The following is a guest post from Jason at Work Save Live. Read more about him after the post!
Over 25 percent of individuals report that their debt has increased within the past 12 months according to recent statistics compiled from sources like the Federal Reserve and consumer surveys.
Almost 15 percent of households carry a debt load that requires over 40 percent of their total income for payment.
When individuals are struggling with money and facing increasing amounts of debt, they may make rash decisions under stress that impact their credit score and future finances. Here are three tips for dealing with debt without taking a hit on your FICO score.
Choose One Account at a Time
Reducing debt when you have minimal or no extra income can be an overwhelming task. Unless you work to reduce debt, however, you may never have the income to deal with it quickly.
There is a way out of this cycle, although it takes time, patience and willpower. Here are a few steps to follow:
- Continue paying each bill before the due date to avoid negative reports on your credit history.
- Pay the minimum or just above the minimum on all but one account.
- Pool your funds and see how much extra you can pay on that one account without getting yourself in trouble financially. Even if you can pay an extra $30, you will be making a dent in your debt.
Start with the account that has the smallest balance to get some motivation. It will take less time to pay off and when you do, you will have extra money to pay other bills each month.
Concentrating on one account at a time makes the task less overwhelming and can lead to a snowball effect, allowing you to pay off each subsequent account faster.
*Editor’s Note* That is one way to pay down debt based on emotions. Another option is to pay off the highest interest rate debt first, rather than the smallest balance. This second method may appeal to more logical thinkers and results in less total interest paid. Different strokes for different folks. *End Editor’s Note*
To Cancel, or Not to Cancel?
Many people often wonder does canceling a credit card hurt credit? Well, the act of canceling a credit card account alone will not reduce your credit score. However, balances associated with the closed card could hurt credit due to the way FICO scores are calculated.
One reason is that your credit score depends in part on the ratio of outstanding debt to credit limits on revolving accounts. For example, if you have a card that has a limit of $1,000 and you keep a balance of around $100 on a regular basis, your credit score may be higher than if you ran a balance of $900.
When you close an account while you still have a balance, you skew the ratio. For example, if you have a balance of $1,200 and you close the account, you now have that high balance and a credit limit of zero for the closed account. If you want to stop using a card, cut it up and work to pay down the balance before you close the account.
The exception to this rule would be a low balance card with a high annual fee. If you only owe a couple hundred dollars but the annual fee is $50 or more, it might make sense to close the account and avoid the fee.
Avoid Numerous New Accounts
Some people use zero interest and no payment periods on new credit lines to play a shuffle game with their debt. This can involve constantly opening new accounts and transferring old balances. A number of new accounts may or may not impact your credit score, but it can keep you from receiving loans for things like vehicles and property in the near future.
Moving to a better lender is not a bad idea, just make sure you are not hopping accounts every few months.
Dealing with debt during financial struggles can be frustrating. However, it is important to take your time and work to resolve issues. The quick and easy fix is usually not the best answer and can even lead to a reduction in your credit score.
Are you struggling with debt? What questions do you have? Be sure to check out the Debt Movement.
*Editor’s Note* If you’re interested in finding out an approximation of your credit score for free check out my Credit Sesame review. It is a great tool that can help you understand your credit score! *End Editor’s Note*
Jason is the creator of the free How to Become Rich e-course, and the founder of WorkSaveLive where he educates his readers on how to save money, pay down debt, and build wealth.
An accountant by day and blogger by night, Lance is the owner of this site. 
We were paying three credit cards, two bank loans, and my husband’s student loan when we decided that it was time to pay off all of them. Unlike others who first pay off the debt with the highest interest, we started paying off the loan with the smallest balance. We stopped using the credit card and paid more than the minimum amount required. We were able to pay it off in four months, then we practiced the snowball effect to pay off other loans. Presently, we are now paying off the last among all these debts and loans. We are excited to know that we will zero debt before first quarter ends!
Cherleen @ My Personal Finance Journey recently posted..Step 1 in Personal Finance – List Out All of Your Financial Accounts and Calculate Your Net Worth
I’m actually very excited to start focusing on paying off our highest-interest student loan next. We’ve personally done the debt snowball method because there was such a large gap between our smallest/largest debts, it made more sense for us to focus on the small ones (regardless of interest rate). We now just have large loans that remain and one of them has 2x the interest rate as the others. Can’t wait to get that one eliminated!
Jason @ WorkSaveLive recently posted..Rock That Debt – Reader’s Budget Analysis
Nice post! I went the debt snowball route myself. It’s been 17 months, and the end is near! The credit cards are not (and will not) be cancelled just yet. I don’t cre about the credit score, but I am confident that I will not use the cards.
Tony@YouOnlyDoThisOnce recently posted..Paying Cash for Your Car
You must be in a pretty good spot not to need a credit score. I feel into the Dave Ramsey brainwash that you really could get a house without a credit score and that’s nearly impossible to do. I coached quite a few clients that had a “0″ credit score after following DR’s plan for years, however two of them weren’t able to buy new homes because they couldn’t get manually underwritten.
Jason @ WorkSaveLive recently posted..Rock That Debt – Reader’s Budget Analysis
Good post Jason. I seem to be seeing you everywhere recently.
I think focusing on the smallest balance card is definitely a viable way to go, although I would tend to agree with Lance to attack the higher rate card as a way to avoid paying more interest. In the end, the important thing is getting the debt knocked out.
John S @ Frugal Rules recently posted..Frugal Friday: Posts That Ruled This Week, College Football is Over Edition
I think paying the highest interest rate is a great thing, however if a person has a bunch of small debts then for psychological purposes it’s usually best if they get rid of those first.
Jason @ WorkSaveLive recently posted..Rock That Debt – Reader’s Budget Analysis
My credit score increased quite a bit once I paid off all of my cards. Since my credit utilization went down to 0% and I had a lot of credit line, it looked good. I am leaving my cards open and if the issue wants to close them, then they can.
Grayson @ Debt Roundup recently posted..Weekly Personal Finance Blog RoundUp – No Sleep Edition
The credit utilization being that low undoubtedly helps your credit score! The lower the debt to credit ratio, the better!
Jason @ WorkSaveLive recently posted..Rock That Debt – Reader’s Budget Analysis
When I was in too deep with my credit it was clear that the issue was the number of cards I had. Since cutting my cards down to one it made budgeting more effective. In all great post Jason!
Fred@Foxy Finance recently posted..10 Easy Ways to Save money
I would add STOP charging!
Marie at FamilyMoneyValues recently posted..Avoiding the High Cost of Senior Divorces
I used to have several credit cards with relatively low limits which put me in a position where I had to use a number of them on a regular basis. What I found I was able to do however was to cancel some of the ones with low limits and then the other card companies would actually increase my limit. It’s nice to now have only two cards with a high enough limit that is practical for everyday use.
Dustin Small recently posted..The Stockodo Seven: Edition #2
We have no credit card debt for the first time in what seems like forever and have no need to apply for any loans anywhere that I can see, so I’m churning a few credit cards for the rewards. You can’t do this is you carry a balance or need to apply for credit, but since I don’t, I’m going to let the credit card companies give me some money for a while. I’ve given them enough!
Kim@Eyesonthedollar recently posted..Can’t Take My Eyes Off These Blogs #21- It’s Cold!
“40 percent of their total income for payment.”
Holy crap. That would be ridiculous.
Miiockm recently posted..A credit card is a tool. Learn how to use it.
It is sad but happens far too often.
In my “debt days” I was queen of robbing Peter to pay Paul. Never missed a bill payment but never paid down a bill either. It was a nasty cycle until one day I made the decision to get real with getting things paid off. I chose the “pay down the highest interest rate first” road. I then did a debt consolidation so that I could concentrate on paying down a few number of bills. I celebrated every time my debt was reduced by milestone numbers or ever time I was able to double the amount I was repaying i.e. my minimum was $50 well when I was able to double the payment to $100 I dedicated a night to me… candlelit bath!
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