you can receive a discharge through Chapter 7. You now must wait eight years after receiving a discharge in Chapter 7 before you can file again under that chapter. The Chapter 13 waiting period is much shorter and can be as little as two years between filings.

Both types of bankruptcy may get rid of debt from unsecured loans and stop foreclosures, repossessions, garnishments, utility shut-offs, and debt collection activities. Both also provide exemptions that allow you to keep certain assets, although exemption amounts vary by state. Personal bankruptcy usually does not erase child support, alimony, fines, taxes, and some student loan obligations. Also, unless you have an acceptable plan to catch up on your debt under Chapter 13, bankruptcy usually does not allow you to keep property when your creditor has an unpaid mortgage or security lien on it.

Another major change to the bankruptcy laws involves certain hurdles that you must clear before even filing for bankruptcy, no matter what the chapter. You must get credit counseling from a government-approved organization within six months before you file for any bankruptcy relief. You can find a state-by-state list of government-approved organizations at usdoj.gov/ust. That is the website of the U.S. Trustee Program, the organization within the U.S. Department of Justice that supervises bankruptcy cases and trustees. Also, before you file a Chapter 7 bankruptcy case, you must satisfy a “means test.” This test requires you to confirm that your income does not exceed a certain amount. The amount varies by state and is publicized by the U.S. Trustee Program at usdoj.gov/ust.