Pay It Off! |
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You will be surprised to know that the credit card debt (excluding mortgage, student loans, medical bills or any other debt) of an average American family amounts to over $8,000, on 16 different credit cards. So, in the following article, I am going to discuss how you can get out of this financial mess and build up a good credit score. Consider a real life example of how a family survived debt. Tales of Life and Debt: Recovering from a Lousy Credit Score, Dollar by Dollar Lydia and Brian are a Washington, D.C. based two-career couple, who decided to construct their own house in 2001. For this purpose, they decided to check out if they are eligible for a mortgage. The time seemed to be the most appropriate, as mortgage rates were extremely low at that time. But they were shocked to discover that they were eligible for only two to three percentage points higher rates than the prevailing one, as they had very bad credit scores, i.e., between 580 and 620. So, they decided to improve it. The first step in this direction was to find out the main cause of their low credit score. They took out their credit scores and credit reports, and soon they discovered that their credit reports contained a lot of redundant, outdated and useless information. Several accounts were already closed; a number of seven-year-old late payments were still listed on the reports. Then, Lydia and Brian mailed certified letters to all concerned credit bureaus and disputed the information. They also noted down which items need to be updated and which ones should be deleted. They also telephoned or wrote to different creditors to ascertain that their records are updated. Their credit score was low also due to their 12 credit cards, which were used up to 50% of their limit and increase their debt-to-income ratio, which plays an important role in determining credit scores. To bring it back to acceptable range, they decided to cut down their useless expenses and started depositing the saved money in the money-market account. Later, they used this money to clear their credit cards dues. In the next nine months, they cleared 11 of 12 credit cards and closed 7 of them. Gradually, they abandoned their credit cards and saved an extra $10,000 to finance their home. After accomplishing these corrections, they contacted their lender again, who was very surprised to see the new credit scores. Now, they were in the 650-730 points category. So Lydia and Brian were able to qualify for the three-year adjustable rate mortgage at 4.95%, which could have been as high as 7% with their earlier scores. In this way, after a nine months effort, they were able to save $400 per month on their mortgage installment, which amounts to about $5,000 every year. Conclusion After that, Lydia and Brian regularly checked their credit scores after every six months to ensure that it remains high. It has benefited them very much. Later, in August 2003, they refinanced their mortgage for 30 years at a fixed rate of 5.75% when their home was appraised at $100,000, much higher than its original appraisal. Finally, they saved a year and a half off the loan term. They're also paying more on their mortgage, so they can make the full payment within the next five years. Now, they use debit cards instead of credit cards and no longer indulge in unnecessary expenditures. |
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