Credit card and unsecured debt is a problem that plagues many, if not most people.
Debt can become overwhelming, shaving down a person’s credit score and ultimately impacting their happiness and even quality of life. For those with bad or at-risk credit, it will be to your benefit to create a plan for getting out of debt and improving your credit score.
This article will outline some strong tactics that can help you resolve debt and rebuild credit as quickly as possible. If you have gotten into debt and are looking to rebuild credit, then read on for a number of strategies and tips for clearing debt quickly and improving your credit score.
Why Clear Debt and Rebuild Credit?
Millions of people every year get into debt problems through the irresponsible or naïve use of credit cards. Additional debts such as student loans and medical bills can compound the situation, leaving a person drowning in aggregate debt and unable to make their minimum monthly payments. As people use up their available credit – a calculation of your free credit card space that is referred to as credit utilization – the interest and total payments climb, making it a chore for people to pay even the minimum amounts every month.
If accounts go multiple months without the minimum payments being made, the accounts can be closed, charged off, or put into collection. The same thing can happen with unsettled medical bills, while student loans can become delinquent or default. Any of these situations can lower your credit score, which is a three-digit projection of how likely a person is to repay debt. A person with a low or at-risk credit score will be less likely to get approval for future loans or credit. A poor credit score can become a real problem when a person wants to finance a bigger purchase such as an automobile or a home. While most people are better off minimizing their number of credit cards, many will eventually want to finance a home or purchase a vehicle.
For these reasons and a number of other ones, it’s in the best interest of most people to keep their credit score as high as possible and to keep debt to a relative
minimum. If you have a large or even overwhelming amount of unsecured debt, there are some suggestions and tactics for clearing this debt more quickly. These strategies will be discussed further below.
How People Get into Debt Problems
What frequently happens is that people rack up large amounts of unsecured debt in their youth, before they fully understand how credit and credit cards work. Credit card companies love to throw offers at people with pristine credit score, especially those who may be a bit naïve to the payback process and credit cards as a whole. It becomes very easy to accept a credit card offer with an introductory APR of 0% for six months, as most people will be able to convince themselves that they will have no problem making the minimum monthly payments or paying off the debt in full during the low APR period.
The problems arise when the introductory or promotional APR period ends and interest rates climb. The minimum monthly payments climb, doubly so as a person continues to use up available credit on purchases. Some people even fall into the trap of having to use credit cards for routine monthly purchases. Very few people think it’s a good idea, or even acceptable, to use credit cards for items such as groceries or diapers, but economic emergencies and job losses do happen.
Sadly, most people who get into major credit card problems are not making indulgent or lavish purchases on fancy cars and hotel rooms. While some would have you believe that the main reason people get into debt is bad spending habits, the real reason that most people get into debt is unforeseen economic problems. There are a number of regrettable, unpredictable circumstances that force people to use credit cards as a means of keeping afloat. Divorce, medical bills, underemployment, and reduced income are some of the more tragic reasons that people pile up unsecured debt. The good news is that there are paths out of debt and that most people can rebuild credit in a timely fashion.
Where to Begin to Rebuild Credit
To start, it’s in your best interest to get an accurate idea about your current credit score. Your credit score might be significantly higher or lower than what you suspect it to be, and the only way to know for sure is to get a reliable credit report. There is a litany of websites that offer free credit reports once per year, such as Annual Credit Report. While there are usually some discrepancies between the different bureaus, getting a free report from a website such as this is a good place to start.
Additionally, if you already have a number of open credit cards, you may find that your company offers on-demand credit scores for customers. To cite one example, Capital One offers a free credit score via their CreditWise program. This program currently comes as part of the package with all new credit card agreements and is
easily accessible online or via the Capital One app. CreditWise uses the TransUnion credit calculator, which is one of the three main bureaus that determine credit score and creditworthiness. Moreover, CreditWise offers weekly credit updates, as well as notifications if your credit score changes.
Another credit card company that works in tandem with a significant credit bureau is Credit One Bank, which works with Experian to give customers accurate
credit scores. American Express also offers free credit reports to customers. This isn’t to say that you should run out and apply for another credit card – particularly if you’re trying to rebuild credit – but one or more of the credit cards you currently possess may offer free credit reports as part of the agreement. Once you know your credit score, as well as the factors that might be dragging it down, you can come up with a sound, sustainable plan to improve and rebuild credit.
After you have obtained one or more current copies of your credit report, you should scour the reports for any possible errors. If something seems amiss on one of your reports, or if there is an account conflict between the reports, the discrepancy may require further investigation. If you believe there’s an error on one or more of your credit reports, the good news is that it’s fairly simple to report
an error on a given credit report. You should report any possible errors before moving on with your plan to rebuild credit.
Strategies to Rebuild Credit
Once you know your approximate credit score and have a better understanding of your credit situation, you can then determine which strategies will best help you get out of debt and rebuild credit.
1. Pay on Your Due Date Every Month (or Otherwise Satisfy the Creditor)
The number one thing that will help you rebuild credit is satisfying your minimum obligations. This can be easier said than done, but it’s the primary thing to focus on when working to rebuild credit. Creditors will report accounts to credit bureaus – or worse, send them off to collection – if the minimum payments are not being made every month. The leniency of each creditor varies, but most people would not want to risk being late on payments for multiple months.
So, a key part of any plan to reduce debt and rebuild credit is to come up with a sustainable way to pay on each account every month. If a person is in economic turmoil, this may require some finagling. Some creditors, including Capital One and Credit One, offer payment assistance plans to help resolve debt. Credit card companies want to eventually collect on their accounts, and it’s not in the interest of credit card companies to put people into situations in which they can never satisfy their accounts.
It’s in your interest to contact your various credit card companies and see what your options are for settling each account. You may be able to renegotiate fees or monthly minimums if the creditor knows that you are being proactive in resolving
the debt. The last resort for satisfying your monthly minimums would be to do some kind of debt consolidation. This approach is likely more trouble than it’s worth, and it’s in your best interest to avoid this approach unless all other options
for settlement have been exhausted. If you happen to have a chunk of cash that you can devote to resolving debt, then you can contact one or more of your credit card companies about a lump sum settlement.
If you have cash in hand, you may be able to negotiate with a creditor on a significantly-lower number against the total amount due on the account. For example, if you owe $2500 on an account, the creditor may be willing to settle the account for $1200-$1500. The percentage will vary greatly depending on the creditor and the aggregate amount of the debt. Most people with debt problems simply don’t have this kind of cash available, but if you happen to have cash to commit to a lump sum payment, negotiating with a credit card company and clearing the debt on an account is a very effective way to rebuild credit.
2. Maintain Low Balances Whenever You Can
This is again easier said than done, and most people in debt understand the concept. But a crucial way to clear debt and rebuild credit is to keep low balances on most or all of your current accounts. As mentioned above, a key factor in determining credit score is credit utilization. If a person has multiple accounts near debt limit, their credit utilization ratio is going to be high. This will drive down credit score. The magic number for credit utilization in most cases is 30%. A goal for anyone looking to rebuild credit should be to get most or all of their accounts down to 30% usage or less.
Approaches will vary, as some people may want to be off certain accounts in full before focusing on other accounts. As an example, if you have a $10,000 account at limit with an interest rate of 30% and an account of $2500 at limit with an interest rate of 20%, it would behoove you in most circumstances to focus on resolving the larger account first. That said, if you are doing a long-term debt resolution plan, you may want to get the utilization ratio on your smaller accounts down to 30% in the interest of quickly improving credit score. Under this plan, the approach would be to get the lower limit cards under control to improve credit score, then seeking a lower-interest loan to settle the high-limit cards.
3. Apply for a Store Credit Card
There is a great way to tactically use a store credit card to rebuild credit. But it does take a degree of discipline. Retail store credit cards often carry exceedingly-high interest rates of 25-30% or more, as retail stores such as Target or Walmart count on their customers to recklessly use store credit despite the high-interest rates. Even if you have poor credit, there’s still a good chance that a retail store will be more than happy to offer you a low-limit, high-interest store credit card.
The way to use a store credit card to improve credit is to make one small purchase per month, maintain a high ratio of available credit, and to pay off your monthly balance in full and on time. This approach will gradually improve your credit, if you have the discipline to not spend lavishly at retail stores. Moreover, there’s a good chance that the retail store will offer you additional credit if you continue this approach for months on end, decreasing your debt-to-credit ratio and improving your credit utilization.
4. Check to See If You’re Pre-Qualified for Any Credit Offers
Some of the credit cards you currently possess may have offers waiting for you, such as credit line increases. While you would not want to increase your credit line just to spend it, accepting a credit line increase that doesn’t pull against your
credit score is another way to increase your overall credit utilization. The trick, as with the retail store card suggestion levied above, is to let this additional credit sit unused. Like money burning in a pocket, this is much easier said than done.
Pre-qualification offers also do not affect your current credit score. Pulls against a credit score are divided into “hard” and “soft” categories, and in many cases, requests for additional credit are hard inquiries into a person’s credit history. If your credit is above-average, marginal, or even at-risk, you may have a number of outstanding pre-qualified offers that you can use tactically to rebuild credit. Also, if you are looking to rebuild credit, it’s in your best interest to know the difference between a soft pull and a hard pull against your credit score. Hard pulls “ding” your credit, further reducing your score, and should be limited to large, secured purchases. Meanwhile, pre-qualification performs a soft pull on your credit. This doesn’t harm your credit score.
5. Consider a Secured Credit Card
As noted above, most credit cards are considered unsecured debt because they are not backed by an asset. Meanwhile, secured debt is backed by collateral. The most common cases are mortgage or auto loans, which are backed by tangible assets that can be repossessed in the event of default or nonpayment. For those looking to rebuild credit, there are a number of secured credit cards, most of which require a deposit of $150-$200 as collateral.
In general, the credit limit will equal the deposit amount, though this can vary depending on creditworthiness. Much like a retail store credit card, the plan would be to make one small deposit per month on the secured credit card, and then to pay off the balance in full at the end of each payment cycle. After proving that you can responsibly handle monthly payments, most credit card companies will bump a customer up to a regular credit card and offer an increased credit limit. You could then use this additional credit to improve your utilization ratio.
Finding the Best Way to Settle Debt and Rebuild Credit
There is no “best approach” if the goal is to settle debt and rebuild credit, but there are a number of strategies you can use to attack the problem and put yourself on more solid financial footing. Negotiating with creditors is one effective way to reduce debt and rebuild credit, while smartly using pre-qualification, secured, and retail store credit cards to improve credit utilization is another way to rebuild credit effectively. Lastly, once you have a stronger grasp on your monthly obligations and your current credit standing, you can investigate credit-builder or consolidation loans from your bank or local credit union.
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