Easy Credit Repair Tips

It may come as quite a surprise, but the fact is that most people do not know and never learn to use money the right way. This can be rather dangerous because it usually leads to heavy debt apart from making it impossible for you to enjoy the quality of life that you want. Once you are in heavy debt and have unpaid debts piling up, your credit score will take a massive hit.  Unfortunately, this domino effect will create many life challenges.


Learning just a few key financial concepts can help avoid all of this and show you how to get the most value out of every dollar you have. Here we have a step-by-step guide that shows you how to repair credit yourself. Even beginners and so called financial newbies will find this guide easy to read and understand.  Dive in to get debt free and start saving for your future.


Setting a Budget


The very first step is to create a budget. A budget gives you control over your money and lets you know where every dollar is going.  A 2016 Gallup Poll revealed that over 66% of Americans do not have a budget, meaning that they don’t know how their money is being spent. This probably works for some people, but it is definitely a very risky way to spend money.   The lack of budget may put you in a really precarious financial situation. A simple way to avoid all of this is to simply log what your monthly income is and allocate spending based only what you earn.   This strategy will help you achieve your financial goals with ease.


In your budget, you cover the following:


  • Fixed Costs:  This includes all bills and expenses that occur month after month or year after year. For example, account for rent, mortgage payments, insurance, utilities, groceries, etc. The ideal spending in this expense column  is about 50% of your income.
  • Financial Goals:  This is any goal that you set up to improve your financial health. For example: repay all of your debt, invest X amount in retirement plan, create and provide for an emergency fund, build a medical fund etc. About 20% of your salary should go towards this expense head.
  • Flexible and Emergency Spending: Not all expenses remain consistent month after month and not all expenses recur. Also, there may be new expenses some months such as emergency expenditures (ie: your car breaks down and you need it fixed or your HVAC is on the brink of dying and you need to replace it.) All expenses that keep changing are listed here.  Make sure to create a small emergency fund for the unforeseen expenses.  Flexible spending would include gas, entertainment, dining out, shopping, etc. 30% of your income is the maximum you should spend on these expenses.  However, your main focus should be on cutting down costs here to the max and divert the cash to your savings or other financial goals.


A Little Number Crunching


In the U.S., the average household income is about $53,046 per year. After taxes, this turns into about $37,000. Based on the above allocations, this is how you should ideally spend this income:

Fixed Costs: about $18,500

Financial Goals: $7,400

Flexible Spending: $11,100

In case your current income does not match your current expenditure, it would be wise to either increase income or decrease spending. Otherwise, debt builds up quickly and starts draining financial accounts and creates emotional strain.


Is your Credit score good?


Your credit report tells you your credit score and you can get it free once every year from all the three major bureaus: TransUnion, Equifax, and Experian. A great plan is to get a report from each bureau at different times of the year so that you can keep track of your score.


Why look at your credit report? Even if you know your credit score, you also get to check if any wrong entries are effecting your score. A recent study revealed that one in five credit reports may have a mistake. Remember that such mistakes can be costing you thousands of dollars year over year in higher interest rates when getting a loan.


Periodic looks at your credit report also helps identify ways in which to improve and restore your credit score. Understand that a potential lender is interested in knowing how much debt you owe compared with how much credit you have access to. Keeping this proportion right can make all the difference.


Prioritizing Debts


The costliest debts are the ones to repay first because this results in maximum savings in fees. Typically, credit cards come with huge high interest rates so these should be your top repayment priority. On an average, credit cards have a 15% average interest rate. If your credit score is bad, this could rise to over 22%. When you are repaying credit card debt, avoid restricting yourself to minimum payment which is usually 4% of your total debt. This hardly makes a dent in your debt. Use a credit card minimum payment calculator to find out how many years it will take to become debt free based on your repayment sums.


Debt Consolidation


Another smart move is to consolidate your debts to  lower interest rates.  This makes it easier to track payments month after month as well. When you consolidate your debt, you take one single loan to repay all of your other existing loans. Getting a debt consolidation loan to get rid of your credit card debt and  lower interest allows you to become debt free much sooner.


Addressing Financial Contingencies


Setting up an emergency fund lets you handle financial contingencies without having to resort to high interest loans. Whether it is a medical emergency or loss of job, a couple of thousand is not going to go very far. A good rule is to have enough to manage about six months of household expenses.


Saving for retirement


About 1/3rd of our population does not have any retirement savings. A far bigger percentage of our population does not have enough  money saved to maintain the current lifestyle post retirement.  Many employers offer retirement savings in the employee benefits packages so it is encouraged to use these benefits for future planning. A few examples are IRAs, 401(k) and Simplified Employee Pensions (SEP).


Many employers match your contribution to some extent. If yours does, you can essentially get free money and definitely should make the best of this benefit. You can also open your very own non-employer retirement savings account. The most popular one is the IRA because it is so versatile. Talk to a financial planner to determine which version fits your situation best.


Start Small, End Big


When you start investing small amounts consistently, you will see that it grows to become a substantial sum quite magically. This is because of the power of compounding. But it is key to start saving as soon as possible and to keep saving at least some minimum amount every month.


This is the trick to save for your retirement. Make the best of opportunities and you will be able to enjoy a great lifestyle even in retirement without having to make drastic spending cuts.


To Sum Up


It can seem to be an uphill task to gain the upper hand over your debts and get your finances in order, but once you take the first step of creating a budget, the going gets easier. The next thing is to target your debts in the right order and systematically pay them down. Yes, you will need to make some sacrifices and perhaps give up short-term dreams in the interim, but these adjustments are so worth it because you can live a financially-free life.