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Alternate Use For The Debt Service Method

Debt service method alternate use

As a more advanced debt repayment strategy, the debt service method of repayment has been previously viewed as a tactic to free up cash flow.

Of course, achieving a better cash flow position is something most people struggle with their entire lives.

But what happens if there is no way to capitalize on available equity or lower-rate available credit, as was discussed in our Debt Service Method Repayment post?

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In cases like these, borrowers need to get creative if they want to improve their cash flow. That means that debtors need to take a more strategic approach to what debt they target first.

Typically, credit cards and consumer debt will carry the highest payments as well as the interest rates.

credit card debt

Since consumer debt is often amortized over a longer time period, those payments may be lower on a per-dollar-of-debt-outstanding basis. So it is ideal to target credit card debt first.

If you have several credit card balances outstanding, then simply pick which one to target first – we suggest employing the Debt Snowball Method if you really need help here.

The key is to repay the debt, improve your credit rating and consequently increase cash flow.

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Even if you are reducing your monthly debt servicing obligations by just $50 per month, the overall impact can be tremendous.

In reality, the repaid credit card (a revolving credit facility) being paid off frees up credit as well. So if all of your credit cards were maxed out before repaying the debt (100% Credit Utilization) eliminating a $50 payment also means reducing your Utilization rate from 100% to something lower.

In the eyes of your creditors, this is a good, positive sign. Targeting a 75% or lower Utilization rate will improve your credit rating to below-average risk, for the most part.

It is worth getting a copy of your latest Credit History and Score once you commit to repaying your debt.

The reason is to track your progress, both in terms of utilization as well as credit score.

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As with a weight loss program, you seldom drop 10 pounds overnight; progress is incremental and having reminders throughout the process is vital if you want to stay on track.

Once you have repaid that first credit card, it may be worthwhile waiting two months and then requesting your updated credit report from a service like Trans Union or Equifax, or a credit bureau service that provides you with multiple ratings and feedback.

We recommend keeping the paid-off card open and not using it – it will not become inactive right away and keeping it open also allows your Utilization rate to stay lower than 100%.

As your credit rating improves while you reduce your credit utilization rate, some of your unsecured consumer debt can be refinanced at lower rates.

credit score rating

By reducing your rate, you are also improving your cash flow (a lower rate means lower payments).

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In some cases, you may also qualify for an extended amortization which would further reduce your payments.

With the improvement in cash flow, you will not only be able to breathe a little easier financially, but you can allocate the freed up cash to your remaining debt outstanding, allowing you to accelerate your repayment.

So while the debt servicing method of debt repayment may seem like an advanced strategy reserved for people with home equity or immediate access to lower-rate credit, that is not the case.

Adopting this method of repayment can not only free up incremental bits of cash in the interim by merging this method with the Debt Snowball method, but it can improve credit, which can result in better borrowing rates and potentially better amortization periods (not to mention some of the other benefits that come with a better credit rating).

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