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Tips to Rebuild Your Credit While Having Debt

27 February 2018 No Comment

Two of every five young Americans have credit card debt. In addition, a similar amount has student loans instead of credit card debt or in addition to it. When you are in debt, the risk of having bad credit is magnified. For many, finding ways to build a good credit score is often put off until after they have repaid the amounts they owe. However, can you improve your credit while having debt? Yes, you actually can.

Having a good credit score has a positive impact on many aspects of your life;  from your borrowing aspects to even your employability. One of the key benefits is that it can save you thousands in finance charges due to simply qualifying for lower interest rate rates on your credit cards and loans. In 2017, the average American household owed $15,654 in credit card debts and in 2016, an American between the ages of 18-65 had $4,717 in credit card debt with an average interest rate of 15 percent. If you are looking for ways to restore credit while repaying your debt, take a look at these tips.

Contact debts in collections and settle if you can

Your payment history and credit utilization ratios account for approximately 70 percent of your credit score, making them key aspects you want to keep well managed. If you have an account in collections or planning to make a late payment, be aware of the effect that can have on your credit score. Each one of these events is recorded in your credit file and can remain there for up to 10 years.

However, there are ways around this. By paying off the balances on those accounts that are in collections, you can see an immediate turnaround. Some paid collection balances are not held against you as a negative mark on your credit history. Therefore by simply contacting the collection agency and setting up a payment plan or paying in full, you can see an improvement in your credit score. You may be able to also settle an outstanding account for a fraction of what you initially owed depending on the flexibility of the credit agency handling your debt.

However, be aware of the timing of your debts. If your debt is close to its time expiration and will be removed soon by the Credit Bureau then it is not as useful to contact the agency and make the extended effort to get it removed.

Take advantage of balance transfers

Credit cards continue to get a bad reputation, linked to the rising credit card debt in America. Although it may seem contrasting, getting a credit card can actually improve your credit. Many card issuers and lenders offer promotional periods with interest-free purchases and balance transfers. Make the best use of this. By transferring your highest interest debts to one of these cards, you can save interest charges and make more progress towards paying off your principal amount borrowed. In addition, by making on-time payments you begin to rebuild a positive credit history.

However, if you are considering this option be mindful of how it can affect your credit score. Try to keep your utilization score below 30 percent on your credit cards so this will involve a bit of arithmetic. The higher your balance on your card compared to the granted limit, the higher your utilization ratio will be and hence the lower your credit score. Remember the link between these aspects. A similar option would be refinancing or consolidating you various card debts using a loan. Often you end up paying a lower interest rate and by making just one payment each month you are guaranteed to be servicing each one of your debts. There is a magnitude of lenders offering personal loans aimed at rebuilding credit.

Go old school and pay with cash

Finally, to avoid further temptation to spend using those credit cards consider paying with cash for all purchases. Avoiding use of your credit card or lines of credit (overdraft) does double duty: it helps you keep your utilization low and it also helps you stick to your debt repayment plan by not driving your debt amount up even further. Systems such as the cash envelope system are great for those trying to curb their spending. The use of a good reliable budgeting model is also important in achieving this. Seeing where your money goes and the unnecessary spending can help you remove those; using the extra funds towards additional payments on your debt.

It may seem a bit daunting to try and improve your credit score while having debt. To help you with this, do some research into the five most important factors that affect your credit score and focus on how you can affect those. The key to improving your credit lies in understanding it.

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