“The whole experience has been very empowering. We may not have a lot of money, but now I know we have options and we can make choices towards financial stability and security. Financial skills are not a given for people in our communities, unfortunately, so we need organizations like Neighborhood Trust!”
—Michelle Torres, Financial Empowerment Center Client
Michelle used to work as an executive assistant, but because of some health challenges, she is now a homemaker and homeschooling parent to her 5-year-old son and 7-year-old daughter. Her husband works in construction. Despite being a very organized person who pays her debts on time, Michelle has big expenses, especially her food and medical expenses. In addition to the inalterable high cost of her prescription and over-the-counter medications, Michelle spends a lot of money on whole and organic foods to help stabilize her health and make sure her family is healthy. At a free orientation for prospective homeowners at Neighborhood Housing Services South Bronx, Michelle was referred to the City of New York’s free Financial Empowerment Centers.
When Michelle met her Financial Counselor Bernard Saavedra at a Center coordinated by Neighborhood Trust, she wanted to learn about improving her credit now, but she also had that long-term goal of homeownership and was hoping for some help with budgeting to help her save for that down payment.
First, they pulled her credit report, which showed $34,000 in student loans but no other open lines of credit. She was making her loan payments on time, which was good for her credit, but the $444 a month she was paying was much too high compared to her income. Bernard suggested she contact her creditor to obtain an income-based repayment plan that would lower her monthly payment.
Bernard also explained that credit scores are calculated in part on how many lines of credit and kinds of credit Michelle has available to her. Bernard recommended a secured credit card, and helped her choose a financial institution that Michelle could easily get to and that had a socially responsible product.
Then they looked at her budget. Michelle had come prepared, with her monthly expenses already written down. She explained that good food and paying her debts on time were important. From her priorities, goals and notes, they built a monthly budget Michelle could live with, while still having a $200 surplus.
Michelle’s work with Bernard inspired her to look even more closely at her budget. First, she called her student loan creditor and asked for income-based repayment. She negotiated a monthly payment of just $100, less than a quarter of what she had been paying.
Then she attacked her household expenses. “My budgeting spreadsheet revealed that we were spending a huge amount of money on toiletries,” she says.” I cut back by finding products such as body lotion that the whole family could use instead of buying several kinds. I purchased magazine subscriptions to get my favorite magazines for less than a dollar an issue, rather than several dollars each at the drugstore. We make and carry our own coffee, water, lunch and snacks when we go out. And, I stopped going to stores often! I go into a store when I need something and with a list in hand.”
Even with Michelle’s high standards for healthy food, she was about to find savings on the grocery bill, too. “I stretched the groceries by not eating meat some days. I eliminated waste by planning my meals, checking my produce each day to use things up before they went bad, and eating leftovers.”
Living on a budget didn’t mean sacrificing fun, though. “I bought a yearly tax deductible membership to the New York Botanical Garden so that I have a nice place nearby to take the kids. It’s cheaper and they have great events!” They even managed to go on vacation. “Because we don’t go out much, I thought it was important for us to do something with the kids.” Vacations, it turns out, can also be done on a budget! “Instead of flying, which can get pricey fast for a family of four, we used our own car and rented a hotel at the Fire Island National Seashore. Instead of staying right at the shore, we stayed several minutes away and literally paid a quarter of the price. I also researched a good supermarket in the area and filled the fridge with fresh fruit, juice boxes, coffee, snacks and breakfast food so we only ate out once a day.”
Next, she looked at her taxable income. In addition to the tax deductible Botanical Garden membership, she donated her wedding dress and a whole lot more to the Salvation Army. She enthusiastically reflected on this with Bernard: “Donations being tax deductible helps you to lower your taxable income and get a bigger return. You can donate operational used electronics, clothes, tools, furniture … almost anything, and turn your cast-offs into money!”
While Michelle came to the Financial Empowerment Center to work on her own finances, they were intimately tied to her husband’s budget, of course. In particular, he was struggling with a bank credit card. “The bank situation was very frustrating because we really were trying to do the right thing and pay what we owed on a long closed account that had been in collection for some time. However, they kept charging it off, sending it to collections and then periodically retrieving the account to re-open it and add more interest and penalties! I was confused because I thought they were not allowed to do this and then really disheartened by the reality that large corporations find loopholes to get away with what I think should be considered predatory practices. Yet, I knew this debt needed to be resolved.” Michelle’s quote illustrates how opaque and confusing situations like this tend to be. When a debt falls into collections it can be transferred many times between collection agencies or even back to the original creditor if a collection agency had been temporarily contracted. As such, it can be alarming to see a single debt appear multiple times on one’s credit report.
Additionally disarming is the fact that the amount is often higher than the client remembers, since additional interest and fees often accrue when the account falls into poor standing.
The next time the $4,300 debt went into collections, Michelle called the collections agency and negotiated a deal on her husband’s behalf. “I think this is an important lesson for anyone trying to get out of debt,” Michelle says. “Sometimes it will be in your best interest to cut your losses and just settle the debt with a collection agency. I simply responded to one of their letters to settle the debt for less than was owed, paid them by phone and they sent a receipt and reported the settlement to the credit agencies for me.” Her husband’s credit score went up 112 points, from “needs improvement” at 603 to the high end of the “good” range at 715. That’s going to help a lot when they’re ready to buy that house.
Of course, even the best budget has to absorb the occasional shock. Michelle told Bernard, “My laptop absolutely died! I had to have the memory extracted and buy a new laptop in an unforeseen and very upsetting episode. I opted to buy a different brand of laptop, which was several hundred dollars cheaper.”
Now Michelle and her husband are focused on savings. When she first started working with Bernard, their savings for a down payment on a home took a hit. “We used savings to resolve debt issues and emergencies, which was necessary. What I’ve learned about savings is that it ebbs and flows so it’s important to keep saving as radically as we can. Our plan is to split our savings into different pools: savings for the house, emergency savings and savings for recurring wants like Christmas and vacation. This will give us better control so we’re not depleting vital savings. Also, we plan to live relatively debt free. The credit cards we each have now are secured cards, which we are using strictly to rebuild our credit. For other things, we will continue to use cash, which makes it ever more important for us to save aggressively.” Their down payment savings account is still recovering, but in just a few months, Michelle expects to be ahead of where she was when she started working with Bernard.
“The experience has been an adventure,” she says, “and I am considering starting a blog to help people in my own community by researching ways to have good quality of life on a limited income and sharing those ideas.”
“I think Michelle is the best example of an empowered person that uses her skills and resources to improve her quality of life,” says Bernard.
We couldn’t agree more. In just eight months, Michelle and her husband accomplished great things:
- Her credit score went up 67 points, from “fair” at 671 to “excellent” at 738.
- She reduced her student loan payment from $444 to $100 a month.
- She was approved for a secured credit card with a $300 credit limit.
- She reduced expenses that she had previously thought non-negotiable.
- She settled her husband’s $4,314 debt by negotiating with a collection agency.
- Her husband was also approved for his own secured credit card with a $300 credit limit.
- His credit score went up 112 points, from “needs improvement” at 603 to “good” at 715.