When my friend, James Arlington, walked to my desk in my office in Manchester late last spring, his face was full of despair. His phone was lost the previous day at the train station, and he needed another phone urgently. However, no phone company wanted to trade with him because of poor credit score. For about one year, he had faced issues like loss of his first born daughter and change of job that threw his finances off balance. After defaulting on several loans, his credit score plummeted, and he is now considered a high-risk party by most financial institutions.
Using a guarantor to secure a phone credit
As a great friend and a neighbor, I could not let James continue suffering. So, I agreed to guarantee him a good smartphone. However, I insisted that he had to get a good credit management plan to clear the contract and get out of debt completely. The phone company agreed and gave James a brand new Samsung Galaxy S6 because my credit score was ok.
Many phone companies are willing to enter into a contract with you even when the credit score is very if the risk level can be lowered. You can do this by raising some deposit, going for a cheaper smartphone, or picking a SIM only contract. You can also use a guarantor with a good credit score who commits to repay the loan in case of default.
The credit management plan that helped James get out of debt completely
The credit management plan we drew borrowed from several financial experts including one of my closest accountants at my workplace accounting department. Here is how it worked.
- Identifying all the sources of revenue
The first step involved identifying all sources of revenue. This included James’s salary plus revenue from part-time jobs he did downtown Manchester. His wife also runs a small bakery shop from the home mini bakery.
- Setting aside cash for all monthly expenses
Having identified all the sources of cash, I helped James to calculate all the monthly expenses and set aside ample cash for them. This included things like rent, utility bills, transport costs, and food for the family. The expenses also factored school fees for his two kids.
- Putting aside some cash into the emergency account
To avoid disrupting the repayment schedule for the mobile contract, James set an emergency account where he kept some of the income to handle unexpected issues.
- He attacked the loans with high interest first
To clear all the loans, James allocated more funds to the high interest and risky loans. For example, the guaranteed mobile phone contract and credit card loans were given priority because of associated high-interest rates. Besides, he kept meeting the minimum monthly payment for other loans such as school loan.
- Identifying areas of austerity and directing extra cash to repay high-interest loans
To make guaranteed mobile phone contract and other loans even easier to clear, James identified areas of austerity in his personal and family lifestyle. For example, he acquired three bikes for him and two children to go to work and school respectively. Then, he subscribed to online movies that only charged a small annual fee and gave up on fortnight visit to the expensive theater. All the extra cash was directed to clearing the high-interest loans.
- He checked with the reference bureau and corrected the credit report
Within six months, James had cleared 50% of the loans, and everything appeared manageable. He went to the credit reference bureau and corrected the report that had a number of mistakes. Even before the phone contract was over, his credit score had picked up, and financial institutions can now give him credit once again.