Financial difficulties are still a reality for a large number of Americans but if you're one of them, it might be a good idea to start taking the reins and trying to get your debts and other issues under control so that you can enjoy a good credit score going forward.
There are a lot of aspects that go into good finances, and those in turn can be reflected in a strong credit rating if you're diligent about keeping your debts under control. But the biggest problem that many consumers have when it comes to getting finances and credit under control is often just the simple process of getting started.
When you're dealing with a tough financial situation and you want to get it sorted out relatively quickly, it may often be difficult to figure out where to begin; when a number of things have gone awry with your various monthly needs, it can be difficult to figure out what to address first. The simplest answer, though, is to figure out what account will cost you the most in the long run.
Why you should start there
When you're trying to cut your debt, particularly those on your various credit cards, identifying the account with the highest interest rate, rather than the one that has the largest balance, is often a good place to start. This is because if you're only making minimum payments into the account with the highest rate every month, you're letting the balance on it grow, and it's doing so more quickly than all your other accounts. For this reason, paying that down to at least a manageable level is often a wise move. Of course, paying more into all of your accounts isn't always easy if you're already living on a tight budget, so the first thing you might want to do is see if there are any ways in which you can streamline your monthly expenses.
What are you paying for cable service? Are there ways you can cut your electric or gas bills? Do you subscribe to anything (like a newspaper, magazine or monthly mailing club) that you can cut out and not really miss? How much can you save on groceries if you start couponing even a little bit? These are the things you should be thinking about when you're trying to reduce debt, because you might be shocked to learn just how much money you spend on things in your everyday life without realizing it.
Once you've identified ways in which you can cut even an extra $50 per month out of your budget, you can begin contributing that to your outstanding debts. The benefit of putting more into your debts than the monthly minimums is that every cent above that level you spend must, by law, be applied directly to your balance's principal. At that point, your debt will begin to dwindle more quickly, and that in turn will make those higher contributions worth even more going forward, because as your balances drop, so too do the minimum payment requirements.
When you successfully slash those balances on accounts with higher rates, you're in a far better position with regard to not only your debts in general, but also your credit scores. This is because a full 30 percent of your rating is made up only of the amount you currently owe as a percentage of your cards' total combined credit limits; keeping balances to less than 30 percent of those maximums will allow you to achieve the highest score possible in this regard.
And during your continual efforts to pay into those debts, you will also need to stay current on whatever other loans you have, which will ensure you don't run into any late payment fees or penalty rates. That will also keep the payment history aspect of your credit score — which makes up another 35 percent of a total rating — perfect as well.
Keeping those two aspects of your finances under control with larger, on-time payments will help to ensure you have good credit in general, which could in turn give you access to more affordable accounts in the future, if you have the need for them.
Of course, if you're trying to get your credit under control, you might also want to make sure you're ordering copies of your credit reports with regularity. Doing so may help you to identify any potentially unfair markings that may be dragging your standing down somewhat. If this is the case, it might be wise for you to work with a credit repair law firm as a means of potentially sorting out these issues in a manner that could be more expedient than what you might be able to accomplish on your own.