Debt and Credit Strategies

i_overviewDebt-and-Credit-Strategies-1A good credit file with a positive debt history will allow you to have the means to pursue your individual dreams and goals that you have set for yourself. Here are key strategies to help you improve your credit standings.


If You Want to Build and Maintain a Powerful Credit Profile, Credit Monitoring and Control is the Key!

It is reported that twenty-five percent of credit reports, which list your credit and borrowing activities, had errors serious enough to cause consumers to be turned down for a loan or job and consequently be charged more interest, according to a survey by the U.S. Public Interest Research Group.

The first step is to pull your credit reports-FREE-something that is now required by law, and there’s only one official site to go to: Check that you want all three reports (that way you only fill out the paperwork once).

Debt-and-Credit-Strategies-2Once you get transferred to the credit bureau’s site, there’s a good chance they’ll try to sell you on one of their services. You don’t have to buy any of them. Simply look for the link to the free credit report. Congress gave you the right to attain your credit report for free once a year from each of the three credit reporting agencies.

You do not get your credit score for free. We suggest you buy that annually (or several months before applying for funding) to validate your standing. Your score is a numerical translation of your credit history that measures the individual’s risk of default on behalf of financial institutions (range of 300 to 850). Generally, 720 and above is considered good, from 620 to 720 is mediocre, and anything less than 620 is poor. One missed payment can knock 100 points off your score!



One more thing. You’ll see dozens of sites that say they are free but sooner than later they are going to ask you for your credit card number and they’re going to ding you for ten to twenty dollars a month for their so-called “free report”. Don’t take the bait. Any site that asks for your credit card to get your free report is not the real thing.


Put a Stop to Non-Stop Credit Card Applications and Unauthorized Inquires that May Affect Your Credit Score

Simply put, just dial 888-5-OPT-OUT (888-567-8688) or go online to, the official site (use only this one) run exclusively by the credit bureaus. For security reasons, you need to copy and paste this link into your browser.

In a minute or so you can opt out of pre-approved credit card or insurance offers. You even get a choice as to whether you want the mailings to stop for 5 years or forever!


Calculate Debt-to-Income Ratios

Your debt-to-income ratio is a vital component of your overall, financial well-being. The majority of your future decisions (be it obtaining a low interest credit card, auto loan, home mortgage or any other loan) will be directly affected by this percentage. In tandem with your credit reports, the ratio determines what you can and cannot do financially.

Your debt-to-income ratio, according to most financial planners, should remain below the 15% of your take-home pay. If this percentage exceeds 20%, it is time to take a closer look at your debts and specific spending habits. If you are planning to purchase a home in the near future, keep in mind that lenders usually require your monthly debt, including the mortgage payment, to be below 38% of your pre-tax (gross) income. If you want to increase your chances for qualifying, work on lowering that ratio, before you apply for the loan.

Use the accompanying worksheet to determine the percentage of after-tax income that you spend on non-mortgage debts each month. List ALL of your short-term loans and debts that appear on either of your credit reports. Do not include cable, phone, internet, utility bills or mortgage loans in this calculation, then check your score.

Download Calculate Debt-to-Income Ratio in PDF Format


Pay Down Debts

List all of your debts, from highest to lowest interest rate, and allocate at least 25% of your monthly net income toward paying everything off. Pay the minimum monthly amount due on each debt and apply the balance of the 25% to your highest interest rate debt, usually a credit card. When that debt is paid off, continue this process until everything is wiped clean.


Control Credit

If your credit cards have high interest rates and you seem unable to make any headway in applying this strategy, go directly to the credit card issuers for help. Most credit card companies will be willing to work with you if you simply ask!

Although the card issuers will not forgive your debts, they may be willing to negotiate a reduction of interest, waive late fees and eliminate or reduce penalties, at least until you are once again financially stable and can afford to resume your regular payments. If you contact the lending institutions on your own, before there are problems, you will increase the chance of a positive outcome.

Credit card banks (like MasterCard® and VISA®) are especially willing to negotiate rather than lose you as a customer. The cost to the bank for replacing a good customer is always much greater than the cost of lowering a customer’s interest rate a few points. Use this cost/benefit factor to your advantage. Store cards, gas cards, Discover® and other specialty cards are usually very difficult to deal with and should be avoided altogether. Suggest replacing these cards with a VISA® or MasterCard® as soon as possible.


Mortgage Strategies

If you are behind on your mortgage payments because of a financial hardship and are worried about a possible foreclosure, it is vitally important that you contact the institution that is holding your mortgage note. Some lenders may be willing to work with you by allowing you to pay only interest for a few months until you are able to resume normal payments. The lender may consider a plan that will allow you to repay a portion of your debt each month until you are totally caught up. Some lenders have even been willing to re-amortize loans and add the outstanding delinquency amount back into the loan in order to make payments current.

Consider refinancing your home for a better interest rate and lower monthly payments or apply for a home equity loan to consolidate your debts. A consequence of these actions is that you would be burdened with a debt over a long period, 15 years or more. On the other hand, you should be able to lower your effective interest rate, because interest on home-based loans is usually tax-deductible. Most importantly, you will increase your monthly cash flow.


When the Bills Loom Larger Than the Available Cash, Use Offensive, NOT Defensive Strategies

Go on the offensive. When you know a payment is going to be late or you are laid off and will miss a couple of payments, call each of your creditors and tell them you will be late and why (try to make a friend and get a name while on the phone). Be direct. Talk with integrity and don’t make excuses.

At the end of your explanation, use those magic words, “I need your help,” and ask how you can work out the payments without damaging your credit rating. Local department stores, furniture stores and appliance dealers with which you have accounts may be willing to work something out with you and may agree not to give you a bad credit rating on your report (get it in writing).

Credit card companies are not always willing to help. Remind them that about once a year, usually in December during the holidays, many credit card companies offer the “you can skip next month’s payment” plan and ask if you can use that offer now. If you are not getting anywhere with the account rep, ask for the supervisor who has more authority to make special arrangements.

Remember, every time you get in a bind, call and give your creditors an update. When you are overdue, don’t make your creditors call you. You will produce far better results than if you attempt to hide.

Most important, when you are behind in payments, promise only what you can deliver and deliver when you promise. Miss a promised payment and any trust you have built is instantly gone.

Occasionally, a credit card company will ask you to send in your credit card when your account is overdue, but it will often reissue the card as soon as your payments are caught up. Damage control is the key. The sooner you can control the situation, the better off financially and credit-wise you will be.


Get Credit For Paying Rent

Consumers who make payments that are never reflected in standard credit reports can register with the PRBC (Pay Rent, Build Credit) bureau online. There is no charge. The site is designed to enable consumers to raise credit scores with rental payments, as homeowners do with mortgage payments.


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