by Amber Tucker
Michigan Chronicle
Let’s discuss some of the best ways to manage credit debt. Whether it’s now or down the line, your credit score tends to play a major role in determining the terms and costs of some of the most important purchases you will make in your lifetime. That dream home you want? If trying to secure a mortgage, your credit history will be one of the main factors in the approval decision and the interest rate of the loan. Consider this: Kelly has great credit with a score of 780. Her dream home costs $200,000 and she has a 20 percent down payment. She secures a 30-year, fixed-rate loan for $160,000 with a 3.875 percent interest rate. Her monthly payments (excluding taxes, etc.) are about $750. On the other hand, with a score of 680, her interest rate increases to 4.125 percent, costing her an extra $25 a month or $300 a year. 100 points made a discernible difference in her interest rates and monthly payments; any lower and the payments or term of the loan may become unmanageable.
This principle also carries over to almost all other instances where you’d need to borrow money, including, purchasing a car or starting a business. Having a stellar credit history is essential to keeping money in your pocket and not your creditors. With the framework of a multi-faceted approach, such as the one we will discuss here, anyone can take impactful steps towards climbing out of debt, having great credit, and thus potentially saving thousands of dollars through being able to secure lower interest rates on future borrowing instances – starting right now.
Step 1. Take stock of where you are
It’s important to know how much of each kind of credit debt you have so you know what kind effort it will take to pay it off. Credit cards are considered what’s known as revolving debt. Assuming your account is in good standing, as soon as you pay a certain amount off, that amount is available on your account to use again. In contrast, installment debt, such as loans, involves receiving a certain amount of money, usually at only one time, and then having to repay that money according to a specific payment plan. What’s more is that some installment debt is secured or backed by collateral, things you stand to lose if your payment status falls into bad enough shape for certain loans, such as mortgages.
Another thing to consider is that creditors usually want to see your utilization ratio, how much of your revolving credit you’re actually using, fall around 30 percent of what you have access to for them to regard your credit as “great”, as it relates to that criterion.
Finally, knowing which accounts are more behind on payments than the others will help you prioritize how to focus using your means to pay down your overall debt. For example, let’s say you have a revolving account on the verge being charged off, which means it has been sent to collections for repayment and will remain on your credit report for seven years. Let’s also say that another account of yours is only one payment behind. In this case, it might be more impactful to your score in both the short and long term to focus on bringing the more delinquent account current.
Step 2. Work with your creditors
Some people view their creditors as “the enemy”. They ignore the “1-888” phone calls, avoid emails, and make every attempt to hide from the institutions they owe money to. This is not only irresponsible, but it’s acting out of irrational fear in most cases. Believe or not, most creditors are willing to work with you. They know that sometimes things happen outside of our control that may affect our ability to make on-time payments in the expected amounts. If you get behind, many will offer payment plans based on your current circumstances to help you get caught up. Even if you can’t make the minimum payments, always try to make a good faith payment of some amount, no matter how small. In addition to this, follow up to explain why your payment was short for that particular month. They’ll view you as more responsible for having done so.
Step 3. Stick to the plan
What good is a plan if we don’t stick to it? Make it a priority in your budget to consistently execute each element of your debt repayment plan; it will serve as a guide for when life throws you off course.
Step 4. Continue to build positive momentum
Once your credit use has stabilized, take meaningful steps to continue to improve your creditworthiness. If your score still isn’t as high as you’d like it to be at this point, there are still some small but positive methods you can pursue to increase your score over time. These include:
• Having family member add you as an authorized user to their credit card to help rebuild your payment history.
• Applying for a secured card once your credit is fair or better to start building a track record of positive credit history.
• Getting a credit builder loan to help establish a history of on-time payment.
The journey from high credit debt back to great creditworthiness takes dedication. There might not be a magic wand that will quickly take your score where you want it to ultimately go. But incremental improvement that is consistent over time could make you eligible for that platinum card before you know it.
First Independence Bank, Member FDIC, Equal Housing Lender
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