How to Eliminate Debt Without Hurting Credit

Debt can be an ugly word.

Debt reduction is hard, no matter which way a borrower looks at it. Even if he is not living paycheck to paycheck, finding a way to allocate extra funds to debt requires sacrifice. Some borrowers look to debt reduction plans as a way to ease the burden, however, the only way in which a borrower can reduce debt and not hurt his credit score is to repay all of the debt, and to do so on time.

Instructions

1. List all debts on a spreadsheet or sheet of paper. Make sure to include the name of the lender, the total amount of the debt, the monthly payment, and the date the payment is due.

2. Create a monthly budget for your family. List all expenses by category. Go through the budget and try to find ways to reduce spending in order to allocate extra funds to debt reduction. Be sure to include the minimum monthly payments in your budget.

3. Look for ways to earn extra money, through overtime, extra shifts, or a second job. Sell unused items around your home, either online through an auction site or through a garage sale at your house.

4. Rank your debts in order of smallest to largest monthly payment. Begin to take the extra money earned and "found" in your budget and apply it to the smallest debt. Once it is paid in full, take all the money that was being applied to that debt and apply it to the next smallest debt. Continue the pattern until all debts are paid in full.

Tips & Warnings

• A borrower's credit score is hurt when he negotiates a lower debt settlement with a lender or has part of the debt removed due to inability to repay. Additionally, late payments on a borrower's credit report lower his score as well. To help to lessen the impact of debt on a borrower's credit score, he needs to repay all debts in full, in a timely manner. This includes collection accounts. If there are still collection accounts left on a borrower's credit report after the current debts are paid in full, he should pay those debts in full as well to reduce the impact on his credit report as a whole.

• Repaying debt, especially large debts, can be a long and cumbersome task. During the process, most borrowers have at least one major setback. Do not allow a setback to derail your progress. Reassess the situation, learn from the setback, and move on.

References

• Experian: Credit Score Basics
• Dave Ramsey: Get Out of Debt with the Debt Snowball Plan