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What’s the upside of the current recession? Clarity about credit. It’s time for us to finally recognize that no gallery, grant, agent, or god is going to make our credit woes disappear. The economy is bad and getting worse, but it’s giving us a gift. There are actions we can take—actions we must take—to guarantee that we can make our art going forward. These actions all center on our relationship to credit.
Think fast: When was the last time you used a credit card? Probably pretty recently, if you’re like most people. These days, using personal credit as a constant source of financing is so common that we barely even register the individual transactions. My first film, A Walk into the Sea: Danny Williams and The Warhol Factory, was made possible by personal credit. Granted, I was conservative (I never took on more debt than I could handle, kept balance-to-available-credit ratios low, used zero percent cards, and paid off the amounts regularly). Still, the cards were a godsend, allowing me to fly to interviews and take calculated risks against future infusions of cash. But what if all that disappeared?
Here’s the kicker: “About 45 percent of U.S. banks reduced credit limits for new or existing credit-card customers in the fourth quarter of 2008,” according to a January 2009 Federal Reserve survey of senior loan officers. And a November 30 report by Meredith Whitney, a former Oppenheimer analyst, states that financial institutions may slash $2 trillion in credit-card lines in the next 18 months.
In other words, your credit card limits are likely to be lowered, and getting new lines of credit is going to be a lot harder. In some ways this is good news. None of us should carry more credit than we can pay down, and lower limits can keep us in the safe zone. But credit is still a useful tool. Like any businesspeople, artists often need access to cash more quickly than our bank balance allows (deadlines to meet before the grant check clears, for example). And as long as we can afford to pay it back, credit can be a lifeline. So what to do?
The first step is to rid yourself of current debt. The truth is, the money that you spend on interest payments is money you can’t spend on making art. If you finance a current project with personal credit you can’t pay down, you’ll still be making payments on that project five years from now—instead of using that money to make new work. You need to look your debt in the eye and:
Figure out how much you owe.
Figure out what your upcoming costs will be.
Determine how much you can realistically spend each month to pay down your balances.
Use on-line credit calculators to determine the fastest way to rid yourself of debt.
A number of websites feature great tools to help you analyze your different cards and their respective balances and interest rates to determine which ones you should pay down first to garner the greatest savings. In general, you should attempt to pay down the highest interest rate debt first. A “debt snowball” calculator allows you to enter up to 20 different debts and their respective APRs. You then enter in how much you can spend each month to pay down this debt, and it will tell you what order/amounts to pay for each card to get you out of debt the fastest.
Power Payment works on the same principle—and the site also has online budgeting, which is very helpful if you first need to figure out how much you can spend on debt payments.
The CNN Money debt planner has a regular pay-down calculator but also allows you to type in when you want your debt to end. It also tells you how much you need to pay each month to make this happen.The second thing you need to do is safeguard your access to credit by improving your Credit (FICO) Score. Your score determines your credit limits, and whether you’ll be offered new credit lines. The lower your score, the harder the credit crunch will hit you. Fortunately, there’s a lot you can do to improve your score. Here are some solid credit repair tips: Order a copy of your credit report, review it carefully, and correct any significant errors.
You are legally entitled to receive one free report a year. You can go to www.annualcreditreport.com and order your free credit report or to www.myfico.com and www.experian.com to order reports for a charge. Changing a mistake on your report (like a mislabeled late payment) can take 30 days to four months or longer. I think this step is best done with friends. Truthfully the report can be a bit daunting, so if you’re with your friends you can have a good laugh at how poorly designed the report is, have some good snacks and plow through finding mistakes. Then write the letters and send them off….
Next, pay your bills on time. I know, it’s a recession. But, now more than ever, it’s important to stay on top of things. A recent missed payment is more likely to lower your score than an isolated late payment from way back. What this means is, forget how you did or didn’t pay your bills before and just start paying them on time now.
Make AutoPay your friend. If you’re traveling a lot or are prone to forgetting, you can set up AutoPay for automatic payment of your credit card’s minimum balance (just be sure to always have enough money in the bank to cover it!). Scared of Autopay? Set a date every month that is “credit day” and stick to paying your bills on that date. The good news is that if you’re serious about debt reduction and you’re paying on-time using the tools on analyzing your credit in the links above, your credit score will improve.
Other tips? Here’s a counter-intuitive one: Use the credit cards you have as frequently as is prudent. A perverse result of the credit crisis is that if you don’t use your credit accounts, the banks may close them or lower the limit. And having your limits reduced can lower your score. The banks are looking for ways to reduce their risk, and an inactive account gives them a great excuse. But remember to use them responsibly; this is not license to go wild. Also, it’s important to keep your overall balance low in relation to your available credit. If your credit limit is $10,000, keeping your balance below $2,500 (25%) will improve your score.
Pay off your credit card debt rather than moving it to lower rate cards. This is important because you want to avoid drastically changing the ratio of your overall balances to your overall available credit. Example: You owe a total of $2,000 on four credit cards, each with a $2,000 limit. Your total limit is $8,000, of which your balance ($2,000) is 25%. If you transfer all your balances to two cards and cancel the other two, your total credit limit is reduced to $4,000 and your $2,000 balance is now 50% of the limit. To the banks, this looks worse than where you started.And what if you have a really questionable credit history?
Open a few new credit accounts, use them responsibly, and pay them off on time. Payment history is 35% of your credit score (new credit makes up 10%; types of credit in use, another 10%; length of credit history, 15%; and amounts owed, 30%), so if you’ve hurt your credit, establishing a good payment history is key to getting your credit score back together. However if you have a short credit history (you’ve never had credit or haven’t used much credit in the past), don’t open a lot of new accounts over a short time period. The banks will think you’re about to go on a spending binge, and new credit is 10% of your score.
How long will it take to improve my credit score? Negative items affect your credit score much more quickly than positive items. Late payments will have a negative impact in just a few months, whereas paying bills on time may take 6 to 12 months to generate a significant improvement. But it’s important to remember that starting right now gets you closer. And remember, a great credit score makes other good things happen. You can qualify for a mortgage, get better rates from the credit cards you do have, and a great score can help with apartment rental and job applications that often include credit checks. Plus, you’ll have the peace of mind of knowing that you conquered the credit demon.
Finally, if this is all too daunting and your bills are mounting and you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor. The key is not to shut down, or pretend a problem doesn’t exist. Remember that you are a resilient creative person, and can use your creative skills to build your way forward through the challenges. Learn from past mistakes—and change them.
As artists we’re skilled at making a lot happen with little money. Let’s use that skill to shape our lives and our work. Let’s use the recession to determine what we want our future to be like—recognizing that with hard work this difficult economic moment will pass both for our country and for us.
Esther Robinson has worked on behalf of America’s artists for more than 14 years in many capacities, including foundation program officer, television and film producer/director, technology entrepreneur, and arts activist. She is the founder of ArtHome a nonprofit “change agent” that helps artists and their communities build assets and equity through financial literacy, credit access, and home ownership. Robinson is also a filmmaker. Her prize-winning film, A Walk into the Sea: Danny Williams and The Warhol Factory, is currently in worldwide release.