How to Build Your Credit Score When Dealing with Debt

Your credit score can open or close doors...

Credit scores are an important aspect of your finances since they can open or close some doors. Unfortunately, they are not influenced by your income and maintaining a good score while in debt can be tricky. If you have just started paying your debts, there is a high probability that you will be dealing with multiple debts.

Since credit utilization accounts for about 30% of your credit profile, you can improve your scores by paying your debts. This will help you get better credit options which in turn can lead to a better financial future. Here, you will learn how to build your credit scores by eliminating the debts.

Pay old debts that are due

This is usually a quick way of repairing your credit scores because any due debt that has not been paid carries a lot of weight. As such, clearing the balances can significantly improve your score. Nevertheless, if the balance is small, the effect may not be huge and you may need to move to a bigger loan or pay several at once in order to see good results.

At times, you can negotiate with your creditor and pay a partial amount if your debt is very old. When the account has been delinquent for more than two years, it is likely that your creditor is willing to take what you can offer and move on. If you initiate the negotiations for a partial payment, make sure the creditor serves you with an agreement before you can make any payments.

If you are dealing with a considerable debt, it is wise to seek the services of an attorney who is quite conversant with credit issues. This is because some states have some legal requirements regarding credit settlements. Besides, the creditor may choose to shortchange you by writing unfavorable remarks on your report and this could hurt your credit scores.

Dealing with small debts

The total number of accounts you hold with outstanding balances can have a significant effect on your credit utilization. Since it is possible to have multiple accounts with unpaid debts, they can lower your credit scores. As such, you can raise your scores by eliminating the small debts you owe.

For instance, if you have six credit cards and all of them have a balance, you can heal your credit scores by paying two or three with lowest balances. This reduces your credit utilization hence improving the score. Typically, creditors will think you are financially responsible if you have several credit cards with zero balances.

Open a secured credit card

While you won’t need to have spectacular credit scores, you must deposit with the secured credit card provider.  Your deposit determines the credit limit but details like payment and balances will be reported.

Just like standard cards, secured cards can be used to make purchases and the balances have to be paid each month. If you make timely payments and always utilize a small portion of the allocated credit limit, it is easy to repair your credit scores. Eventually, you work your way up to get a normal credit card and you can also get your cash deposit back. 

Nevertheless, some secured credit cards require a hard credit check and they also come with higher fees. As such, try to switch to a normal card in the shortest time possible.

Pay a lump sum on installment loans

Opening a new personal loan to purchase a car or another item can hurt your scores. This is because the credit account is still new irrespective of your ability to handle the payments. But with time, the adverse effects decline. For instance, if your account is about two years old with regular payments, it has a better effect as opposed to one that is less than three months old.

However, you can circumvent this effect by paying a lump sum. You should aim at paying an amount that is worth at least a year of the loan payments. This lowers the outstanding amount and as a consequence, the risks associated with the loan. While this doesn’t have an identical effect with a long payment history, the effects on your credit scores are significant.

Make cash payments

If you are facing a hard time to keep up with payments on your credit cards, it is wise to pause charging the credit cards. Besides helping you raise the credit utilization ratio, you avoid accumulating more debt. However, a habitual credit card user can have a difficult time making this decision and that’s why some people embed their cards in a block of ice.

Other people prefer cutting the cards or leave them behind whenever they are going out. If you have a problem with this habit, it is important that you find a strategy that can expertly help you deal with the issue.

Rebuilding damaged credit scores can be daunting, especially when you have lots of debts to deal with but it is quite possible. The trick is to dedicate your attention to factors that have a huge impact on the credit scores. Basically, making timely payments and maintaining low credit utilization can lower the amount you owe as well as increase the scores. However, you can still ask your credit card provider to increase your credit limit but make sure you won’t end up spending more. But if you feel that your debt situation is getting worse, it is prudent to seek for help. welcomes thoughtful comments and the varied opinions of our readers. We are in no way obligated to post or allow comments that our moderators deem inappropriate. We reserve the right to delete comments we perceive as profane, vulgar, threatening, offensive, racially-biased, homophobic, slanderous, hateful or just plain rude. Commenters may not attack or insult other commenters, readers or writers. Commenters who persist in posting inappropriate comments will be banned from commenting on