Many people of all ages are taking the health of their finances more seriously and beginning to take proactive steps to turn things around if they’ve been struggling.
In the past, consumers racked up tens of thousands of dollars in debt without blinking an eye, but in today’s world, they’re understanding more about the dangers of accepting all those credit card offers.
If you’ve been too afraid to face your debt and start the healing process of repairing your credit, you’ll be relieved to know there are 10 easy action steps that can help at no cost to you.
Having financial peace is one of the most important things in keeping your stress levels low. It’s also empowering to have a good credit score, which often plays an important factor in big ticket purchases, such as a car or house.
1. Create and Stick to a Healthy Budget
Before you begin to clean up what you’ve accumulated in the past, you need to make a better plan from this day, forward. Take away any shame or stigma you’ve carried around with you over your situation and just do better from here on out.
Start by knowing what money is coming in and what’s available to spend. A healthy budget will keep you on track for dwindling down your debt and keeping it from continuing to spiral out of control.
Make a list of all your incoming money, such as your paycheck, child support, and any government funds or other incoming revenue. Then make a list of all your outgoing bills and expenses.
These should include all your credit card debt, service bills such as electricity and water, your mortgage and car payment, automotive and health insurance, groceries, entertainment, and more.
If you look back on previous grocery charges, you may find that you have been spending more than you should. You can improve this by learning how to shop smart, looking for deals and using coupons or even purchasing store brands over name brands.
Make sure that you are only shopping with cash from now on. You don't want to be racking up more debt on your credit cards for impulse purchases. You may discover that you have more outgoing commitments than you do incoming revenue, but it's important for you to be honest about where you're at.
2. Find Out and Organize Your Debt in One of Two Ways
Once you have a budget in place, it will be time to dig down and find out where you stand with creditors. This may be a painful exercise emotionally, but it's important that you lay it all out so that you can tackle it in the smartest way possible.
Start by listing out all the debts that you have, whether it is to individuals or companies. You want to list the name of who is owed, the amount that is owed, the minimum payments that are normally due, the interest rate, and the credit limit, if applicable.
By doing this, you will be allowed to see how your debt should be organized so that you can begin paying it off. There are two different ways that you can do this to your advantage.
The first way is what's commonly known as the snowball method. Dave Ramsey likes to tout this process, and it's where you organize your debt from the lowest amount owed to the highest, paying it off one at a time and applying the minimum amount that was due to the next largest debt once it is paid off.
So, for example, if you owe $100 on a credit card with a $25 minimum payment, you would pay that credit card off and take the $25 you typically owed on it each month and apply it to the next debt on your list.
Another way that you can pay off your debt, which is more financially responsible, is by paying off those with the highest interest rate first. The interest you are being charged is going to eat away at the money you are throwing at this process.
However, it is often more inspiring to see entire debts being wiped out faster than it may take you to pay off those with higher interest rates. Choose whichever method that makes it easier for you.
3. Find Out Your Credit and FICO Scores
Once you have all your debts listed, you want to go to the three major credit bureaus and run your credit score on each one of them. You will be going to TransUnion, Equifax, and Experian and downloading your free credit report.
They may each have different scores listed. Usually, they will each be in the same ballpark, but there may be a few points that are different. You also want to find out what your FICO score is.
This is typically a summary of all of your credit reports, and will appear as a number anywhere between 300 to 850. The higher your credit score, the better your financial health.
Don't be alarmed if your credit score is currently in a dangerous state. You will quickly see it rise as you begin applying the tips necessary to start paying off your debt and freeing up part of your credit.
4. Analyze Your Credit Score to See What's Hurting It
Once you have your credit scores downloaded, you need to see what is hurting your score. You can use a site such as Credit Karma to get an overview of what your total balance is for credit cards, student loans, auto loans, home loans, etc.
Using a site like this, you can see the effect you will experience once you start eliminating your debt by using their paydown tool. You will be able to see at a glance whether or not your payments have been on time or were late, or even in collections.
You can go to your score details to see what guidance they have in helping you improve your credit. For example, you will be able to see your payment history, credit card use (which means the ratio of debt to available credit), derogatory marks such as collections or bankruptcies, the age of your credit and total accounts, as well as hard inquiries.
Each time you log on and you see a change in your credit score, you will be able to see what changes occurred to make that happen. For example, it will tell you which credit card had a decreased balance and by what amount, or if you had an increase on a credit card, too.
When you look at the factors that are affecting your credit score, they will show up in red if they are negatively affecting your credit. For example, if you are using 90% of your available credit, that will be negatively affecting your score.
It will also tell you whether or not certain factors have a high impact on your score or a low impact. For example, your payment history has a high impact on your score, while the number of accounts that you have open has a low impact.
5. Negotiate a Better Interest Rate
You want to look at the interest rate on each of your current credit cards. Sometimes, companies will raise your interest rate and you will be paying more than you originally signed up to pay.
You can contact each of the individual creditors and simply ask for a better interest rate. That doesn't mean they will always agree to it, but if you ask nicely and are showing improvements, they may be willing to work with you, even slightly.
Another thing you can do is transfer higher interest rate balances over to a card with a lower interest rate. So if you have a balance of $2,000 on a high interest rate card with 26% interest, you can transfer it to another card with a 10% interest rate and save money as you're paying it off.
6. Don't Close Old Accounts
Many people have a knee jerk reaction to seeing their current state of debt and credit in black and white and they begin shutting down all of their credit cards so that they won't be tempted to spend money again.
But in doing so, you are eliminating much of the available credit that you would have had, which will hurt your score in the long run. It is better for you to pay off your credit card and have an available balance of $10,000 that's just sitting there than to close that card and cut off the available balance that can ultimately help your credit score.
You may notice that when accounts automatically close, such as a car payment that you finally pay off, your credit score takes a dive. Even if you have consistently made payments on that debt, when the company closes the account, it will have a negative impact temporarily.
7. Consider a Consolidation
You may want to consider a consolidation of your debt to help you pay it off. Instead of having five different minimum payments to keep track of and make payments on, you can consolidate all of those debts into one credit card and have a lower minimum payment.
Another thing you can do is try to apply for a consolidation loan. This may be better if you have extensive debt that you wish to consolidate, such a dozen credit cards and other debt that would be better suited to one large payment that was less than the cumulative minimum payments if they stayed separate.
8. Increase the Amount You Pay Toward Your Debt
If you are one of the people who has analyzed their outgoing and incoming money and realizes that you have to pay more than you earn, then you need to change things so that you have enough money to pay off your debt and improve your credit.
Another reason you may want to do this is simply because you want the debt payoff and credit repair process to go faster. It may take you years to get everything paid off if you are merely making minimum payments.
There are several different ways that you can increase the amount you are bringing in so that you can specifically target it to your debt. First, check and see if there is another position within your company that would offer you a raise in earnings.
Or, stay in your current position and ask your boss for a raise if you believe you deserve it. Many companies will not take a proactive approach in giving their employees a raise unless they ask.
If that doesn't work, then you may consider getting a part time job to supplement your current income. This could be an evening or weekend job that gives you a little more money to put towards your debt.
You could also start a side gig that helps you earn more so you can pay more to your creditors. You can start something like this online, creating gigs on sites like Fiverr, or creating products to list on sites like Etsy or even Amazon.
Another way people often earn more money to pay off debt is by selling items they no longer need. From a simple garage sale on your street to using eBay to sell collectibles, this will help you become debt free, faster.
9. Correct Erroneous Credit Information
Make sure, when you do download your three credit reports, that you carefully and methodically go through each one and mark it if you spot an error. You can dispute any errors on your credit report, and the creditor has a short amount of time to respond to the dispute before it is removed from your report.
You may find debts that have long been paid off that are still showing a balance. You may find that someone else’s credit has merged with yours and should not be on your report.
There may be some sort of fraud situation that has destroyed your credit score without you knowing about it. Make sure you dispute each error so that your credit history is corrected and your score can rise.
10. Get Your Credit Limit Raised Without Spending More
As you begin to pay off debt, you will receive offers to add on another credit card. You don't necessarily want to add more credit, but it is a good idea to have your existing creditors raise your credit limit whenever possible.
As your score begins to improve and your payments are consistent, you can automatically request a credit increase on the creditor’s website. Or, you may do it over the phone when you contact their customer service line.
What you don't want to do is sign up for a dozen new credit cards and then max them all out so that your credit gets in even worse shape than it was before, and your debt grows out of control.
Having debt is nothing for you to be ashamed about. Many people are never taught how to manage their finances and have to figure things out on their own, often later in life. But once you are aware of the problem, it does become your responsibility to seek out a smart way to manage your money, become debt free, and maintain healthy credit.