Bad credit can pose numerous debt reduction hurdles, from higher loan interest rates and larger deposits required for housing and utilities to providing debt management programs and consumer proposals as a possible solution.
Credit counselors offer invaluable assistance for creating budgets and reviewing debt situations to discuss possible solutions, often free of charge.
1. Get a copy of your credit report
Lenders use your credit report, a summary of your debt and payment history, to decide whether they lend you money. Each consumer reporting agency – Experian, Equifax and TransUnion – are offering one free report each year.
Your credit report contains your personal data, past and current accounts, any time a lender requested your report, financial issues that have become public record like bankruptcy and foreclosure proceedings, as well as your credit score which is calculated based on all this data.
Lower credit scores make obtaining loans and credit cards harder, and increase interest rates charged when they do become available. To build up your score, focus on paying bills on time while decreasing debt loads; identify expenses as needs or wants (ie spa visits are neither).
2. Create a budget
Debt reduction plans can help you pay down credit card and loan balances, reduce credit utilization ratio, and boost your score. Before initiating extra payments, however, be sure to determine how much extra money there will be after covering monthly bills and expenses.
Step one of establishing a budget should be creating a detailed list of your income and expenses that enables you to understand how much can be allocated towards debt repayment without incurring further borrowing. Create your budget using an Excel spreadsheet or one of the many budget apps available today – budgeting should not be difficult!
Once you understand your financial resources, prioritizing debts becomes easier. There are two methods available to you for doing this – either using the debt snowball method where extra payments are allocated toward smaller debts first; or you could opt for debt avalanche whereby interest payments come first.
3. Make a plan to pay off your debt
Stick with your plan when paying off debt – doing so will improve your credit-to-income ratio, make saving easier, and enable access to financial products in the future.
Start by reviewing your budget and calculating how much discretionary income is left after subtraction of baseline costs from take-home pay. Next, allocate any surplus money towards debt repayment. This might be through side hustle earnings, raises or bonuses as well as money received as personal sales proceeds, gifts or otherwise.
Consider working with a nonprofit credit counseling agency to establish a debt management plan (DMP). A DMP can help negotiate lower interest rates from creditors while creating an affordable plan to eliminate your debt in three to six years – though you must give up any new credit until this goal has been achieved.
4. Contact a nonprofit credit counseling agency
Credit counseling agencies can be an invaluable asset when it comes to debt. They can assist in creating a budget and offering advice on how to tackle it. In addition, many of these agencies also offer debt management programs which allow you to consolidate all your debt payments into one monthly payment – this option is often ideal for people with poor credit since its rates tend to be much lower than other loan solutions.
Nonprofit credit counseling agencies also provide other services, including money advice and homeownership counseling. If necessary, they may assist with filing bankruptcy – often seen as the last resort by consumers in serious financial difficulty.
To locate a certified credit counselor, try the National Foundation for Credit Counseling (NFCC) or Financial Counseling Association of America (FCAA). Both resources offer local agencies you can visit and arrange an appointment to discuss all available options with. It’s important to keep in mind that no nonprofit credit counseling agency should require payment before meeting with their clients.