Credit Repair Tips for Young Families

As a young family, you may have already found yourself in need of credit repair. Perhaps you have put too much financial stress on yourself as your expenses rose but your income didn't quite keep up. The following borrowing tips can get you on the road to credit repair.

1. Lose the credit cards.
If you are in need of credit repair, the first thing that you must do is get rid of your credit cards. Do not use them anymore. You must pay off your credit card debt, but you cannot do that if you are adding to it.

As a young family, you have many expenses before you. Children cost a lot of money – diapers, daycare, baby equipment – plus you probably want to enjoy life a bit, too. It is important to be patient with purchases and only buy what you can afford. Credit cards provide a false sense of means. Since it is money that you are borrowing, you have to repay the debt plus interest. Instead of racking up credit card debt and needing further credit repair, put the cards away and focus on paying them off instead.

2. Get rid of previous debts.
It is not uncommon to still have debt from your single days or from college, even after you have married and started a family. In order to get your credit in good shape, you should pay off that debt as soon as possible. Student loans are a smart debt – they carry low interest rates and good terms, but you still don’t want to be paying them forever. Focus on your high interest debt first, and then concentrate on student loans once those are paid.

One good strategy for credit repair is to consolidate your high interest debt. You can apply for a loan that allows you to consolidate your high interest debt into one loan with a good interest rate. You can even set up an automatic payment option with your lender or bank. That way, the money goes toward debt repayment before you even see it. Consolidating your debt can help you pay it off faster. The lower interest rate enables you to pay more toward the principal each month so the debt is paid off sooner. Your home equity can also be used this way. But remember, if you use your home equity to pay off debt, it will no longer be there for profit upon the sale of your home.

3. Be smart about a car loan.
As a young family, your clunker from your single days may no longer meet your needs. It may not be conducive to car seats, and it may not be reliable anymore. If you need credit repair but also need a new car, make some careful choices. You could end up paying a much higher interest rate than you can afford. First, try to get pre-approved for a loan so that you can lock in a good rate. Second, avoid using the car dealer’s financial department -- they will probably not give you the best deal. If your need for credit repair prevents you from getting the rate that you want on a car loan, then consider using a home equity loan to purchase a car. This could be a smart move, especially if you use it to also pay off existing debt. Not only can you get a better rate, but the interest on the home equity loan will be tax deductible. Again, remember that if you choose this option, the equity will no longer be available to you upon the sale of your home.

4. Create a budget and stick to it.
Now that you recognize the need for credit repair, the next step is to avoid needing it in the future. Budgeting can help. Look at your monthly take-home pay and add up all of your monthly expenses. Then, look at how much money you actually need for your living expenses and debt payments. If you have money left over, use it to pay toward the principal of the debt you are paying off for your credit repair, instead of more frivolous expenses, like going out to eat and buying items you don’t need. This will help your credit history improve more quickly.

5. Plan for the future.
A final tip to remember is to plan for the future. Even though you are trying to repair your credit by paying off the past, you must still save for the future. As a young family, there are two priorities here: your children’s college and your retirement. Start a college savings plan for your children as soon as possible to give the money the most chance to compound. Also, enroll in your employer’s 401K plan and use other investment accounts to save for your own retirement. These are high priorities that should not be neglected even if you do need credit repair.


 

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