How to Develop a Credit Repair Plan

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If you're carrying a lot of debt and your credit score is impacted as a result of carrying that debt, what you want to do is you want to put together a credit repair plan.

What that means is you want to go out and you want to look at all the credit balances that you have, any loans that you have, any credit cards, any lines of credit, and even your mortgage.

You want to sit down and you look at them and you compare them. What that means is you want to look at all the interest rates. Obviously, your mortgage is usually your lowest interest rate. Today, those rates are running around 3% to 4%. Credit cards are usually the highest, at 19% or more.

What I would recommend is I would go and get a line of credit if you don't already have one or even a loan if you can get a loan. Loans are in the neighborhood of 7% right now. And lines of credit are the same as your mortgage.

You could refinance your house a bit and put it on the line of credit and then take any credit card debt, pay that off with the line of credit. What that does is first of all, and it's going to help with your credit score and it's also going to reduce your monthly payment because credit cards are usually asking for 3% of the balance each month. And mortgage payments are usually spread out a lot more.

Now I know people don't like refinancing their home or putting a home equity line of credit on and then putting all that debt on it cause it feels like they're going in reverse. But what you do when you do that is you make the payments that you would have made to your credit card and you start applying those to your mortgage. Because credit card payments are usually higher because of the interest rates relative to the balance that you're carrying.

Let's say you've got a credit card and you're paying $500 a month, you throw it into a line of credit, the balance from that credit card. Now you’re only forced to pay, let's say $50 a month because it's usually amortized over a longer period of time.

But, now you take that $500 that you were paying to your credit card and you keep applying it to your line of credit, paying it down. What's going to happen is you're going to pay it down a lot faster because the line of credit is only 3% as opposed to the 19% or 20% or 21% that the credit cards were charging you. So that's a good thing to do for a credit repair.

Now the key thing too is when you pay off those credit cards, don't get rid of them. I know a lot of people say cut them up. But that's the worst thing that you can do because now you're affecting your credit score. I mean, if you're really, really can't control yourself, you have no self-discipline. I mean, I've heard of people freezing them by putting them in the freezer. Take them out of your wallet and keep them on your desk. That’s probably just as good of a solution. Or hide them or give them to a friend or give them to a family member and tell them you can't use these anymore. But don't delete them or don't cut them up. Don't cancel them. Because you want to keep those credit lines on your credit Bureau, so that helps improve your credit score.

Okay. So that's one of the things you can do. That’s probably the biggest, most effective way that you can repair your credit.

I know there are some firms out there, some that specialize in this, so you might want to talk to some of those. They'll charge you a little bit, but it's probably worth it over the long run so that your credit score is good.

It's not so much that you're trying to improve your credit. It's that you're trying to reduce your monthly expenses by reducing your overall credit that you owe. And that's bad credit, right? We’ll get into good credit later on, which is credit that's used for investments. This was consumer-based credit where you went out and you bought things with it, like cars for example, or like, you know, stereos or trips or all the fun kinds of things.

Okay? So that's how you should be doing your credit repair.

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