August 13, 2021
- Olsen Breet
- June 30, 2021
If you are looking to improve your credit score, you will have to pay off your debts, and if you want to settle your outstanding dues, you should have enough money for that. You are not alone if you have stuck in debt just because you did not realize the buying power.
Of course, if you are taking on debt despite your poor repaying capacity, you will fall into debt. So what should you do? The first thing you need to do is to take up the reins of your finances.
A rule of thumb says that you should buy money only when it is urgent and make a repayment plan for your outstanding dues. This blog discusses in detail how you can get rid of debt and improve your credit rating.
Ways to settle your debt
First off, you need to make a budget to endure that you do not overspend and do not buy unnecessary things.
Unless you have settled all of your debt, you should freeze your credit cards and use cash only to make purchases.
You should create a lean budget that allows you to meet only essential expenses to put more money toward debt payment.
If you find that your current income is not sufficient to pay back your debt, you will have to increase your income sources.
- Debt snowball vs. debt avalanche
Based on your current financial condition, you will have to decide whether you pay off the smallest debts first or the debt with a high-interest rate-making minimum monthly payment toward each debt. The former is called a debt snowball method, and the latter is called the debt avalanche method.
- Unsecured debt consolidation loans
If you have multiple debts and it is hard to keep up with repayments of each, you may decide to take out unsecured debt consolidation loans for bad credit people.
These loans are a great solution to manage your debt easily because you will use the borrowed money to pay off your outstanding debts entirely and be left with one large debt that you pay down over an extended period. Since you are paying down in fixed monthly installments, you can manage it conveniently.
- Settlement of mortgage debt
Mortgage debt can accumulate in case any financial emergencies pop up and you fall behind the due date. Even though the lender can take back your house, they are always more interested in collecting funds instead of foreclosure.
You can come back on track if you try to make payments earlier. For instance, you can create one or two additional payments in a year. However, you will have to ask your lender if they allow you to do so without charging early repayment fees.
Even if this clause exists, you can ask to make an earlier payment only to fill the gap (the installment you should have already paid). In that case, it may not cost you additional charges.
Tips to improve your credit score
If you are looking to maintain a good credit score, you should pay off your outstanding debt. However, that is not enough. You will have to look over your habits. Here are some ways how you can improve your credit score.
- Build an emergency cushion
Regardless of your income, you should create an emergency cushion. Its purpose is to help you tide over during a financial emergency. It does not matter how much you can contribute to it every month, but make sure you stick to the plan.
If you have decided to stash away 10% of your monthly income, you should stick to this proportion. Try to meet all of your regular expenses within the available funds.
If you are on a tight income, you should try to live off a lean budget or make an alternative source of income. This will prevent you from borrowing money over and over.
- Take out an installment loan.
There are various loans in the UK in 15 min claimed to help you build your credit score, but they do not affect it because they are paid in a lump sum in a short span of time.
A lender wants to see the financial commitment, and this is feasible only when you pay down debt over an extended period.
This is why you should try to take out an installment loan that requires at least six monthly repayments.
If you keep up with the payments, the lender will inform credit reference agencies of your payments, and your credit score goes up consequently.
- Use credit cards smartly.
It is a better idea if you make all purchases with cash because this can avoid overspending. Use a credit card for an emergency and make sure that you pay off the balance within the interest-free period.
The bottom line
Debt payment and credit score building have a direct relationship with each other. This is why it is recommended not to have mounted debt. Pay all your bills on time, create a budget to avoid overspending, track your expenses and build an emergency cushion to take better control over your finances.