It’s not that the average person wants to drown in debt. They just look around and see all the things many of us have taken for granted. They want to live in a big house and drive a nice car like their peers. If they can’t afford it, they turn to debt.
It doesn’t have to be that way. Here’s how anyone can turn their debt situation around, and even build credit while doing so.
It starts with a hard look in the mirror
Many people advocate a balanced approach when it comes to paying down debt. It might take a little longer, they argue, but at least you’ll keep your sanity.
I disagree. I think taking the balanced approach to getting rid of debt is like slowly ripping off a band-aid. The quicker you get it over with, the better you’ll be. You’ll save hundreds -- if not thousands -- of dollars in interest, and you’ll be free to enjoy the fruits of your labor faster. Plus, you’ll build credit faster and better by paying down that debt.
There’s also the psychological aspect to it. If you’re anything like me, you’ve flung yourself into something, gung-ho, to really do it right. Three months later my motivation is out the window because I’ve moved onto something else. But in those three months, I can accomplish a lot more than if I took a balanced approach.
There comes a point when you have to feel nauseated when you look at your debt balance. Only then will you truly do what it takes to pay the creditors.
Next, build credit
The nice thing about building your credit is that the next time you need to access credit you’ll end up paying far less for it. Folks with good credit can get unsecured lines of credit for rates of between 4-6%, or they can utilize a balance transfer to get 0% interest for up to a year.
People with crummy credit are stuck using credit cards -- or turning to even worse types of loans. There’s a Canadian company that specializes in unsecured loans to people with poor or no credit. This company charges an interest rate of more than 46% per year. There’s no way anyone is getting ahead paying that much interest.
The first step to rebuilding your credit is taking a look at your credit report. Canadian residents can request a free copy of their report from Equifax directly. The process is straightforward; all it takes is a phone call.
The first thing to do when you get the report is to see if there are any errors. The biggest errors when it comes to your credit score are on accounts that have some sort of issue. Sometimes, especially if a company has sent your file to collections, it’ll be listed as unpaid even though you might have settled with whoever was responsible for collecting. Clearing up those errors isn’t a hard process. You just have to prove to the credit bureau that you paid.
After errors are corrected, it’s really only a matter of time and good behavior until a credit score really recovers. You can help the process and build credit faster by doing things like not closing any open credit lines (like credit cards) and by paying your bills on time each month. Keeping the balance low on credit cards also helps. And try to avoid applying for additional credit, since inquiries on your credit report will temporarily bring your score down.
Repairing credit won’t happen overnight. But at the same time, it’s not a difficult process. It’s really as simple as paying off your debts and making sure you don’t go nuts acquiring new ones. Treat it as a process and not a quick solution, and you’ll be back to pristine credit in no time.