Want to Improve Your Credit Score? 4 Ways to Lower your Debt


What’s keeping you from qualifying for a mortgage? Odds are it’s your FICO credit score being too low…but what does that even mean? What goes into determining that score, as well as your likelihood of securing a loan?

More than 35 percent is determined by how dependable you are when it comes to paying your debts. If you regularly pay things such as rent, utilities, car payments or other monthly costs late, your credit score is going to take a major hit. So if you do pay things according to schedule, you’re off to a great start.

But that’s not enough. A major chunk of your FICO credit score, 30 percent, is determined by your level of debt. This is why buying a new car or another piece of high-priced retail or service is not advised for those looking for a new home. You will be better off the less open debt you have; even student loans will work against you.

Many responsible homebuyers want to know how they can reduce their debt quickly and boost their mortgage qualification status accordingly.

You could buy a lottery ticket…or you can try one of these more realistic and totally feasible options.

Borrow from Mom & Dad

Let’s get the easy one out of the way first: You could always swallow your pride and ask your parents, or another relative, for a loan.

Source: forstudentpower.org

The benefits are obvious. The downside on taking a loan from a bank, is that you’ll ultimately be paying interest on top of it. The upside on taking a loan from your parents—unless they’re real slick operators—is that they’ll be willing to give you an interest-free loan (if for a lesser total amount than a bank might). But, if you’ve got $20,000 in student loan debt that you want to pay off right now, you could have mom and dad front the money, and arrange a repayment plan for the next five years (and you better pay back your parents. We’re just saying).

This is far better than falling into a predatory loan trap. Although some loan services will give you a small loan with no questions asked, the interest rates they charge will almost certainly leave you in a worse position.

Borrow from a Life Insurance Policy

If your parents can’t/won’t lend you the money, anyone with a whole/permanent life insurance policy with cash value can actually borrow on it.

This is a second-best option, because you will be charged interest for borrowing early. The trick is that the rates you’ll be charged are much lower than typical lender rates, so it’s much more affordable. That said, it’s important to pay it off as soon as possible for two reasons: A) That interest will pile up and B) if you die before paying back what you took out, that sum (plus interest) will be taken from the sum paid to your beneficiary.

Borrowing from life insurance is a much better option, in the long term, than borrowing from a savings account or 401(k), although those could be used if you are truly in dire need.

Snowball Debt Payments

Do you own multiple credit cards? If so, “snowballing” is a clever way to pay as little as possible on your existing debts.

First, find the card you hold that has the lowest interest rate. Find out how much room you have left on that card, and then transfer as much debt as possible from your card with the highest rate over to the one with the lowest rate. Now you’ll ultimately be paying less thanks to the lowest rate.

Don’t just do this once. Continue to transfer debts from higher cards to the lowest one. Try using just the lowest card whenever possible.

Are you struggling to clear up space on that lowest card to transfer from other accounts? Well, another good idea might be to…

Pay More than the Minimum

All credit card bills tell you the minimum payment that’s due. Don’t fall for it. Pay as much of your bills as you can, whenever you can. If that means making multiple payments a month, so be it.

Source: http://davidstockmanscontracorner.com

Many people feel that they’re taking the easiest way out when they pay the minimum amount, and taking the smallest hit to their savings. But think about it in the long term: The longer it takes you to pay your debts, the more money credit card companies and banks make in interest from you.

Paying off as much debt as possible right now benefits you both now and in the future. In the future, you won’t be paying as much interest. Tomorrow, your overall debt will be that much smaller and your credit score will be higher.

Remember: Pay off your debt responsibly. Consider these options we’ve presented, but don’t do anything rash. It’s more important to be able to pay your mortgage payments in a few months than to qualify for a mortgage in the first place.


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