It’s no secret that excessive debt often contributes to lower credit scores. People who are working to improve their credit scores often have several debts that are in repayment. But how can you know which debts to pay off first, or if you should pay at all? Here are a few tips to help simplify the process.
1. Check your credit report and credit scores. People who know they have poor credit may only know because they’ve been recently turned down for new credit. If that applies to you, get your credit report sooner rather than later. Being turned down for credit entitles you to a free copy of your credit report, even if you’ve already received your credit report in the past year. By getting the most recent version of your credit report and scores, you’ll know exactly where you stand. Start off by disputing any inaccuracies that you see – inaccurate items on your credit report can significantly damage your scores.
2. List your debts from smallest to largest. By itemizing your debts, it will help you to focus on paying down your debts more efficiently. If most of your debts are nearly the same value – $1000 on one credit card and $1500 on another, for instance – then list your debts by interest rate instead.
3. Pay off the smallest debt (or the one with the highest interest rate) first. By getting rid of debts in a targeted fashion, you can improve your credit scores more quickly as you eliminate your debt obligations one at a time. Use the money you spent towards paying down the first debt as an additional payment to pay off the next, and you will be able to get out of debt even faster.
4. Don’t forget to reward yourself along the way. Getting out of debt and improving credit scores is hard work. Whenever you meet one of your goals, set aside a reasonable reward to celebrate your hard work. Whether it’s saving for a vacation, a special night out, or some other treat, make sure that it fits with your current budget and savings goals.
5. Remember that not all debt is bad. Some debts are actually seen as good debt by lenders. In general, if you have borrowed to purchase something that will increase in value, this debt is seen as positive by lenders. Student loans, traditional mortgages, and money borrowed to grow your business all fall into this category. That doesn’t mean that you shouldn’t repay these debts – on the contrary, paying off good debt can only increase your net worth in the future.
Paying down debt and paying on time are two of the most powerful techniques for raising credit scores. If you’re having difficulties with tackling your debt and getting your credit on track, talk to a reputable credit repair agency, and work with a professional to raise your credit scores one step at a time.