Debt and Your Credit Score
Tips for creating a budget and paying down debt.
In our last two blogs for Credit Awareness Month (“Understanding Your Credit Score” and “Credit Score Holding You Back?”), we have mentioned how debt factors into your credit score calculation. So now, let’s talk about methods on how to handle debt in favor of your credit score.
Budgeting and dealing with debt can be a struggle, but your first steps would be to create a budget and pay down your debt strategically.
Identify & Simplify
First, identify and track how you’re currently spending your money. Take advantage of free online tools or mobile apps to help make budgeting simpler and identify where you need to make changes.
Next, set your financial goals and refine your budget to meet those goals. Continue to track your spending to make sure you’re staying within your budget.
Start Small
Once you’ve created your budget and know where your money is going, it’s time to start paying down your debt. A good tactic for dealing with debt is Dave Ramsey’s Debt Snowball Plan.
The plan works by focusing on one small, manageable debt at a time. Here are some tips to implement this plan:
- Make a list of all your debts and the balance owed, from smallest to largest.
- Pay off the smallest debt first. Make minimum payments on all your other debts and funnel the rest of your extra funds into the smallest debt.
- Each time you pay a debt in full, work on the next smallest debt on your list.
- Continue this program until you reach the last debt on your list.
- Know how it feels to live debt-free!
By starting with your smaller debts, you’ll see results quickly, which will help motivate you to keep going. You’ll be surprised by how much progress you can make in a short amount of time!
Talk To Your Creditors or Collection Agency
If you have been getting letters and phone calls regarding payments to a creditor and you know you’re behind on your payments, the best thing to do is to contact the companies you owe as soon as possible. Explain your financial situation and request to set up a payment plan that you can afford to pay on. Everyone benefits when you’re making payments toward reducing your debt, so many creditors are more than willing to discuss a payment strategy and work with you to make the amounts manageable.
If you haven’t contacted the companies to whom you owe a debt, after a period of time your debt may be sold to a collections agency. If that happens, you’ll get letters and calls from a different company.
But the remedy is the same: Call the collection agency to set up a payment plan with them. Getting a payment plan set up is better than doing nothing at all!
Remember, just because you are behind on your payments doesn’t mean you have no rights. The Fair Debt Collection Practices Act ensures you are treated fairly and honestly and that collectors are not abusive or threatening toward you.
If you’ve recently cleared a debt from your credit history, you may be closer to the goal of homeownership than you realize! Let’s discuss your options. Contact one of our Mortgage Bankers today!
*Lake Area Mortgage; a Division of Royal Credit Union is not a credit counseling or financial advisement firm. This information is for educational purposes only and is not to be taken as guidelines or guarantees to improve your credit or financial situation.
