Debt, Savings, and Credit Repair: Which Route to Choose

Achieving financial stability is a balancing act, and it is important to strike the ideal relationship between debt and savings. If approached correctly, the result is a well-maintained credit score with room for growth. However, mismanagement can result in catastrophic consequences. If you are unsure about when to spend and when to save, consider the components below. They can help fine-tune your credit repair efforts.

Debt Basics

Owing money is an uncomfortable thought for many. Interest rates, long-term burdens, and general risk are a few of the dim byproducts of the lending world. Despite the downsides, there is a silver lining. Credit reports are built based upon history and behavior. Without debt, you cannot demonstrate your ability to manage money wisely. Debt also offers freedom of choice. Few people can afford to write a check for big ticket items like homes and cars. Mortgages and auto loans allow you to buy the things you want without the up-front cash. Although the role of “borrower” might make you shudder, the benefits for a responsible spender are abundant.

Saving Basics

“A penny saved is a penny earned,” says the old adage, and it couldn’t be more accurate. Savings play a critical role in your credit repair abilities. Without an emergency fund to sustain you during difficult times, you risk your possessions, financial safety, and general credit health. A good rule of thumb is to save at least 10 percent of each paycheck. This strategy allows you to live more conservatively and prepare for unforeseen crises. Money in the bank equals strength and security.

Finding Equilibrium

Credit repair isn’t black and white; equilibrium often exists in the gray area. It can be difficult to know how to handle surmounting debt without damaging your efforts to save. Consider the following scenario:

Chad is a 34-year-old real estate broker with considerable debt. He owes $35,000 in private student loans, $15,000 on a maxed out credit card, and $200,000 on a mortgage. Chad recently collected a large commission from a home sale, bringing his savings account balance to $29,000. He would like to improve his financial stance, but is unsure of where to begin.

Chad is faced with a number of options. He could use his savings to:

  • Invest in an IRA and hope to grow his money with interest
  • Reduce amounts owed on credit cards
  • Pay down his student loans and reduce the monthly payments
  • Apply the money to his mortgage
  • Pad his bank account, leaving the funds untouched

If you are like Chad, it is important to consider these options carefully and weigh them against one another. What is the average yield for an IRA in today’s market? What kind of credit score gains would result from reducing credit card utilization? How much money would you save by paying down your student loan debt? Does your mortgage have early payment penalties? How will debt reduction affect your tax deductions? Above all, how will each of these options affect your credit repair?

Financial health isn’t an exact science, but it is worth the extra attention. Contact us for a free consultation. We can help you navigate the road to credit repair and offer helpful advice along the way.