How to Get Out of Debt Without Ruining Your Credit Score
Getting out of debt is a lofty, but good goal. Many borrowers find it hard to get out of debt, and resist future temptation, without potentially doing damage to their credit score. The key is to know what can negatively impact a credit score and to plan accordingly. Through the use of budgeting techniques, you too can get out of debt without ruining your credit score.
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Instructions
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Formulate a budget to begin to pay down debt. Place all monthly expenditures into categories and analyze your budget to see if there are any areas where reductions can be made.
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Contact your lenders, especially credit card companies, to see if they will reduce your interest rate, if you have paid your bills on time for at least the past year.
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Earn extra funds, if at all possible, to speed up your debt repayment process. Earn extra cash with a garage sale or sell items online.
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Set aside three to six months living expenses before debt repayment. This becomes your emergency fund to tap into, as opposed to tapping into additional debt.
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Rank your debts according to minimum monthly payment. Begin paying extra on the smallest monthly payment, with the money found in your budget and earned through extra work or projects. Continue paying on that debt until paid in full. Now, tackle the next smallest monthly payment by adding all the extra funds plus the smaller card's minimum payment to that debt until paid in full. Snowball your payments in this manner until all debt is paid in full.
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Resist the urge to close open lines of credit, such as credit cards and home equity lines of credit. Closing them will hurt your score. Keep them open by simply charging one item per month on the card--such as a tank of gas--and pay the balance in full at the end of the month to prevent interest expense.
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Tips & Warnings
Pay off all collections, liens and judgments on your credit report as soon as possible. An unpaid debt of this type has a bigger impact on your score than a paid one. However, it will not immediately raise your score. The impact takes longer than 30 days. Yet, a paid debt will fall off of your report within seven years, but an unpaid debt stays there longer.
Do not consult with a debt consolidation firm or allow credit cards to charge off a portion of your balance. Both of these options will seriously damage your credit and make you look undesirable to future lenders.
