Building a strong credit score and keeping your debt low is a good way to stay on firm financial footing. It can be hard to resist putting a dream vacation on a credit card, or stretching your budget to lease a flashy new sports car. But paying down what you already owe and handling credit responsibly will put you in a better position to make major life investments like buying a house or starting a college or retirement fund.
Make a budget. The first job in paying down debt and managing your credit score is to figure out exactly how much money you have coming in and how much money you have going out. Put together a monthly budget to help you allocate how much you can spend on necessities such as rent or mortgage, credit card payments, food, utilities and transportation, and how much you spend on discretionary things like entertainment, dining out and hobbies. Make sure you pay your necessities -- including your debt bills -- before spending any money on discretionary items.
Start saving. If you don't have a savings account, open one. Add savings to your budget like you would any other necessary expense and start setting aside money each month. It's good to have a cushion of at least three months living expenses so you can handle your debt and maintain your credit if you lose your job, become injured and can't work, or face an unexpected financial need.
Eliminate high-interest debt first. Pick a credit card or loan that has the highest interest rate and focus on getting it paid off. Make more than the minimum payment, and if possible, apply extra money toward the principle, which will help you pay it off faster. When you have that debt paid off, apply the money to the next highest interest loan and ramp up those payments. This collective approach to debt management will help you gain momentum as you pay down debt.
Pay bills on time. The best way to maintain a good credit score is to consistently pay all of your debts on time and as agreed upon. Set up an automated payment plan where payments are directly transferred from your bank account on a specific date. If you can't do this, create a bill payment calendar to make sure you don't miss payment dates. If for any reason you can't make a payment on time, call your creditor and explain your circumstances. You creditor might be willing to negotiate terms to help you protect your credit.
Live within your means. Don't take on more debt than you can comfortably handle. Get into the habit of saving for things you want rather than paying for them on credit. This will teach you healthy financial habits, which in turn will help you protect your credit and keep your debt ratio low.
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