When you owe money, your credit score takes the hit, so it makes sense to avoid borrowing more cash if you can help it, right? Not necessarily. There are plenty of ways to pay off debt without taking out loans that will hurt your credit score in the process — if you know where to look and what to do! We’ll tell you all about them here in this guide on how to pay off debt without hurting your credit score.
1) Get a handle on your debts
Paying off your debts is an important step in creating a better credit score. Here are some ways you can do so without hurting your credit score: Avoid using payday loans or other expensive forms of credit. Use the snowball method of paying off debt by paying off small debts first and then working your way up to the larger ones.
2) Consider a debt consolidation loan
A debt consolidation loan is a great option if you have enough equity in your home. By taking out a personal loan, your credit score won’t take the hit that it would with a traditional home equity loan. Plus, you’ll be able to pay off all of your debts at once, rather than paying them off one by one over many months or years. And the interest rate on most personal loans is much lower than what you’re currently paying on your other loans.
3) Create a budget and stick to it
It is important that you create and stick to a budget if you want to pay off debt without hurting your credit score. If you are unsure about where to start, use this calculator for a quick overview of your spending habits
4) Build up your emergency fund
If you’re in debt and want to pay it off without hurting your credit score, the first step is building up your emergency fund. This will help you avoid any late payments that could damage your credit score. Plus, having an emergency fund will give you peace of mind if an unexpected expense pops up. You can also save money by cutting back on discretionary spending (i.e., eating out, shopping) or selling some of your belongings on sites like eBay or Craigslist.
5) Use balance transfers
If you’re looking for a way to pay off debt without hurting your credit score, balance transfers are one of the best options. Balance transfers allow you to consolidate your existing credit card balances onto one new card and make payments on a fixed interest rate that is often lower than what you were paying before. If you make timely payments, keep your balance low and don’t miss any deadlines, this can be an effective way of paying off debt without affecting your credit score.
6) Snowball your debt payments
One of the best ways to pay off debt is by snowballing your debt payments. This means that you will make the minimum payment on all debts except for the one with the highest balance. You then take any extra money that you have and put it towards paying down this high-interest loan. Once this one is paid off, you repeat this process with the next highest interest rate loan until all are paid off in full.
7) Refinance your debt
One of the best ways to pay off debt without hurting your credit score is by refinancing your debt. Refinancing works by taking out a new loan with a lower interest rate than the one you currently have and using the money you save on interest payments each month to pay down the balance of your original loan.
This technique can be done alone, but it’s more effective when combined with other methods like making bi-weekly payments or paying off more than the minimum monthly payment on your current loans.
8) Get help from a nonprofit credit counseling agency
If you’re struggling with debt, consider talking with a nonprofit credit counseling agency. These agencies can help you figure out how much debt you have and what options are available to you. They might also be able to help you set up a payment plan that won’t hurt your credit score.
9) Try the debt avalanche method
The debt avalanche method is one of the most popular debt repayment methods out there. It works by paying off your debts in order of interest rates, starting with the highest and working your way down. This can be a great option for people who have multiple loans with different interest rates, but it might not work for those who have mostly low-interest-rate loans.
10) Consider a debt management plan
If you have a few thousand dollars in debt, it might be wise to consider a debt management plan. These plans are often the best way for people with lower incomes and no savings to get out of debt. A debt management plan is typically set up by a nonprofit organization or a credit counseling agency. The counselor will negotiate with your creditors on your behalf and make arrangements for monthly payments based on your income and ability to repay the debt.