How to Prioritize Debt and Rebuild Your Credit

young couple sitting on the floor going over finances

There are many similarities between paying off debt and building credit. While they may sound like separate endeavors, working on one will almost always help with the other.

When your credit card debt is too high, it can lower your credit score. A low credit score reduces your opportunities while making access to financial products, housing and utilities more challenging. And if you don't make enough money to cover your debts, you could face additional negative consequences.

If you're struggling with debt and poor credit, you may feel overwhelmed and confused on how to begin. Here are some ideas to help you get on the right path.

Know How Much Debt You Have

Start by compiling a list of all your loans and credit cards and how much you owe on each. Write down the monthly minimum payment and due date for each account. Organizing and visualizing all your accounts can be key to paying down debt and improving credit.

Listing all your debts may also reduce the chance of missing a payment. Because payment history is the most important factor in calculating your credit score, if you're having trouble making on-time payments, your credit score could suffer.

Once you've listed your debts, you can consider methods for paying them off as quickly as possible.

Research Your Options

Paying down your debt can help you save money and improve your credit. Two ways to attack your debt are the debt avalanche and debt snowball payoff methods.

With the debt avalanche approach, you make minimum monthly payments on all your debts except the one with the highest interest rate; pay as much as you can toward that account until it's paid off. Then use the same strategy on the debt with the next-highest rate and so on until all your debts are paid off.

The debt snowball approach won't save you as much money as the debt avalanche method, but it will give you quicker wins, which may help you stay motivated to pay off your debts. With the debt snowball, you pay off the debt with the lowest balance first, regardless of the interest rate. Pay as much as you can to that account while making minimum payments on other debts, then once that's paid off, focus on putting the most money you can toward the debt with the next-lowest balance, and so on.

Because late payments can both cost you in fees and do serious damage to your credit, make sure that you make all payments on time going forward. Putting your bills on autopay and scheduling them to allow enough time for payment processing makes it far less likely you'll be late with payments, which can go a long way toward improving your credit scores.

If you're having trouble making payments due to high interest charges, lenders may be willing to make your payments more manageable. Try calling your lenders to ask if they would consider lowering your interest rate. If a card issuer is willing to reduce your interest rate by even just 0.5%, it could make paying off your balance much easier.

With regular, on-time payments, your credit score could start to improve after a few months. A credit score in the 700s, which could take anywhere from a few months to a few years to attain depending on your situation, usually results in better interest rates and terms from creditors. At this point, you might consider refinancing high interest debt to lower the interest rate and save money.

If you get paid every two weeks but all your bills are due at the beginning of the month, having enough money to make your payments on time can be challenging. In this case, consider asking lenders to change the due dates so you have a couple accounts due after your second paycheck of the month. That way you're more likely to have the cash flow you need to pay all your expenses on time.

If you have federal student loans and are struggling to pay them, you might be able to switch to an income-based repayment program. You can even try to defer these loans for a certain period of time. You may still accrue interest during this period, but deferment can provide some breathing room while you focus on your other debts, and could help you avoid hurting your credit.

Don't Forget About Utility and Other Bills

While you focus on paying down debt that directly impacts your credit, like loans and credit card debt, don't neglect bills like utilities and rent. Unpaid utility bills can be sent to collections, and multiple late rent payments can result in eviction. Accounts sent to collections show up on your credit report and can harm your credit scores for years to come.

Some utility companies, including electric, water and internet providers, have hardship programs for low-income individuals, which may include a permanent reduction in payments or a one-time grant. You may have to prove your income and submit a pay stub. If you're not sure whether your provider offers this service, call and ask if there's an income assistance program.

The Bottom Line

There are many options out there to help you get a handle on your debt and other bills—and help your credit at the same time. So do your research and talk to your lenders to see what's available, and commit to paying down debt to help ensure a positive financial future.