When you are drowning in debt, your quality of life can suffer. It can put a strain on your family and lead to stress, worry and arguments. When you have too much debt, your credit score drops and you may not get the loans for which you apply. Or, if you do get a loan, you will probably have to pay a high interest rate. Chances are that you did not get into debt overnight, so it may take you a while to get out of it. But, it is possible to get out of debt and raise your credit score.
Best Way
The best way to get out of debt and raise your credit score is to pay down your debt and stop using your credit cards. If you try to settle or negotiate your debt for less than what you owe, your credit score will suffer because the lender tells the credit-reporting agencies that you settled your debt. This is a bad mark on your credit report, resulting in you having difficulty getting future loans.
Function
To pay down your debt, do all you can to make more than the minimum payment. The minimum is typically only 2 to 3 percent of your balance. If you only pay that, you prolong your debt, and you rarely become debt free. The longer you have the debt, the more you pay in interest. If you write down everything you spend in a week, you will see certain luxuries that you can eliminate, such as going out to lunch or buying coffee in the morning. Everything you save on luxury items can go toward your debt. Giving up luxuries while you are paying off debt isn't fun, points out information from the Motley Fool website, but neither is fearing bill collectors each month.
Strategy
Since your goal is to get out of debt and raise your credit score, you should start paying off cards that are maxed out or close to it first. The two biggest factors in your FICO credit score are payment history and amounts owed. Paying your bills on time accounts for 35 percent of your credit score, and amounts owed accounts for 30 percent. The amounts owed category includes your credit utilization ratio, which is the amount of available credit you actually use. It's best to keep your credit utilization below 30 percent. When deciding which cards to tackle first, pay off the ones that are closest to their limit.
Raising Money
Some ways to raise money to pay off debt are to cash out your savings and investment accounts, borrow against your life insurance or your 401k or borrow from family or friends. If you hate to cash out your savings, consider the amount you are earning on your savings compared to the amount you are paying in debt interest. If you realize that you are losing money by keeping your funds in savings, use your savings to pay your debt. Once you are debt free, you can build your savings again.
Borrowing against your life insurance could work if the interest is below what you are currently paying on your debt. Be sure to pay back your life insurance. If you borrow from your 401k, you will have to pay that back within 5 years. Only borrow from friends and family if you are certain you will pay them back. Otherwise, you will burn relationships.
Potential
If you own a home and have equity in it, you could take out a home equity loan or home equity line of credit and use that to pay off your debts. The interest you pay on a home equity loan or line is tax-deductible and the interest is typically lower than what you pay on credit card debt. Be careful not to use your credit cards while you are paying off the home equity loan. You can lose your house if you miss your home equity loan payments.
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