Tips on Repaying loans and improving your credit score
The current market conditions can be blamed heavily on incurred debt and the inability to repay loans: on a mass scale, this is what caused the recession and the current market conditions. Further to this, banks haved tightened up on their lending procedures to avoid making the situation evern worse. Fortunately in Canada, we were not so much impacted by the subprime crisis and are in better standings than the American economy. However, this does not necessarily mean that the Canadian economy will rebound quicker than our American counterparts. Typically, during a recession, consumers tighten up on their spending habits which inevitably causes the market to shrink. For an individual trying to get out of debt, the goal here is to curb the unrequired spending habits while ensuring that safety standards are met.
People with large oustanding credit balances, may feel the credit crunch and may resort to relying more heavily on their credit cards, loans, or line of credits (LOCs). The impact of these types of measures is that the interest that is charged on each account could possibly outweigh the minimum dues. In other words, debt becomes an endless cycle of minimum payments that are equal to or less than the interest being charged!!
This article will suggest a few technique to manage debt and how to repay debt. The first step in reducing debt is to acknowledge your mistakes and make life-changing decisions to get out of your stiuation. This might include packing your own lunch, taking public transportation, carpooling with a colleague, and so forth. The more cash flow that you have or can create, the quicker and easier it will be to rectify your debt situation.
Now, let’s take a moment and begin by listing out all of your credit-related balances as well as their corresponding interest rates. For example you might have something like the following:
1. Credit card #1 — Outstanding balance of $5,000 @ 9.99% AIR (Annual Interest Rate)
2. Credit card #2 — Outstanding balance of $8,000 @ 17.99% AIR
3. Line of Credit (LOC) — $15,000 @ 4% AIR
4. Mortgage — $250,000 @ 7%
At this point in time, you should have an idea of where you stand with your credit. It is important to note that should ALWAYS make your minimum payments for each of your accounts to avoid having your credit score taking a hit! Various credit bureaus such as TransUnion, Equifax, FairIsaac, Odyssey, etc. calculate credit (beacon/FICO) scores based on credit utilization and payment history. Therefore, make sure that all payments are made on time with at least the minimum payments!
Now, list out the minimum payments for each of the “variable” accounts. By this, I’m referring to the accounts that are “not-as” important as the other accounts. To explain this thought, let’s look at the mortgage. Regardless of the interest rate, mortgage payments should take priority in terms of which bills should be paid. Let’s face it: you could potentially have your house foreclosed. Next, failing to pay an LOC would affect your future ability to take out a loan. You should also plan a monthly budget to have a better picture of your current standings. Food, shelter, and other satety needs should be met first before making any plans on paying off debt.
Getting back on the case in point, let’s put some random numbers in place:
1. Credit card #1 – $20/month
2. Credit card #2 – $40/month
Now, while it is important to make the minimum payments on all our your credit balances, the key point in reducing your debt is to pay off one element at a time. As you may recall from earlier, you should have an idea of which accountsare being charged at a higer interest rate. To reduce your long term debt, the best approach is to take things one step at a time: Pay off the cards with higher interest ratings first. Then, rinse and repeat and pay off the next one, until finally you are complelely out of debt.
The reason for this is is relatively straight forward: the higher interest card will cost you more in the long run. In the same regard, another recommendation is to apply for a line of credit and do a balance transfer to your credit card accounts. This will lower the amount of interest that you will pay throughout the year and should give you more leverage in paying back other loans. Be careful with this advice however. As I noted near the beginning, managing your debt should be a life-changing decision. If you have not accepted this, you may in fact put yourself in a deeper hole by applying for a line of credit. (I.e. maxing out your LOC would be a terrible mishap).
In summary, debt management is simply a method of keeping track of your expenses and cash inflows. Once you have established your goals in reducing debt, managing it shouldn’t be too hard. The important thing is to keep a budget and pay off the higher interest items first and take things one step at a time.
Tags: budget, credit card debt, credit crunch, Debt consolidation, increase cash flows, recession, reduce your debt, repay debt, setting a debt reduction goal, tighten up on spending, tips on reducing debt