Debt free living could be setting you up for pain

Debt free living is popular these days with books like Dave Ramsey’s Baby Steps and the allure of a stress-free bank account.

I’m all for paying off your debt but there’s something in the debt free lifestyle that could cause you just as much stress in the future. That lifestyle choice could close the door on opportunities and financial choices you need to make later on.

In this video, I’ll show you why debt-free could be dangerous and how to manage your credit to keep your options open.

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Pros and Cons of Debt Free Living

It’s hard to live debt free, honestly, since most adults either carry a mortgage, owe a car, face monthly student loan payments, credit card charges — or all of these. It’s a wonderful thing to be able to say you are debt-free it sounds liberating. But really, debt has its own pros and cons.

Living debt free in this modern era has its own advantage and disadvantages. In the US, a student loan can help you get an education and increase your earnings potential. Having a mortgage could be your way to own a real estate property easily. Credit cards can be used in cases when you don’t have cash available or if your cash on hand isn’t enough to pay your groceries or bills. Imagine trying to buy a house and buying home appliances, or leasing your own car or even as easy as availing a smartphone plan without a reliable credit score… How’s that? Do you agree to just have everything paid in cash at once?

Is Debt Free Living a Mistake?

Everyone wants to do their debt-free scream but are they setting themselves up for pain in the future?

It’s not that managing your debt or paying it off is dangerous. I pay my credit card balance every month and fully support the need to get out from under your debt.

The average American household has over $50,000 in debt not including their mortgage. One in every five dollars earned is going to pay off debt and that’s too much.

The Debt Crisis in America
The Debt Crisis in America

But not managing your credit score is more dangerous than you might know.

That’s because of all the things your credit score affects like renting a house, your insurance premiums and even getting a job.

Because of something called a credit-based insurance score, insurance companies can charge people with bad credit more and according to industry data, they do. People with a credit score below 650 pay almost up to 75% more for home insurance and double in auto insurance premiums compared to those with a higher FICO.

credit based insurance graphic

Potential employers and landlords can also look at your credit report. It’s totally legal and could keep you from getting the job or home you need.

So credit is very much a part of your life. In fact, I think credit has affected all our lives at one point.

Becoming debt free is one thing but you still need to manage your credit score.

How to Build a Perfect Credit Score

Fortunately, I’ve got three credit repair tips that will help you increase your credit score fast, whether you’ve got a bad credit or an 800 FICO. You might have heard of some of these but I’ve added a little twist to each that can boost your score as much as 100 points within a few months.

The first thing you need to do to fix your credit score is to get everything bad removed from your report. Now this can take up to seven years for things like missed payments and even longer for a bankruptcy but there is a way to get some bad marks removed faster.

You can file a dispute with the credit bureaus to remove the mark from your credit report. Now this is supposed to be for errors and identity theft but it sometimes works for other things as well. These department stores like Sears and JC Penney have their own problems, they’re not going to take the time to respond to a dispute letter about your closed store card.

Make sure you check your report from each and file separate disputes.

You can also negotiate with creditors and collection agencies if you still owe them money. Tell them you’ll pay in full if they remove the bad mark from your report. Be tough and get it in writing and you’ll watch your score jump.

Sonya of Financially Fierce has a great tip on this one. She says to check on any collection accounts on your credit report to see if the collection agency bought the debt or if it’s just collecting for the original lender.

If the original lender still holds the debt, contact them first to work out a deal. If you can work something out and pay off the original lender, you’ll be able to get the collection agency removed from your credit report.

Now filing a dispute can take a couple of months but there is a way to fix your credit faster called Rapid re-scoring. Mortgage lenders are able to contact the credit bureaus directly to resolve disputes and negative credit remarks so you can qualify for a mortgage.

I’ve seen people get a higher score within 48 hours after a mortgage lender starts this process.

Managing Your Debt and Your Credit Score

Our second trick to fixing your credit fast is to pay down revolving debt and asking for a credit limit increase. Your credit score hates revolving debt like credit cards. That’s any debt without a payoff date or a fixed monthly payment. So when you’re prioritizing debt payoff, make extra payments to your credit cards first.

debt free lifestyle mistake

You also want to ask the card company to increase your limit. This is because a big part of your credit score is what’s called the credit utilization ratio. It’s how much you have borrowed versus your limit.

So if you have a credit balance of $5,000 on a $5,000 limit – you’re maxed out at 100%. But owing that some $5,000 on a card with a $10,000 limit means you’re only borrowing half of what you can. It just looks like you’re being more responsible with your debt.

Now you can pay off your debts so that decreases one part of that credit utilization ratio but you can also ask to increase your limit which increases the other part – it’s a one-two combination that really boosts your score.

In fact, you don’t have to ask to increase your credit limit just once. Kali of Going Beyond Wealth makes a point of regularly asking for higher limits so she’s always got a higher utilization ratio.

Between that and managing her credit, she’s increased her score to an 802 FICO.

Finally here, and this is one of the least well known credit repair tricks, is to add your rent to your credit report. You pay rent every month but unless your landlord is reporting those on-time payments, it’s doing nothing for you.

Using websites like RentReporters or RentTrack, you landlord can verify your rent payments to the credit bureaus and really help you build a great credit history. I’ve seen this one credit score trick alone increase a score by as much as 30 points in a month.

So it’s ok to let out that debt free scream and avoid getting over your head with debt but don’t avoid credit altogether. A debt-free lifestyle will hurt your chances to get the money you need and worse if your credit score falls. Manage your score and increase your FICO when you need to so you don’t get locked out of the financial system.

Read the Entire Debt Free Living Series

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