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5 Credit Repair Tips to Get You Out of Debt
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If your credit score needs a lift and debt is dragging you down, know that creating and committing to a debt payoff strategy can have a positive impact on your score.
There are several ways to get a quick credit score boost when paying down debt, which we outline below. The first step of knowing where you stand may be the hardest, but once you map out which strategies that work best for your situation, you can set the path toward rebuilding your credit and financial future.
Should you hire a credit repair company?
There’s no way to raise your credit score overnight, and any credit repair company that offers fast solutions is likely trying to pull the wool over your eyes. In fact, the Federal Trade Commission (FTC) even has a webpage dedicated to warning people against credit repair scams.
There are legitimate steps you can do yourself — without having to pay a credit repair company — to repair your credit, such as reviewing your credit reports for errors, paying down debt and getting a credit card that reports on-time payment activity to the credit bureaus. In other words, taking steps to fix your credit on your own is likely to be safer and cheaper.
For those situations where managing your debt and fixing your credit seem impossible on your own, a nonprofit credit counseling agency may be a better choice than a for-profit credit repair company.
These agencies can help you assess your financial situation and create a budget that works for you, and may even put you on a debt management plan. For a reasonable monthly fee, you’ll make one payment monthly to the credit counselor, who will then disburse that payment to your creditors. Plus, the counselor may be able to negotiate lower rates and waived fees.
When choosing a nonprofit credit counseling agency, check that they’re affiliated with either the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA) as a way to ensure they’re legitimate.
If you decide to go with a credit repair company rather than fixing your credit yourself or working with a nonprofit credit counseling agency, it’s important to know your protections under the Credit Repair Organization Act (CROA). The law requires companies to explain the following:
- Your legal rights in a written contract and the services the company will provide.
- That you have three days to cancel without any charge.
- How long it will take for the company to get results for you.
- The total amount you will pay the company for credit repair services.
- Any guarantees the company makes to you.
And if a credit repair company doesn’t fulfill its obligations, you have options in the courts:
- Suing the company in federal court for your actual losses or for what you paid them.
- Seeking punitive damages against the company for violating the law.
- Joining other people in a class action lawsuit against the company.
5 credit repair tips to boost your credit and get out of debt
When trying to improve your credit standing while reducing your debt load, know that there are few quick fixes unless you get a windfall and that it will take time and patience.
Negative marks stay on your credit reports for years — to be specific, late payments and foreclosures stay on your reports for seven years. Bankruptcies stay on your reports for seven years in the case of a Chapter 13 bankruptcy and for 10 years in the case of a Chapter 7 bankruptcy.
However, by making a budget you can stick to, assessing where your credit is right now, and taking the right steps to feed positive information to your credit reports, you can make progress.
Here are a few key steps that can help you along your credit-building journey.
1. Pull your credit reports and credit scores
Reviewing your credit reports, along with checking your credit score, will allow you to understand your starting point as you work to pay down debt and repair your credit. Your credit report will show any outstanding balances on loans and lines of credit.
You should go through your report from each credit bureau and identify any negative marks dragging your credit score down. If anything on your reports is inaccurate, such as accounts that aren’t yours or a file mix-up with someone with a similar name, you can file a dispute to have it removed.
Know that while you can try to dispute legitimate negative items on your credit reports, such as late payments, the credit bureaus will likely reject your request to remove them once they conduct their review of your dispute with the lender.
Note that you’ll have to file a separate dispute with each bureau that shows the information, but if one credit bureau makes a correction based on the dispute, it is required to notify the other two bureaus.
Under federal law, consumers are entitled to one free credit report from each credit bureau per year, accessible through annualcreditreport.com. And through April 2022, all three credit bureaus are offering free weekly credit report access due to the COVID-19 pandemic.
2. Commit to a debt repayment strategy
Paying down revolving debt accounts is one of the fastest ways to boost your credit score, as credit utilization (how much you borrow compared to your credit limits) accounts for 30% of your FICO Score.
When you have a line of credit that you borrow from as needed and pay back as you go, that’s called revolving credit. Credit cards and home equity lines of credit are two common types of revolving credit. Installment loans, like auto loans or mortgages, do not factor into credit utilization.
High credit utilization indicates to lenders that your finances are strained and that you might have trouble paying back what you borrow, and personal finance experts recommend you keep your revolving credit balances well below 30% of your credit limits for maximum credit score results.
There are three main ways to approach paying down your revolving debt:
- The debt snowball method. With this approach, you tackle your smallest debts first by allotting bigger payments while only paying the minimum due on the larger debts, hitting achievable milestones early and working your way up to the bigger debts last.
- The debt avalanche method. This approach focuses on paying off the debts with the highest interest rates first, which is the best option for saving money on interest charges.
- The debt snowflake method. If you can’t dedicate a set amount of extra cash to your debts each month, the debt snowflake method allows you to chip away at what you owe. With this method, you make the required monthly payments, while searching for opportunities to save in small ways and put that money toward your debts. For example, you might bring in extra money with a side hustle or save by canceling subscription services.
3. Consolidate your debt
Consolidating multiple debts into one can also help your credit score and debt repayment strategy in three ways:
- You can pay off higher interest revolving debt accounts, thereby reducing your utilization ratio
- You can also possibly save substantially on high interest charges with a lower rate loan
- You’ll have one set payment amount with a clear end date
Consolidating your debt allows you to turn multiple payments into one. And, depending on your credit history and the lender, you may get a better APR than what you’re currently paying.
You can find personal loans from banks, credit unions and online lenders — and by signing up for a free LendingTree account, you can comparison-shop loans from a variety of lenders.
Once approved, your new lender may send funds to your creditors or to you directly to apply toward your debts.
With a balance transfer credit card, you’ll apply for a new credit card offering an introductory 0% APR period on balance transfers, then request a transfer of debt from your old account or accounts to the new card. Note that you can’t transfer debt between cards from the same issuer, and also be aware you’ll likely be charged a fee of 3% to 5% of the amount transferred.
Balance transfer 0% intro deals can run from six to 21 months, and any remaining balance will be subject to the ongoing APR. Personal loan terms, on the other hand, give you anywhere from two to five years in which to repay.
4. Ask for a lower interest rate on your credit cards
More than 8 in 10 cardholders who asked their credit card issuer for a lower interest rate got a reduction, according to research from CompareCards. Despite that high rate of success, just 1 in 5 cardholders have tried asking.
If you’ve been with the issuer for a while, and you’re not behind on your payments, you’ll have a higher likelihood of success when requesting a rate reduction. When you call the issuer, be ready to ask for a specific APR rather than just a lower rate. It can also help if you have competing credit card offers, such as prequalification offers received online or in the mail. If your request is approved, make sure to ask whether the rate reduction is temporary or permanent.
While a lower interest rate won’t immediately boost your credit score, it will help you save money when carrying a balance and potentially allow you to pay down debt more quickly. And as explained above, lower utilization on your revolving accounts will improve your credit score.
5. Create an emergency fund
To prevent taking on more debt, having an emergency fund allows you to draw from savings to deal with unexpected expenses. A good rule of thumb is to stockpile savings equivalent to three to nine months of your income in a savings account, allowing it to earn interest and keeping it separate from the funds you use for day-to-day spending.
The exact amount you need in your emergency fund will depend on factors such as your housing payment, the number of people in your household and the nature of your work. For example, a freelancer without a steady stream of income to count on may need a larger emergency fund than someone with a regular full-time job. If possible, automate the transfer of money to your emergency fund so it will happen each month without you manually having to make the transfer.