It should be noted that I am not a financial advisor. I am just a gal that grew up with very little financial and credit literacy. I learned the hard way. And sometimes the very hard way. I then did a lot of research and dug myself out of the bad-credit hole. I am hopeful that this information may help someone that was struggling like me.
It is no secret that your personal credit score affects the price you pay for credit. The percentage rate you pay on a loan (or if you get a loan) is a direct reflection on your personal credit score. This is common knowledge. Two people apply for the same loan and credit-worthiness (assigned to them by a score generated by an algorithm) determines which of these two will get a loan and how much each will pay for that same loan.
With the housing market so hot right now, it seems everyone is trying to buy a home. But for some, credit score can mean the difference between renting and buying.
The effect of credit score on the ability to buy a house is self-evident. But did you know that credit also affects how much you will pay for car insurance? Of if you get a particular job? Your personal credit score can be an asset and save you money or can be a literal weight that keeps you stuck where you are, weighing you down.
Creating a good credit score from nothing and maintaining it is so much easier than digging yourself out of a bad-credit hole. So, what do those of us do that have found ourselves on the wrong side of the credit rating system? This series will focus on small changes that can help you create good credit, wealth, and decrease the financial stress in your life.
I have been there. I have dug myself out of this hole. I have some tips. I’m going to start with three tips to start, and explain why you should consider doing them.
1. Save $1000 dollars. I credit this to the Dave Ramsey method of money management. Save this in cash. This way, if your car breaks down, your child needs stitches, or you have an unexpected expense, you can dip into this fund to pay for these without using credit cards or worse yet “pay day loans.” I recommend saving this money in cash, or in a savings account separate from your main checking account. Preferably in a different bank that is dedicated to savings only.
2. Sign up for Credit Karma, Equifax, or some other free credit reporting application. You can check your credit and become informed on your situation. Many people have no idea what their score is, nor what debts are currently showing. You can boost your credit score by eliminating incorrect data on your score. You can do this by contesting debts that your think are paid off, or are incorrect. Through Equifax and Credit Karma, you can contest a debt you think is incorrect online, and the credit reporting agency will reach out to the creditor for you. It is then the creditor’s responsibility to prove you owe that debt.
3. Once you understand what you owe and agree to what you owe, pay your credit cards off, as quickly as possible.
Stop paying the minimum monthly payment (MMP). Pay double or triple that and watch your balance shrink. One at a time. Start with either a). the smallest balance or b). the highest interest, or annual percentage rate (APR). I prefer to start with the smallest balance and work my way from there.
Here is a quick example:
Let’s add $20 to our outflow monthly (total) and shave 6 years from our debt burden.
Card #1 MMP is $10/ month, with $300 balance and 24% APR,
– Paying the MMP, this card will be paid off in 3.8 years!
Card #2 MMP is $25/month, with $1500 balance and 18% APR,
– Paying the MMP, this card will be paid off in 12.8 years!
Card #2 MMP is $40/ month, with $2500 balance, and 16% APR.
– Paying the MMP, this card will paid off in 11.2 years!
If you pay $30/ month on card 1 – just adding $20/month to your monthly outflow, you will pay this off in less than one year! (11.2 months!)
Once Card #1 is paid off, take that payment and apply it to card #2.
$30 + $25 (MMP for Card #2) = $55/month applied to card #2.
Doing this, card #2 will be paid off in 2.9 year
(That’s almost 10 years less than using only MMP for those counting!)
Once Card #2 is paid off, apply that $55/month to you card #3 payment.
$55 + $40 (MMP for Card #3) = $95/ month applied to card #3.
Doing this, card #3 will be paid off in 2.7 years.
You can shave 6 years off your debt burden and save thousands in interest by paying an additional $20/ per month.
And I know what you are thinking, “Hey, Sonia, can’t we just take that $1000 and apply it to card #1 and some of card #2?” Well, sure you can. But when something unexpected happens that costs money, and it invariably will, you will be forced to use one of those cards and end up in the same spot. Trust me on this, save the cash. You will need it. And if you don’t, well you have it just in case you do.
I hope to be back in the next few weeks with 3 more tips on how to create, repair, and capitalize on your credit score.
If you have questions or want my reference materials, please contact me at firstname.lastname@example.org.
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