Step 7: Prioritize Your Debts and Raise Your Credit Score

Now that you’ve found some money, you need to know where to put it. Step 7 will help you determine which debts to pay off first and what you can do to improve your credit score.

Part 1: Prioritize Your Debts

Earlier, you learned how to pay back your credit cards. Those cards, however, may not be your top priority. That’s because you have two types of debts – secured and unsecured.

Secured debts are those that are backed by assets, such as your home and your cars. They can be repossessed or taken back.

Unsecured debts are not backed by assets. If you miss a payment on your credit card, the bank is not going to repossess the all-in-one blender/chopper/vacuum/steamer that you bought on impulse during your most recent loney night of watching infomercials. You may have the annoyance of a collector calling you at all hours, but at least you can continue to watch more infomercials in the comfort of your own home.

1. Your secured debts are your top priority.
2. Debts for which your wages can be garnished, such as student loans and child support.
3. Any services you need to continue using. If you have a chronic medical condition, make sure you pay your doctor bills, or else your doctor may not be willing to see you again.
4. Unsecured debts, like credit cards. Once you’ve accounted for all of the above debts, focus on taking care of your credit cards. Return to step 3 to help you get them paid off as soon as possible.
5. Family and friends. Your family and friends are hopefully the most understanding of your creditors. Commitment to repay those debts, but make them a lower priority. Also, choose accounts that can improve your credit score first.

Part 2: Raise Your Credit Score

Improving your credit score is an important part of this process because increasing your credit score will reduce the interest rates you’re paying to your creditors (mortgage lenders, auto lenders, credit card companies, etc.). If you have a lot of debt, then the interest collected on those debts can add up quickly and command a large portion of your monthly budget. A high credit score can make that portion as small as possible.

What is a credit score?

A credit score – AKA a FICO score – is a numerical indicator of the information in your credit report. Credit scores range from about 350 to more than 800, though most fall into a middle range. Scores below 500 or more than 800 are pretty rare. These scores can affect many areas of your life. Every year, tens of billions of credit decisions are made based on FICO scores alone. Some of those decisions include:

• How much money you can borrow
• What interest rate you’ll pay
• Whether or not you’ll qualify for an increase in your credit line
• Whether or not you’ll qualify to rent an apartment
• Whether or not you can get a cell phone
• Whether or not you’ll qualify for a cash advance
• Whether or not you’ll actually get the credit card for which you’re “pre-approved”

As you can see, your score is a very powerful piece of information. It is basically a snapshot of your borrowing and repayment behaviors over the previous 24 months. The good thing is that, over time, you have the power to improve it.

What factors affect your credit score?

• 35% – How well you pay your bills
• 30% – How much credit you have available to you and how much of that credit you’re using
• 10% – How recently you have opened (or inquired about opening) new accounts
• 10% – The percentage of your file that is bankcard debt vs. the percentage of installment debt
• 15% – How long you have had the cards

Now that you understand what affects your credit score, it’s time to do something about it! Read the Fico-raising Advice Sheet to learn what steps you can take to improve your credit score.

Click here to print the FICO-raising Advice Sheet
You need the Adobe Acrobat Reader to view the contract. Download it here.

Step 7 Summary

You can now prioritize your debts and raise your credit score by:

• paying off secured debts first
• understanding what your credit score is and what areas of your life it affects
• using the FICO-raising Advice Sheet as a guide to boost your credit score

Congratulations! That’s the end of Step 7.

Now you’re ready to go on to Step 8: Understand Your Spending Issues and Save

or go back to step 6

Credit Score Resources

• myFICO
• Lexington Law Firm
• Instant Online Debt Consolidation – Free Quote!