How to create your debt game plan & build credit

Sometimes the hardest part of getting out of debt is getting started. Once you’ve identified your financial goals and initiated new spending habits, it’s time to create a game plan for reducing debt and building credit.

Just like you put together your new spending plan, you need to closely examine your debt. Your game plan for debt-free living includes four main parts:

• Total up your debt
• Rearrange your debt
• Pay it off
• Stay the course

Write down all loan payments and terms. This list includes credit cards, your mortgage or rent, student loans and any other forms of debt. While it can be daunting to come face to face with the truth of everything that you owe, it is important to know exactly where you stand.

List all your debts on a sheet of paper from smallest to largest. Commit to paying minimum payments on all the debts, except the smallest one. For this payment, pay as much as you possibly can, to get it paid off as soon as possible.

Once you have paid off your smallest debt, use that extra income to begin tackling your next debt on your list. Continue the process until all debts are paid off. This is called the “snowball pay-down” approach.

Remember that using debt wisely is not a one-time decision. Every time you are tempted to buy something—you have a decision to make. How will that purchase impact your game plan? Remind yourself of the burden of excessive debt. Don’t continue to add to your debt problem. Work to solve it.

Everyone says you should have good credit, but why? What difference does a score make—and what’s in it for you? In the most basic terms, a credit score is a 3-digit number that shows lenders how risky (or not) you are to lend to. If you have debt, you can still have a good credit score. Consider these tips to maximize your score:

• Keep your oldest cards open.
  
• Use caution when consolidating and closing out credit cards. Closing a card doesn’t erase your history from your credit score.
  
• Develop a good credit mix, not just credit cards, but also auto loans or a mortgage.
  
• Borrow from good sources. For example, payday loans can also be hurtful to your credit. These kinds of loans are usually a small amount with a high interest rate, and require you to pay back the loan on reception of your next paycheck.
  
• Avoid collections, bankruptcy and civil judgments.
  
• Ask creditors for forgiveness.
  
• Dig for and correct any credit errors with creditors.