When you're raising a family on a modest income, maintaining good credit can feel like a constant battle. But whether you're dealing with credit card debt, missed payments, or just want to improve your score, there are steps you can take to turn things around. This blog will guide you through the process, using a relatable example of a family looking to buy a new van as they prepare for their second child.

1. Start with the Basics: Understand Your Credit Report

Before you can fix your credit, you need to know where you stand. That means pulling your credit reports and taking a close look at your scores. Your credit report is like a report card for your financial life, showing how well you've managed your debt.

Let’s take the example of the Martinez family, who are expecting their second child. They already have a home, but they’re saddled with credit card debt  and they are not loving the interest rate on the loan for a much-needed new van. They checked their credit reports and found that several of their credit card accounts have interest rates as high as 26%!

To get started, they pulled their credit reports from all three major credit bureaus (Equifax, Experian, and TransUnion) using AnnualCreditReport.com, where you can get free reports. They carefully reviewed the reports for any errors—like incorrect balances or accounts that don’t belong to them—and disputed them immediately. Errors like these can unfairly lower your credit score, so it's important to correct them as soon as possible.

Common Credit Report Errors: According to the Consumer Protection Finance Bureau, common mistakes on credit reports include:

• Incorrect identity information, such as wrong name, phone number, or address

• Accounts that belong to another person with the same or similar name to you

• Fraudulent accounts resulting from identity theft

• Closed accounts, such as credit cards or car loans, that are reported as open

• Incorrect late or delinquent status on accounts

• Repeat listings of the same debt

• Incorrect current balance or incorrect credit limit

These mistakes can significantly impact your credit score, so it's crucial to identify and dispute them promptly.

Quick Tip: Many families are surprised to find errors on their credit reports. These mistakes can range from misspelled names to more serious issues like fraudulent accounts. Fixing these can give your score a quick boost.

2. Tackle Debt Head-On: Understanding and Using a HELOC

Once the Martinez family had a clear picture of their credit, they turned their attention to their debt. They decided to consolidate their high-interest credit card balances using a Home Equity Line of Credit (HELOC) from First Alliance Credit Union. But what exactly is a HELOC, and why is it beneficial?

What is a HELOC?
A Home Equity Line of Credit, or HELOC, is a type of loan that allows you to borrow money by using the equity you've built up in your home as collateral. Think of it like a credit card, but with a much lower interest rate because your home secures the loan. With a HELOC, you have a revolving line of credit that you can draw from as needed, up to a certain limit, and you only pay interest on the amount you borrow.

Comparing Interest Rates:
For the Martinez family, this was a game-changer. Their credit card debt was subject to interest rates as high as 29.99%, which made paying off the debt seem impossible. By switching to a HELOC, they could consolidate their debt into one manageable payment with a much lower interest rate - oftentimes cutting your interest payments in half. That’s a significant reduction in interest, which means more of their monthly payment goes toward reducing the principal balance rather than just paying interest.

Why This Works:
A HELOC typically offers lower interest rates compared to credit cards. By using the equity in their home, the Martinez family could lower their monthly payments and reduce the total amount of interest paid over time. This strategy is especially useful for families who own a home and are looking to manage their debt more effectively.

Imagine you're paying $500 a month on credit cards just to cover interest. With a HELOC, that payment could drop significantly, allowing you to pay down your debt faster and save money in the long run. Plus, by consolidating multiple credit card payments into one HELOC payment, you simplify your finances, making it easier to stay on top of payments.

3. Fixing Your Credit & Build Better Financial Habits

Improving your credit isn’t just about paying off debt; it’s also about building better habits that will keep your credit score healthy in the long run. For the Martinez family, this meant setting up automatic payments on all their accounts to avoid missing due dates. They also focused on keeping their credit utilization ratio low—meaning they aimed to use less than 30% of their available credit.

They also decided to keep their oldest credit cards open, even after paying them off. Why? Because the length of your credit history plays a big role in your credit score. By keeping older accounts open and in good standing, the Martinez family could improve their credit score over time.

Get started with your HELOC today!

Real-Life Example: Let’s say you have a credit card you’ve had for ten years, but you don’t use it much anymore. Instead of closing the account, keep it open with a small recurring charge (like a streaming service). This helps maintain your credit history and shows lenders that you can manage credit over a long period.

4. Seek Professional Help When Needed: Credit Counseling

Sometimes, despite your best efforts, fixing your credit can feel overwhelming. That’s when it might be time to seek professional help. Credit counseling services, like those offered through First Alliance Credit Union, can provide personalized advice and help you create a plan to improve your credit.

The Martinez family, for instance, worked with a credit counselor to create a realistic budget that allowed them to pay down their debt while still saving for their future. The counselor also helped them understand the long-term benefits of improving their credit, such as getting better interest rates on loans and even saving money on insurance.

Important Note: Credit counselors can negotiate with creditors on your behalf, helping you secure lower interest rates or set up manageable payment plans. This can be a lifesaver for families struggling to make ends meet while trying to pay down debt.

Fixing Your Credit: The Road to Better Credit

For the Martinez family, fixing their credit wasn’t just about buying a new van—it was about securing a better financial future for their growing family. By understanding their credit report, using a HELOC to tackle high-interest debt, building better financial habits, and seeking professional help, they were able to improve their credit score and qualify for a better loan rate.

Improving your credit doesn’t happen overnight, but with patience and the right strategies, you can see real progress. Whether you’re looking to buy a car, a home, or just want to save money on interest, fixing your credit is one of the smartest financial moves you can make.

Fix Your Credit! Speak to a professional!