Fix Your Credit Score & Payoff Debt: A Simple Solution

At some point in life, we decide that it is time to get our affairs in order and strive for something more. But somewhere in the back of that thought is our history; credit history that is. What some do not understand is that the amount of people you owe hurts you more than the amount of money you owe. Some people opt to file for bankruptcy for a quick fix. I wouldn’t suggest this option for any debts less than $10,000. So I am going to address those debts that are under $10,000. However, I still do not suggest bankruptcy; but this will make it easier to manage and understand what I am saying.

For a score with a range between 300-850, a credit score of 700 or above is generally considered good. A score of 800 or above on the same range is considered to be excellent. Most credit scores fall between 600 and 750.

First, I suggest you go to www.annualcreditreport.com and get a free copy of your credit report from ALL THREE reporting agencies. Make sure you print/download each report; this is free to do once a year. Keep in mind, each agency may have something different on them. If you know you’ve paid something off that may be showing on one report but not the other, you need to dispute it; which is not hard to do and each agency will tell you how. Second, go to www.creditkarma.com and see what your current credit score is; if you try to do this on the Annual Credit Report site, they will try to charge you. You can also review your credit report and directly dispute any charges on it, but the report isn't as detailed and does not consist of all three reports. So if you follow the directions above and use both sites, you will have the most accurate and cost-free results.

After you have your reports and scores, take a look at all of your outstanding debts. List them all in order of lowest to highest. Using excel (or a sheet of paper), transfer your debts to an excel worksheet. Add an additional worksheet within the same workbook and look at everything under $100 and list them in order of lowest to highest. Next, add a 3rd worksheet and repeat this process for anything over $100 but under $500. Finally, add the last worksheet and list everything over $500 (you can also add additional sheets and sort the balances for those as well, up to the highest debt amount, whatever works for you).

Right now ignore your lists that are over $100; each paycheck pay off one of the under $100 charges (if you can afford it, pay off more up to what you can afford). Now so far you’ve already improved your credit score by removing the small stuff and you’ve improved your debt to income ratio.

Once you have paid off all of you under $100 balances, move on to your over $100 but under $500 list. Look at your paycheck and decide how much you can pay towards these bills per month. I suggest you choose the smaller balances (under $300) first and get them out of the way first then work your way to the bigger ones. However, instead of making a payment on the same bill each paycheck, set up a per paycheck payment schedule for each debt. Choose a different bill for each paycheck so that you are only paying on it once per month and not twice per month. Each time you pay on a bill add the new total and a new pay date. What really helps is if you put the paycheck date that you are going to pay that bill, on your tracking sheet. Do this until all of those bills have been paid off.
Ex:
Credit Card 1: $500 – Pay $50.00 on 06/01/12
Credit Card 2: $300 – Pay $50.00 on 06/01/12
Credit Card 3: $200 – Pay $50.00 on 06/15/12
Credit Card 4: $400 – Pay $50.00 on 06/15/12

Credit Card 1: $450 – Pay $50.00 on 07/01/12
Credit Card 2: $250 – Pay $50.00 on 07/01/12
Credit Card 3: $150 – Pay $50.00 on 07/15/12
Credit Card 4: $350 – Pay $50.00 on 07/15/12

Lastly, you have your big bills. Hopefully, you don’t have too many of these. Contact the creditors and request a settlement amount. A lot of these balances have incurred interest and are usually 5 times what you actually owe. Most creditors are willing to reduce this amount by 50% but they will give you a certain time to pay this amount and you will need to do exactly that. Request a copy of the settlement agreement so you have hard copy proof that you paid this amount and keep a copy of all payment receipts, money orders, or cashed checks, until these have been removed from your credit report. If they are unwilling to negotiate, follow the above payment schedule and make payments.

As you pay off each debt cross it off your list so you can keep track of your progress. I also suggest listing the check/money order/credit card auth# and date actually paid next to it. 

Remember: When you pay off a debt early, your credit score will drop, temporarily; do not worry, it will go up higher than it was during the next reporting cycle. But I suggest that you do not try to get a home loan right before/after paying off a major debt, wait about six months to a year and do not incur any additional debt during this time.

A few pointers:

1. Anything almost 7 years old will drop off your credit report, but once you pay on it, your 7 years start over again from the date of last payment so make sure you're ready to pay it off.
2. Any judgments determined in court are upheld for 20 years and do incur interest. This can also be garnished from your paycheck and/or bank account at any time.
3. Dispute ANYTHING you truly do not think belongs. A lot of times disputes can get these charges removed within 30 days.

I hope this helps and feel free to contact me directly for any questions!!

And...It Is What It Is!