6 Proven Steps to Pay Down Debts to Improve Your Credit Score

It is no secret that excessive debt often contributes to credit score downgrades. If you are working to improve your credit score (here is a good explanation of its basics), you may have multiple debts that are due, be it credit cards or personal loans. 

However, how are you able to know which debts need to be paid first, or if you need to repay them at all?


Photo by Sharon McCutcheon


Here are six steps that will make it easier to pay back your loan as quickly as possible.

1. Check Your Credit Report and Credit Scores

People who know they have a bad credit report often only know about it because they were recently denied a new loan. Therefore, ask the lender for the exact reason you were denied financing.

You may find out that you have too much debt already. However, it is good to make sure there are no other problems on your credit report that the lenders have discovered. At the same time, you will get your credit report sooner rather than later.

Being refused a loan gives you the right to get a free copy of your credit report, even if you already got it last year. When you get the latest version of your credit report and assessment, you will know exactly where you are. Start by challenging any inaccuracies you see. Look at what elements in your credit report could significantly damage your score.

2. See the full financial picture

Before choosing a strategy to repay your debt, you need to get a complete idea of what you owe. 

Start by detailing your debts, and this will help you focus on paying them more efficiently. Also, pay attention to both the minimum payment for each debt as well as your monthly interest rate.

Do not try to guess and get the numbers out of thin air. Check your user agreement or call your customer service number to find out exactly what you owe and the amount of interest you are being charged. You will need these exact figures as you consider different repayment strategies.

Once you have made your list, it will be time to analyze your current budget and spending habits. If you are still withdrawing money from your credit card regularly, it is time to stop, especially if your purchases are outside the scope of your basic needs. Consider your monthly income and understand that this is all the money you have to pay your expenses and to pay off your debts.

Next, list all your necessities such as utilities, telephone bills, gas, and food. Also, list your minimum balance of payments in this monthly calculation. It is important to remember to maintain these minimum payments. Otherwise, you risk falling into further debt.

Whatever money you have leftover, after necessary expenses have been paid, can be used to pay off your debt. The more motivated you are, the more you can get rid of your debt. You can spend less on food, reduce your driving expenses to save on gasoline, and get a cheaper mobile phone plan.

If you are still short of money, perhaps it is time to take more drastic measures. You can get an extra job, exchange your car for a cheaper model, or sell some of your items. 

Once you have found out how much money you can spend on paying off your debt, it is time to decide what you should do.

3. Pay off the smallest debt first

By getting rid of debt purposefully, you can increase your credit score faster as you take turns liquidating your debt obligations. One option is to choose the smallest debt from your list and invest all the extra money in its aggressive repayment. Just remember always to pay the minimum balance on your other debts first.

As soon as you repay one credit card or a small loan in full, you will feel motivated to keep moving to the next balance. That also reduces the number of monthly repayments that you need to keep track of.

It won’t save you extra money on interest payments, but it’s convenient, especially if you have trouble remembering how to pay your bills every month. Besides, you will create a snowball effect that will allow you to invest more money paying off more substantial debts as you pay off the smaller ones.

This option will help you to mentally gear yourself up for success as you continue to repay numerous debts. Prove to yourself that you can do that. 

From there, you will want to keep the momentum because you have already seen that it is possible.

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4. Pay off the highest interest balance first

For some, knowing that they save extra money on interest is all they need to know. If this sounds like you, look at your list from a financial point of view and find a loan or credit card with the most expensive interest rate.

The longer you wait to pay this debt, the more interest you will accumulate and pay over time. No matter how big or small your balance is, the debt with the highest interest rate is always the most expensive.

If you have been a loyal customer with regular, timely payments, you may also be considered for a lower interest rate.

Give your credit card company or lender a call and explain that you are trying to pay off your debt ASAP and would like a lower interest rate because you are so good at handling your payments. There is nothing wrong with asking, and people are often surprised at the positive response they get.

5. Reward yourself along the way

Repaying the debt and improving your credit score is hard work, for sure.

Whenever you achieve one of your goals, put aside a reasonable reward to celebrate your hard work.

Whether it’s a day trip, a special evening, or some other form of pleasure, make sure it fits your current budget and savings goals. It’s not a reason to overspend. It’s just a moment to breathe and appreciate yourself and the sacrifices you have made.

It is also great to keep a friend or relative who supports you informed of your progress. They will help you to stay on the right track when you are tempted to spend on something that goes beyond your budget. They will also be there to give you a “high five” when you reach your last milestone.

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6. Not All Debt is Bad

Some debts are considered good by creditors. In general, if you borrow money to buy something that will increase in value, the debt is deemed to be positive by the creditors.

Having a good payment history for student loans, traditional mortgages, and money to develop your business falls into this category. 

This doesn’t mean that you should not repay these debts. On the contrary, repaying good debt can only increase your credit score in the future.

Keep in mind that you have to be strategic about which debt you decide to repay in the first place. Loans with low-interest rates, such as mortgages and student loans, probably do not have the same amount of interest like credit cards, car loans, and personal loans. 

Since they are treated as installments rather than revolving loans, they are weighted more favorably when calculating your credit score.

Strategic repayments and timely payment of your bills are the two most powerful ways to improve your credit score. These two categories together make up 65% of your credit score (payment history is 35%, and the use of credit is 30%).

It may take some, but with diligence and consistency, these two simple actions can significantly increase your credit score and regain your way of enjoying life and the approval of your loan and the lowest interest rates possible.

If you ever feel overwhelmed or have difficulty repaying your debt and getting a loan, talk to a reputable credit score agency. Working with a professional will help you get a full analysis of your credit history and determine which actions are best suited to your unique situation.

It can also save you a lot of time in case of disputes and dealings with lenders and credit bureaus. Once you know all your credit history cleansing options, you can start getting your credit score up one step at a time.


Photo by Austin Distel at www.distel.co

Final Word

Paying off debt is an integral part of obtaining financial responsibility and credit score upgrades.

We outlined several useful approaches above, but you will need to find your way to a better credit history depending on your situation. Don’t worry – with time, patience, and commitment, you will be able to improve your credit score.

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