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How to Pay Off Debt Listed on Your Credit Report

Your credit report contains a fair amount of information about your debts, including their balances. If your balances are high, you may not like what you see. Thankfully, there are many ways you can pay off debt listed on your credit report.

But first, it's important to verify the information for accuracy and understand the potential consequences of leaving your debts unpaid. Once you've done that, explore several ways to pay off your debt, including debt repayment strategies, consolidation, credit counseling and more.

Check Your Credit Report to Find Out Your Debt

Whether or not you're paying off debt, it's important to review your credit report regularly to ensure the information is accurate.

Inaccuracies are rare, but they can happen, so you'll want to make sure to match up the balance and payment amounts with your own records. Also, look for accounts you don't recognize—it's possible that someone may have used your information to open a new credit account fraudulently, and you shouldn't be liable for that.

If you find inaccurate, unsubstantiated or fraudulent information, you can file a dispute with the credit reporting agencies, which will investigate the claim and have the information corrected or removed if a discrepancy is found.

Paying down your debts is obviously an important step in ensuring your financial stability, and doing so reliably can help you build a healthy credit score. How much debt you owe is the second most influential factor in your FICO® credit score, and it takes into consideration your credit card balances as well as the remaining balances of your loans (including student loans).

The only factor that's more important than amounts owed is your payment history. That's why it's important to keep in mind that if you don't make payments on your debts, it can damage your credit score. What's more, late payments and collection accounts can remain on your credit report for seven years, regardless of if and when you get current on your payments.

Make a Plan to Pay Off Your Debt

Once you've reviewed the debts listed on your credit report, take some time to consider the different paths you can take to pay them off. Here are some of the best options you can choose.

Debt Repayment Strategies

The simplest approach, which doesn't involve other financial products or services, is to simply get strategic about paying down your debt. Two of the most effective ways to pay off debt include the debt avalanche method and the debt snowball method:

  • Debt avalanche: With this method, you'll make just the minimum payment on each of your accounts, then target the account with the highest interest rate for additional payments. Once that balance is paid off, you'll take what you were putting toward it and add it to the minimum payment on the account with the next-highest rate until it's paid off. You'll continue this pattern until you've eliminated all of your debts.
  • Debt snowball: This method works similarly, but instead of targeting accounts based on their interest rates, you'll focus on the accounts with the lowest balances. The avalanche method will typically save you more on interest, but the debt snowball method may be a good option if paying off balances more quickly can help keep you motivated.

Debt Consolidation

If you have credit card debt, you may consider using a debt consolidation loan or a balance transfer credit card to pay it down.

Debt consolidation loans are personal loans, which typically carry a lower average interest rate than credit cards. Another key difference: A debt consolidation loan will give you a set repayment schedule, which can help if you've struggled to stick to a repayment plan in the past. Keep in mind, though, that many personal loan companies charge an upfront origination fee.

Balance transfer credit cards are another option. They offer introductory 0% APR promotions, which can allow you to pay down some or all of your credit card debt interest-free. They typically come with an upfront balance transfer fee, which is added to your balance. But if you're committed, using one could save you a lot on interest.

Both of these options are best if you have good or excellent credit. If not, you may not qualify for a low enough rate on a personal loan, and you may not be able to get a balance transfer card at all.

Credit Counseling

If your credit isn't in good enough shape for debt consolidation, credit counseling may be a good fit. Credit counseling agencies can provide free advice and also set you up on a debt management plan.

With one of these plans, you'll make all your payments on eligible unsecured debts directly to the agency, which disburses them to your creditors on your behalf. The credit counselor may also be able to negotiate lower interest rates and even monthly payments.

Debt management plans typically come with a modest monthly fee. Also, you'll want to make sure you're working with a legitimate nonprofit agency. You can find one in your area through the National Foundation for Credit Counseling.

If you're stretched thin financially and in debt because you're struggling to cover essential costs, you can also explore financial assistance opportunities. Financial help is out there that could help you pay for things like rent, food, utilities and other needs. Once you're back on your feet, you can make some progress paying down your debt.

Debt Settlement

Debt settlement is an extreme measure you should only consider if your only other option is bankruptcy. With this option, you'll work with a debt settlement company or law firm, which will attempt to negotiate with your lenders to work out a payment for less than what you owe.

During the process, you'll typically be asked to stop making payments on your eligible balances and instead make payments into an account with the debt settlement company or law firm. Once that balance has reached a certain threshold, they'll start negotiating on your behalf.

There are no guarantees with debt settlement, however, and it can have a devastating effect on your credit.

What to Do if Your Debt Is Already in Collections

The longer you allow a debt to go unpaid, the worse it is for your credit. If a debt goes unpaid long enough, a creditor might sell it to a collection agency, which can cause even more trouble. Collection agencies typically buy your balance for pennies on the dollar, then turn around and try to collect the full amount from you.

If this has happened to you, it's crucial that you don't ignore the debt. If you do, the agency may sue you and seek to have a judge order repayment via wage garnishments, bank account freezes and more.

Instead, consider paying off what's owed. If you can't afford it, you may try to settle the debt for less than the original balance. In some cases, you may want to enlist an attorney who specializes in debt collection. Not only can they help you settle, but they can also help protect your rights as a consumer. Just know that attorneys aren't cheap, and it may ultimately be cheaper to simply handle the process yourself.

Maintain Good Spending and Credit Habits

Regardless of your current financial situation, make it a goal to develop good financial habits that can help you gain control over your debt.

An important step in making that happen is to stay on top of your credit by monitoring it closely for balances changes, missed payments and credit score changes. Building a good credit history can make it easier to qualify for affordable credit in the future, such as a low-interest car loan or home mortgage.

It's also a good idea to create and maintain a budget. At the very least, a budget will let you know exactly where your money is going. With that information in hand, you can develop a strategy to allocate your money in a way that helps you achieve your financial goals—for example, you may want to cut back on discretionary spending to put more of your money toward debt.

In addition to focusing on debt, it's also crucial that you build an emergency fund. Many people go into debt because of emergency expenses they can't afford, and having some money stashed away for a rainy day can help mitigate that risk.

As you work to develop good money habits, you'll be able to build a good foundation for your financial plan.

Avoid the Temptation to Let Up

Once you've paid off all your debt, you may be tempted to focus a little less on your money management. But if you're not careful, it's easy to slip back into old habits, and you could run into trouble again.

Continue to monitor your credit regularly and stay on top of your budget. Also, evaluate your progress consistently to make sure you're on the right track to meet your goals and make adjustments as needed. Paying off debt and building financial security can be a lifelong process, and it's important to stay disciplined in your efforts.