How to Reduce Debt Without Ruining Credit

Reducing debt is not as easy as creating it. Daily living habits as well as long-term spending mistakes are two factors that contribute to debt. There are several ways to eliminate debt, many of which will ruin credit. Filing bankruptcy, foreclosures, debt consolidation and settlement scams can all reduce your debt, but they also can lead to low credit scores and high interest rates. However, by effectively and consistently changing your daily habits, you can reduce your debt without sacrificing your credit scores.

Things You'll Need

• Budget Personal financial records Daily spending diary

Instructions

1. Determine how much debt has been accumulated by performing an honest evaluation of your financial state. Look at all your debt, including mortgages, auto loans, credit card bills and any other debt. Calculate the total monthly bill payments.

2. Start a diary of daily spending habits. Differentiate between the basic necessities and luxuries. Cut back on expenses that are in the luxury category and find ways to spend less money on the necessities.

3. Purchase items on credit that can be repaid in 30 days. By paying your credit card balances in full each month, you can avoid interest charges.

4. Eliminate multiple merchant credit cards. Ten percent of your FICO (Fair Issac Company) score is based on the type of credit you carry, and the goal is to maintain a healthy balance of credit cards, which means no more than two of each merchant cards. Note, though, that eliminating several credit cards could have a negative affect on your credit score as well as significantly reduce your available credit, so you want to choose carefully.

5. Transfer debt on high-interest credit cards to low-interest credit cards to save money and reduce debt. Check with the merchant for transfer fees before transferring the balance, and ask about any other fees that may make the balance transfer less attractive.

6. Write daily reminders and notes in a spending diary, which will serve as a reminder to pay bills on time and avoid late fees. The diary also will help identify unnecessary expenses. For example, make your morning coffee at home, take bag lunches to work or trim back on cable and telephone packages.

7. Call all your credit card issuers and ask if there are programs available to reduce interest, monthly payments or even settle the balance amount completely. In some cases, settling debt directly with the company will result in a temporary suspension in the use of the account. However, many creditors will reopen the account in good standing after your payment obligations have been met. Before entering into these types of agreements, ask the creditors how the payments will be reported to the credit agencies.

8. To reduce mortgage debt and avoid a foreclosure, call the mortgage company promptly and ask if there are any mortgage-modification or deferment programs to reduce monthly debt.

Tips & Warnings

• Seek the advice of a debt counselor (but do not invest time or energy into debt-reduction schemes that seem to good to be true). Find ways to eliminate utility bills through the use of green energy, and reduce auto expenses by purchasing fuel-efficient cars. Take public transportation or walk to your destination whenever possible. Perform odd jobs or turn a passion into a business to put a little extra money toward reducing debt.

• Don't pay someone else to repair credit without understanding how you accumulated the debt and being willing proactively to stop those habits.

References

• Reducing Mortgage Debt
• Help For Homeowners
• FTC Debt Management

Resources

• Read this Article in Spanish
• Understanding FICO Score