The 2nd Step To Repair Bad Credit: Pay Off Your Debts

#1 Maxed out credit but no late payments

0% APR transfer credit cards

Those kinds of offer are for a period from 6 month to 1 year interest free (or low interest charges) on balance transfer. This won’t solve your credit problem. However, it is a good temporarily solution if you expect to be able to repay the credit card within that time frame. On the other side, if you don’t think your financial situation will change, requesting another credit card will only decrease your credit score. Therefore, this solution is made for people with a good credit rating but with temporary financial difficulties only.

Consolidation loans

Most banks will offer a personal loan in order to pay off all your revolving credits (credit cards and lines of credit). It is useless to ask for a line of credit in order to consolidate your debts. By doing so, you are not helping yourself: you are trading small revolving credit account to a bigger revolving account with a lower interest rate. If you maxed out your credit cards, it is time to get some financial discipline by paying steady instalments. This is why we recommend consolidations loans to pay off your debts.

Consolidation mortgage or equity loans

This solution is almost the same thing as paying off your debts with a persona loan. However, since you are using your property as guarantee, you will be able to benefit from a better interest rate and probably a long amortization. While a longer term will decrease your payments and increase your cash flow consequently, it will also increase the overall amount paid in interest. Instead of looking for a large amortization, try to stay focus on paying off your debts.

#2 Late payments

Depending of the severity of your late payments, you may have the option of consolidating your debts through a personal loan or an equity loan. However, the 0% APR transfer credit card won’t be offered anymore. If you are R2 or R3 on a single account, you can always try to defend yourself with an address change or that you had personal problem for a specific period of time. If it never happens before, you may be able to get through again.

However, you must have a good and detailed explanation. Imagine that you have to convince your boyfriend / girlfriend that you didn’t cheat on him/her even though he/she saw you kissing someone else. It is not going to be an easy task!

Co-applicant or Guarantor

Having another person to sign on your application may be a very good solution to your problem. However, this person must know that he will be held responsible for the loan at one point or another. In a case of a co-applicant, he will be held directly responsible for any late payments, even though he is not making them.

In addition to that, the co-signor must have a strong credit history, a good income and a solid net worth. We will elaborate more about co-signors in another article.

Community lending site and private lenders

There are pools of investors such as Prosper where you can fill in a submission for a loan. This will cost you higher interest rate but will not be shown on your credit bureau. In addition to this, it could give you enough liquidity to pay off your existing debts and starting fresh.

Family and Friends

Money is not meant to be mixed with people close to you. However, if the bank doesn’t want to lend you money, you might have to ask your relatives for help. We suggest that you write a contract with defined lending conditions. It is always easier to do business when it’s in writing.

Next time, we will look at how to start putting money aside.

If you liked this article, you might want to sign up for my FULL RSS FEED. Then, you would get my daily post in your email and can read it at any time. To subscribe, please click HERE.