It might seem like a never-ending cycle: When you have bad credit you pay more on interest rates, so it makes it even harder to get out of debt. And the more debt you have the worse your credit can get. But this is not the end of the line for your credit score. You can get out of debt and build up your credit with a debt management plan.
What Is Bad Credit?
First, it’s good to understand how your credit score works. According to Bankrate.com, a poor credit score is below 670 for FICO and 661 for VantageScore.
While the components of your number are weighed a little differently between the two credit score companies, here’s how your score is broken down:
Payment history: Making late or no payments can significantly drive your score down.
Credit utilization ratio: Your score will take a hit if you’re using more than 30% of your available credit.
Credit history: The length of time you’ve had certain credit cards gives you credit history, so don’t toss out any old ones even if you don’t use them.
Credit mix: The more diversity in your credit portfolio the better, including credit cards, auto loans, a mortgage, and student loans.
New credit: Opening a new credit line can give your credit score a boost by expanding your available credit, but overusing it or not paying on time can quickly take your score down a bad path—so make sure you keep it in good standing.
How Can I Get Out of Debt?
While there are several ways you can begin to tackle your debt, all of them start with a budget. Two well-known strategies for helping people pay off loans are the debt avalanche and the debt snowball. While both these strategies can be helpful, a mix of bad credit and debt may mean you need more help than just a repayment strategy. That’s where a debt management program (DMP) comes in.
Many people may not know this, but just by enrolling in a debt management program and making payments on time, your credit score can go up.
Here’s how it works:
First, you make an appointment with a credit counselor, who can help you assess or create a better budget. Once they’ve enrolled you in a debt management plan, they’ll work with your lenders to consolidate your unsecured debt (credit cards, unsecured loans, collection accounts, etc.) into one affordable monthly payment while also working to reduce your interest rate— instantly making your debt repayment more manageable and the path to better credit and less debt an achievable goal.
Benefits of Debt Management
One monthly payment | lower interest rates | no more debt collector calls
Make your no-obligation - FREE - counseling appointment now