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Personal debt - specifically credit card debt - has reached epidemic-like levels in America. Balances are at all-time highs, with Americans carrying $682 billion in credit card debt that is not paid in full each month. This includes both people paying interest and those with a balance on cards with a 0% introductory rate. A Consumer Finance Protection Bureau study found that only 29% of all credit card balances are paid in full every month, which means 71% of all credit card balances carry over each month, which only adds more debt in the form of interest charges.

According to Experian, the average American credit card balance is $6,348. This does not even include store credit cards, which have an average balance of $1,841. And according to the American Bankers Association, 43.8% of all credit card accounts are not paid in full every month. Additionally, those who do not pay off their accounts in full every month tend to carry higher balances.

Sometimes an individual's debt can become so significant, that it becomes completely unmanageable. The monthly minimum payments required on multiple credit and/or loan accounts become so large, that you either can only make the minimum payments and keep falling behind due to interest charges being added or worse, you begin to make late or missed payments altogether, adding more charges in the form of penalty fees and sending your credit into a tailspin. This can become a vicious cycle, that for some, becomes impossible to recover from.

Simply put, millions of Americans are in financial distress and a big reason for that is unmanageable debt. Credit management is a passport to a financially healthy life, but it takes discipline, persistence, and patience. One important fundamental of good credit management is a good credit score. Creditworthiness, as it pertains to a FICO score, can impact much more than one’s ability to borrow money. It’s now often utilized to determine many other factors such as what you pay for insurance and even whether you get a job. If your credit score needs repair, you need to act now.

There are six ways you can begin right now to repair your own credit:

  • Get a complete picture of your credit profile
  • Set up a budget to pay your balances
  • Pay all bills on time
  • Lower your credit utilization ratio
  • Use multiple types of credit
  • Keep unused accounts open

Let’s examine the big picture of credit repair and how each of these six actions work to help you improve your credit standing.

Get a complete picture of your credit profile
When you’re setting out to repair your credit, the first step is to see where you currently stand. Do this by requesting your credit report from the three credit bureaus - TransUnion, Equifax or Experian. You can obtain a free copy of your report once a year. All you need to do is ask.

Review your credit report carefully and look for inconsistencies, errors or inaccuracies. If there are items which you feel are incorrect, you have the right to request clarification. All of the information in your credit report should be accurate, complete, verifiable, and timely. Any item that does not meet these criteria must be removed or corrected. If you notice re-aging on your credit report or on-time payments show up as late payments, you have the right to dispute it.

Try to have any derogatory mark removed as soon as possible as this has a significant impact on your overall credit score. Generally speaking, once you initiate a dispute, a consumer reporting agency must investigate it within thirty days. Once they have completed an investigation, they have five business days to notify you of the results. If you provide additional, relevant information during the 30-day investigation timeframe, the reporting agency may extend the investigation for an additional 15 days.

Set up a budget to pay your balances

Budgeting is an important element to all aspects of our finances, and as such, you should have a budget devoted entirely towards debt reduction. Start by creating a 90-day spending profile, itemized according to your monthly expenses: rent/mortgage, food, gas, utilities, insurance premiums, clothing, entertainment, and variable expenses. This will give you an idea of monthly expenditures, which will be very useful in understanding how much you’ll be able to apply towards debt repayments. Once you have a firm grasp on your monthly expenses, deduct those from your income. What remains should be an amount that you commit towards debt reduction and savings goals.

If you currently do not have an emergency savings fund, commit to saving $1,000 as quickly as possible. This will be important to help cover unexpected expenses that life inevitably throws at us. The goal is to have that fund available so that you don’t need to go further into debt to cover unexpected costs.  

Once you’ve saved $1,000, start paying down your debt balances as aggressively as you can. A great way to do this is to set up a separate saving account to deposit your remaining monthly funds that will be devoted strictly to debt repayment. Try to continue to contribute to your emergency fund as well, with the goal of at least 3-6 months of monthly expenses.

Pay all bills on time
Even one late payment can dramatically impact your credit score, so it’s imperative to ensure your bills get paid promptly. Not only will this increase your credit score over time, but you’ll also avoid paying as much interest. On-time payments account for 30% of your total credit score, making this factor a cornerstone of successfully maintaining and repairing credit.

Lower your credit utilization ratio
Credit utilization ratio or the percentage of your available credit compared to your total credit limit is an important factor to your credit score as well. Generally speaking, carrying a balance of more than 30 percent of your available credit will begin to have a negative impact on your score. Maxing out credit cards will definitely hurt your credit score and conversely, anything between 10 and 30% credit utilization ratio will help improve your score. Paying down balances is one way to lower your credit utilization rate. Another is to request an increase in your credit limit. If you have a good payment history, many credit card companies will approve your request. An increase in your available credit effectively lowers your balances (as a percentage) and results in a corresponding decrease in your credit utilization ratio. Just make sure you don't actually use the additional available credit or you’ll defeat the purpose of this exercise. Still another way to lower your credit card utilization rate is to open a new account as it has the immediate effect of increasing your available credit, thus producing a corresponding lowering of your overall credit utilization.  

Use multiple types of credit
There are two main types of credit - installment and revolving. An installment credit line has fixed payments over a predetermined period of time, for example, a mortgage. A revolving credit, on the other hand, is one where you have a fixed credit limit from which you can borrow.  Paying your balances increases your credit limit to levels near or equal to the original amount from which you can keep borrowing and keep paying back in a revolving manner, for example, a credit card. Keeping diverse types of credit lines accounts for approximately 10% of your credit score.

Keep unused accounts open
Your credit history accounts for 15% of your total credit score. Keeping your old unused accounts open extends your credit history. As long as all other factors remain the same, this would have a positive impact on your credit and your credit score will rise over time. Closing an old account may decrease your overall average credit history and potentially have a negative impact on your score.

It can be difficult to navigate the intricate credit industry environment on your own. Initiating disputes on your credit records can be time-consuming and stressful. If you’re attempting to repair your credit, the process can be lengthy, requiring patience and commitment and getting educated on your rights as a consumer. The preceding recommendations can help you get there.

If you’re dealing with unmanageable debt and need professional assistance, we can probably help. For a free consultation about your options, please call 877-973-3287.

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