How to Clean Your Credit Up Free of Charge

The failure to employ effective debt-management techniques can subtract thousands of dollars from your bottom line each year and even lead to bankruptcy. Beyond current expenses, prospective lenders may refuse to approve your applications for mortgage or consumer debt due to your poor credit history. Cleaning up your credit free of charge is a long-term process that begins with goal setting. From there, you must learn to organize your personal finances and locate sources of cash flow that can be used to make timely debt payments.

Instructions

1

Define detailed financial goals, which should include total costs and projected dates. Common financial goals often include retirement spending, tuition funding and a first-time home purchase. Perhaps you will need more than $1 million to provide for a Southern California retirement within 25 years. Financial goals should serve as motivation to get your debt under control and to begin saving money.

2

Order a copy of your credit report from Experian, Equifax or TransUnion. For free, you can also order one credit report per year through AnnualCreditReport.com. The credit report documents your history of making payments and categorizes your current debt according to amount and type.

3

Rank your current debt according to interest rates. It is important that you pay off the most expensive debt first to save money on interest charges.

4

Define good and bad debt. Good debt can be leveraged to build wealth, as it includes school, business and home loans. Good debt often feature low interest payments, which are also tax-deductible. Bad debt, however, is associated with credit cards and loans that charge high interest rates to finance consumer spending. When cleaning up your credit, focus on keeping bad debt to a minimum.

5

Contact each individual lender with the intent of negotiating lower interest rates. If a current lender refuses to lower interest-rate charges, you may be able to shop around and refinance old debt. To refinance, you will take out a new loan at a lower interest rate to pay off an old loan. Consider taking advantage of credit card specials, which sometimes offer low interest rates on balance transfers.

6

Review your current banking and investment balances. You may be able to use existing bank deposits and sell under performing investments to raise cash to pay off expensive debt. Compare debt-interest rates against expected returns when deciding to spend savings on credit relief. For example, it is more economical to spend cash to pay off a credit card that charges 15 percent interest than it is to take out a 3 percent certificate of deposit.

7

Analyze banking statements to calculate monthly cash flow. To do so, you will subtract monthly expenses from monthly income. To increase monthly cash flow, you may be forced to reduce your living standard by limiting your expenses to necessities.

8

Spend free monthly cash flow to pay off debt, prioritizing debt payments according to interest rates. Make the minimal payments on low-interest debt so you preserve the most cash to pay down the loan that carries the highest rate.