If you have bad credit, rebuilding it can be more difficult than it would have been when you first started. There are lots of reasons people find themselves with bad credit and in debt, but the good news is that these things are not permanent. Even though your debt may seem insurmountable and your credit score unfixable, this usually is not the case. If you’re looking to make a change and start getting your finances in order for the future, here are some helpful steps you should take.
Determine How Much Debt You Have
The first thing you’re going to need to do is determine how much debt you have accumulated and where it is owed. Begin by making a list of all of your loans and credit cards, and how much you owe on each one. You also want to write down what the minimum payment for each account is so you have a better idea of what you absolutely need to start paying on everything to limit further damage to your credit.
It is better obviously, to pay as much of your debt as possible whenever you can, but if this isn’t a possibility for you right now, the minimum amount is a good place to start. It will also help you start getting into the habit of paying your bills on time each month. When you have them all listed out and put in a place you can see it’ll be less likely that you forget to make your payments. Making your payments on time is very important for improving your credit score, so no matter what you want to begin paying the minimum amount on time.
Explore Your Options
There are multiple ways to minimize your debt and improve your credit score so that you can focus on saving money. The two main ways to tackle your debt are the debt avalanche and debt snowball methods.
The debt avalanche approach means that you make your monthly minimum payments on time except for the one with the highest interest rate. For this one you are going to pay as much as you can so that it is paid off the quickest. After you have paid this one off you can move to your next highest interest rate account, and so on until each one is paid off.
On the other hand, the debt avalanche method means that you pay off the debt with the lowest balance first no matter what the interest rate is. So you will pay as much as you can to that account while making the minimum payments on your other ones. You will work your way through your accounts, paying them off one at a time until all of your debt is paid off.
The avalanche method allows you to save more money, but the snowball method will give you quicker results. The method that you choose will depend on what works best for your specific situation. For example, if all of the interest rates on your debts are pretty much the same, the snowball approach may give you better results. However, if you have some accounts with very high-interest rates that you would like to stop paying as soon as possible, you should go with the avalanche method.
What is most important with both of these methods is that you are making minimum payments on all of your accounts each month. You would obviously be able to pay off one debt more quickly if you put all of your money into that account for a few months. However, while you would be doing this, interest and late fees would be building up on those other accounts. Not to mention how terrible late payments are for your credit score. Both of these approaches, or ones that are similar will ensure that your debts are being paid off but you aren’t hurting your credit score further.
Bankruptcy is a Last Resort
Having a lot of debt and knowing that your credit score isn’t great is extremely stressful and it can leave you feeling hopeless. You hear a lot about bankruptcy and how bad it is, but not everyone understands why it is bad. In general filing for bankruptcy will further damage your credit, so if restoring your credit is one of your main priorities it should be used as an absolute last resort. If you feel like bankruptcy could be your only option moving forward, discuss it with a bankruptcy lawyer first. They will be able to help you determine whether this is the best way to get you out of debt and eventually back on your feet, or if alternative options would be better for your specific situation.
Roni Davis is a writer, blogger, and legal assistant operating out of the greater Philadelphia area