9 Credit Repair Tips to Get You Out of Debt
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, which is impossible if you are adding to it.
Throughout your life, you have many expenses before you. College costs a lot of money. It can even cost more than your house. Because of this crunch on your money, it is important to be patient with purchases and only buy what you can afford. Credit cards provide a false sense of means. Not only are you acquiring debt to make your purchases, but you also have to pay interest on top of what you borrowed. Instead of racking up credit card debt, which leads to needing credit repair, put them away and focus on paying them off.
2. Know the difference between smart debt and dumb debt
Anyone who is in need of credit repair needs to understand the difference between smart debt and dumb debt. Too much dumb debt can get you into a situation where your credit needs improvement. By understanding the difference, you can make wiser choices in the future.
Smart debt is any debt that leaves you with an asset that is worth the cost of the loan. Dumb debt, on the other hand, is credit that is used to buy things that you do not need or cannot afford. It is the dumb debt that gets us into trouble. Paying off the dumb debt as soon as possible — and avoiding it in the future — is a smart financial move and can help you repair your credit.
3. 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.
4. Consider refinancing your mortgage
Refinance interest rates may have changed significantly since you first got your mortgage. If you refinance your home, you may be able to get a better rate and even use some of your home equity to help you to pay off your debt. This can be a smart strategy for credit repair. If you need credit repair, refinancing to shorten the length of the term on your mortgage may not be the best option for you. You certainly save money over the course of the loan with a shorter term, but your monthly payments are higher, which may make your payments more difficult. Instead, you can refinance for a lower rate that gives you lower monthly payments, therefore freeing up more money to go toward paying off things that will improve your credit. Or, you may be able to use cash-out refinancing to tap into the equity in your home to pay off your debt. If you choose to do this, be sure that this is the best use of your home equity.
5. Be smart about a car loan
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.
6. Be aggressive about borrowing for college
Don’t think earning a good income means you should not apply for financial aid to pay for your children’s college. It may be a good idea to take out loans and your children should accept every grant and scholarship they are offered. If your children are able to get any form of financial aid, it can ultimately help you repair your credit since that aid cuts down on the loans you need. Have your kids apply for student loans and apply for PLUS loans yourself. PLUS loans are federally sponsored education loans that give you some options on repayment:
- Standard – fixed payments throughout term
- Graduated – payments that start low and begin to rise
- Income-sensitive – payments based on your actual income
- Extended – payments that let you pay off over a longer timeframe
- Consolidated – payments that include multiple loans in one payment
- Choose the PLUS repayment plan that best helps you on the road to credit repair
7. Consider downsizing your home
If you are in the midst of credit repair, you may not want the large mortgage payments and home maintenance bills that go along with it. This is the time to consider downsizing. You can sell your current home and use the equity for a down payment on a new house and to pay off your debt load. This can really help with credit repair. You may achieve lower monthly payments and can pay off a significant portion of your debt. First, make sure you carefully consider whether this is the best way for you to use your home equity.
8. 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.
9. 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. 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.