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How to Get Out of Debt in 2020

February 26, 2020

PHOTO ILLUSTRATION BY EMIL LENDOF/WSJ; PHOTOS: ISTOCK

For many, paying off debt can feel like an insurmountable task.

The most common types of debt for Americans include mortgage debt, student loans, auto loans and credit-card balances. Debt can dent one’s ability to save for retirement, may hamper homeownership and impede overall future financial security.

While some may be tempted to ignore debt for now, it isn’t recommended.

“The longer you procrastinate making a plan to get debt-free and just make the minimum payments, especially on high-interest rate debt, the more brutal the build up,” says Erin Lowry, author of “Broke Millennial.”

Instead, taking the time to devise a strategic course of action can help those with debt feel in control of their financial lives—even if becoming debt-free is years away.

Below, three personal-finance authors sketch out a game plan to help those hoping to make a fresh start on their debt repayment.

Get organized

To help eliminate her husband’s roughly $50,000 in student loans, Ms. Lowry created a spreadsheet after the couple got engaged in 2017. In the document, Ms. Lowry and her husband wrote down each of the lenders’ names, the interest rates, principal balances and minimum monthly payments.

Doing so helped the couple see their total obligations clearly and gave them a greater sense of control over their debt. It also enabled them to develop a plan for how they would combine their money after marriage in August 2018.

From there, they decided to “avalanche” their debt: They made minimum payments then paid down debt from the highest interest rates to the lowest, regardless of each loan’s balance.

The approach worked well. The couple anticipated to be student-debt-free by February 2020, and hit their goal this December.

“We attacked it as a team,” said Ms. Lowry.

Commit and take action

Jill Schlesinger, author of “The Dumb Things Smart People Do With Their Money” and on-air business news analyst for CBS, said people too often take a defeatist attitude when it comes to their debt. They berate themselves for racking up the debt and are convinced they will never be free of it.

Change your perspective, she recommends.

“You have to have a conversation with yourself that you’re going to do this,” Ms. Schlesinger said.

Ms. Schlesinger said start by taking small steps. For outstanding debt, establish automatic payments, even for a small amount, so you can avoid or minimize penalties and fees. Whatever the outstanding debt, try paying an additional amount, even just $10, to chip away at it.

If it is medical debt, you could try to negotiate with the medical provider to work out a payment plan.

People often get shellshocked when they find out about medical bills, said Stacey Tisdale, president of Mind Money Media Inc. and author of “The True Cost of Happiness: The Real Story Behind Managing Your Money.” It is important to take a deep breath and remember that unlike much of your other types of debt, there is usually no interest charged on medical debt. Medical organizations will likely want to negotiate because if patients don’t pay, they typically sell the debt to collectors who may buy it for pennies on the dollar.

“Make a phone call as they will most likely work with you,” Ms. Tisdale said.

Set goals and reminders

If you connect why you want to pay off your debt to your overall financial plan you will have a better chance of success, said Ms. Tisdale.

Just aiming to pay off your credit-card debt by this time next year because it seems like the right thing to do may not motivate you to actually do so, especially if you have to make sacrifices to make it happen, she said.

But if you set specific, measurable, attainable goals with a deadline that connects to your overall financial plan you will be more motivated, she said.

Ms. Tisdale also likes to keep reminders of her goals handy. For example, many years ago when she wanted to save money for a trip to Paris, she put a picture of the Eiffel Tower in her wallet with her credit cards. This small step gave her pause and reminded her of her goal every time she considered charging something.

Also, set realistic expectations and cut yourself some slack, CBS’s Ms. Schlesinger said. You probably didn’t create the debt overnight so don’t expect to eradicate it all at once either.

The post How to Get Out of Debt in 2020 appeared first on Real Estate News & Insights | realtor.com®.

How Long Does It Take to Improve Your Credit Score Enough to Buy a Home?

November 29, 2018

How long does it take to improve your credit score? If you’re hoping to buy a home, having a good credit score is key, since it helps you qualify for a mortgage. So if your credit score is low, knowing how long it takes to raise it to home-buying range can help you plan.

While raising a credit score can’t happen overnight, it is possible to raise your credit score within one to two months. However, it could take longer, depending on what’s dragging down your score—and how you handle it. Here’s what you need to know.

How long does it take to raise a credit score?

First off, what’s considered a good score versus a poor one? Here are some general parameters:

  • Perfect credit score: 850
  • Excellent score: 760-849
  • Good credit score: 700 to 759
  • Fair score: 650 to 699
  • Low score: 650 and below

 

While it varies by area and type of loan, generally lenders will look for a score of 660 or higher to grant a mortgage (here’s more on the minimum credit score you need for a home loan).

If you’re looking to boost your credit score fast, here are some actions you can take.

Correct errors on your credit report

Correcting errors on your credit report is a relatively quick way to improve your credit score. If it’s a simple identity error—like a credit card that’s not yours showing up—you can get that corrected within one to two months.

If it’s an error on one of your accounts, though, it could take longer, because you need to involve your creditor as well as the credit bureau. The entire process typically takes 30 to 90 days. If there’s a lot of back-and-forth between you, the credit bureau, and your creditor, it could take longer.

The first step to correcting errors is to get a copy of your credit reports from TransUnion, Equifax, and Experian (the three major credit bureaus), which you can do at no cost once a year at annualcreditreport.com. Next, review them for errors. If it’s an error on one of your accounts, you must refute that error with the bureau by providing documentation arguing otherwise. For example, if you paid a credit card on time and the card issuer is reporting a late payment, find a bank statement showing that you paid on time.

Credit bureaus typically have 30 days to investigate the error. If they agree that it’s an error, they will remove the item. The credit bureau may also ask for additional information or ask you to discuss the information with the creditor involved. If that’s the case, stay on top of communications with your creditor so you can get things resolved as quickly as possible.

Deal with delinquent accounts

Bringing delinquent accounts current and settling accounts that are in collections can also boost your score fairly quickly. Once the creditor or collection agency reports your account update, you should see a positive bump in your score. Keep in mind, though, that your late payment history will remain on your credit report for seven years.

If you have bad accounts that have been on your report for six years or more, you may not want to worry about settling them or bringing them up to date. This can re-age the account, and if you fall behind again, it will stay on your credit report for another seven years.

“Make sure you don’t re-age these accounts, because they’re going to drop off soon,” says Nathan Danus, CDMP and Director of Housing and Community Development at DebtHelper in West Palm Beach, FL. Negative information typically “falls off” your credit report after seven years, so if you’re close, it’s best to just wait it out.

Lower your credit utilization

Credit utilization refers to how much you owe compared with the amount of credit you have available. For example, if you have a $10,000 credit limit across all your credit cards and you have balances totaling $9,000, you’ve utilized 90% of your credit. This drags down your credit score.

“What these consumers often need to do is pay down the balances on their existing credit accounts, which can be a challenge if they’ve allowed the balances to creep up over time,” says Martin H. Lynch, compliance manager and director of education at Cambridge Credit Counseling of Agawam, MA. “The ratio of what’s owed to the amount of credit available represents 30% of the consumer’s score, so rapid improvement is possible if there’s a large amount of money available to pay down balances.”

Linda L. Jacob, a financial counselor at Consumer Credit of Des Moines, IA, recommends paying down balances to below one-third of your credit line. Any payments you make will be reflected on your credit report as soon as your creditors report your payment to the credit bureaus. Credit scores are updated on an ongoing basis, and creditors typically report once per month, so if you make a payment that lowers your credit utilization, that should be reflected on your credit score within two months.

If you’re regularly using your credit card but you want to keep your utilization low so you can apply for a mortgage, you may want to pay down your credit-card balance on a weekly or biweekly basis. This ensures that your balance is as low as possible whenever your creditor reports your payment history to the credit bureaus.

You can also decrease your card utilization by getting more credit, but this approach can backfire. Consumers sometimes assume that by getting more credit, their credit score will improve. If you have a $3,000 balance on a card with a $4,000 credit limit and you’re approved for a new credit card with a $1,000 limit, you now have $5,000 in total credit lines. Instead of using 75% of your available credit, you’re now using 60%. That’s better, right?

Not necessarily. “Just applying for credit lowers your credit score, and that effect lasts for months,” warns Mike Sullivan, personal finance consultant at Take Charge America in Phoenix, AZ. “For the first few months after you apply for credit, your credit score may actually go down.”

You can try getting around this by asking a credit limit increase on a card you already have. Be sure to ask whether they do a “soft” credit pull rather than a “hard” credit pull, though, since hard credit inquiries are the ones that impact your credit. A creditor may be willing to give you a credit line increase with a “soft” pull, which will not hurt your credit score.

Soft inquiries are for background purposes only. For example, a credit card company may do a soft pull to see if you’re eligible for certain credit card offers, or an employer may do a soft pull before offering you a job. Soft pulls can be done without your permission and do not impact your credit score. Hard pulls require your permission, and are done when lenders or credit card companies are assessing whether to grant you a loan or line of credit.

How to raise your credit score for the long haul

Once you’ve corrected errors, settled your delinquent accounts, and brought your credit utilization under control, the only other things that will improve your score are time and developing good payment habits. For example, if you tend to forget to make payments, you can set up automatic payments so you don’t forget.

And here’s some good news for people with bad credit: Generally, people with the lowest scores will see the biggest gains the fastest.

“It’s a lot like dieting,” says Sullivan.

For instance, if your score is 550, “you could probably get it up 30 points in a matter of a couple months, if you’re really dedicated and really careful,” he explains.

On the other hand: “If your credit score is already a 750 and you’re trying to get it to 780, that can take double or more the time.”

Still, it’s worth doing whatever you can to get the best interest rate possible.

The post How Long Does It Take to Improve Your Credit Score Enough to Buy a Home? appeared first on Real Estate News & Insights | realtor.com®.