Experian, TransUnion and Equifax now offer all U.S. consumers free weekly credit reports through AnnualCreditReport.com.
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Your credit reports provide a consolidated view of all the accounts that are reported in your name to each credit bureau. You can use them to find some basic information about your debts, including the names of your creditors, account balances and required monthly payments.
Taking a close look at your credit reports is a useful step to take when tackling your debt. Let's explore several ways to pay off your debt, including debt repayment strategies, consolidation, credit counseling and more.
1. Check Your Credit Report to Assess Your Debt
To get a better idea of your debt situation, you can check your Experian credit report for free. You can also get a copy of your credit reports from Equifax and TransUnion—the two other national credit bureaus—through AnnualCreditReport.com.
Some of the things you'll want to note include:
- Creditor names
- Most recently reported balances
- Credit limits (for credit cards)
- Minimum monthly payments
Keep in mind, though, that your credit report won't list all of the details about each loan and credit card account. The report won't show your interest rate, for instance. Your reported balance may also differ from what you see elsewhere—especially if you've added to your balance or paid it down since the account was last reported. As a result, you'll also want to check your online accounts with each lender to get a full picture.
If you find a tradeline you don't recognize or spot information you believe to be inaccurate, you have the right to dispute it with the credit reporting agencies. Keep in mind, however, that some creditors may go by a different name on your credit report. Review all the information about the debt and consider reaching out to the lender before you file a dispute.
2. Check Your Credit Score
Depending on the health of your credit profile, you may have access to several options for repaying your debt. In particular, if you have good or excellent credit—generally a FICO® Score☉ of 670 or higher—you may be able to qualify for low-interest debt consolidation loans or balance transfer credit cards.
Check your credit score for free with Experian to evaluate your creditworthiness. If your credit score is being affected by missed payments or a high credit utilization rate, you may consider focusing your efforts on paying down those debts first.
3. Calculate How Much You Can Put Toward Debt Payments
After you've gathered information for all your debts, add up the monthly payments to understand how much the obligations are costing you each month. Then, look at your income and expenses to determine whether you can afford to put more cash toward your debts each month.
This may involve reviewing your income and expenses over the past few months, or simply checking how much money is left over in your checking account each month.
4. Create a Budget
Once you have a good idea of how much you can afford to put toward your debt each month, create a budget to make sure you stay on track with your goal.
A budget can also help you categorize your expenses, see whether you can cut back on some of your spending and reallocate that cash flow for debt payments. Each month, set a goal for each spending category, then track your expenses to stay in line with your goals.
5. Choose a Debt Payoff Option
Once you have a good idea of your current situation and how much you can afford to pay every month, 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 use an accelerated method to pay down your debt. Two of the most effective options include the debt avalanche method and the debt snowball method.
- Debt avalanche: With this approach, 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 Loan
If you have credit card debt, you may consider a debt consolidation loan. Debt consolidation loans are personal loans that typically carry a lower average interest rate than credit cards. They have set terms and fixed monthly payments, which makes repayment more predictable.
If you've struggled to stick to a repayment plan in the past, a debt consolidation loan would eliminate the temptation to pay only the minimum amount due. Keep in mind, though, that many lenders charge an upfront origination fee. Also, the best interest rates are reserved for people with good or excellent credit.
Balance Transfer Credit Card
A balance transfer credit card offers an introductory 0% APR promotion, 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 to your goal, using one could save you a lot in interest charges.
You generally need good or excellent credit to get approved for a balance transfer card.
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, which comes with a modest monthly fee.
With a debt management plan, 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.
If you want to go this route, make sure you're working with a legitimate nonprofit agency. You can find one in your area through the National Foundation for Credit Counseling.
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:
- Monitor your credit regularly. With Experian's free credit monitoring service, you can check your FICO® Score and Experian credit report anytime and also get real-time alerts when changes are made to your report.
- Stick to your budget. Tracking your spending and ensuring that it aligns with your goals can take some time and effort. But if you become complacent, it could impact your debt repayment plans and hinder your progress toward other important financial goals. To minimize the legwork of budgeting, consider using a budgeting app.
- Build your emergency fund. 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.
- Pay every bill on time. Whether or not you have a pristine payment history, it's crucial to make it a priority to always make your debt payments on time to avoid damaging your credit score.
- Avoid taking on additional debt. Only apply for credit when you need it, and if you're using credit cards for everyday spending, try to avoid spending more than what you can afford to pay off each month.
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
After you've developed your debt repayment plan, it's important to stay motivated until you reach the finish line. 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, slipping back into old habits could create more trouble.
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.