Last Updated on December 5, 2015 by Dave Farquhar
Sometimes people ask me for help with their finances. And I’ve seen the effects that debt can have on people. I believe having no debt is best. Having debt that you’re paying off is second-best. Festering debt, however, is crippling. That’s what you want to avoid, before it catches up with you. Not only can bad debts keep you from borrowing more money, it can also make it more difficult to sign a lease or get a job.
Here’s how to make a plan to pay off that debt and improve your credit score.
Figure out how much it is, and what your minimum payment is. Start sending in those minimum payments, if you haven’t been. A debt in repayment cuts your disposable income, but a debt in collections gets in the way of your future.
I don’t know exactly how much a $100 debt in collections hurts your credit score, but it does. Having that on your record isn’t worth it. I’ve seen people with bad credit who could straighten out their biggest problems in a year, if they had a plan to do it.
So make those payments. And if you can possibly do it, send in a few extra bucks. Just a few can make a difference. If the debt is under $100, sending in $5 extra every month virtually guarantees the debt will disappear within 12 months. Even if a debt is $100,000, sending in $10 extra every month is enough to pay that debt off a month or two early.
And here’s another trick. Let’s say you have two debts, and you’re getting a bill every month for each. Your payment on one is $20, and the payment on the other is $50. Let’s say you’ve been sending in $25, to pay that first debt off early. Now, once that debt is paid, when your bill for $50 for your remaining debt comes, send in $75–the $25 you’ve been sending in on the other debt, plus the minimum payment on the other.
This does two things. It establishes a track record of paying off debt. And it reduces the amount of debt hanging over your head. If the payments you’re making on old credit cards, student loans, car(s), and other debt are merely 8 percent of your income–$80 for every $1,000 you make–that’s enough to make it harder to get a mortgage, or even a lease. Eight percent is borderline and usually isn’t enough to deny you from getting one at all, but it’s certainly enough to force you to settle for your second or third choice.
The other thing you can do is apply windfalls toward your debt. If you get a steady gig mowing someone’s lawn or watching their kids, take some of that extra money and pay it toward the debt. If you get a bonus at work, take some of the bonus and send in a little extra when the bill comes that month.
You can do this
You can do it. I know, because I’ve been there. I paid off a $108,000 mortgage in seven years by sending in extra money every month. I never missed a payment, which helped. I don’t think I was ever late with a payment either, which saved penalties. Most months I sent in extra money. I saved money by packing my lunches and taking them to work, making my own coffee, and stuff like that. After I made my last car payment, I started sending in the money I wasn’t paying for a car. When I got bonuses at work, I sent the whole bonus in. I got a couple of steady side gigs, and sent as much of that money in as I could. My wife did the same, and with both of us chipping away at that debt, it went away pretty quickly, as you can see. That mortgage was supposed to take 30 years to pay off, and we did it in a quarter of the time.
Whether it was a good idea to pay off that mortgage is a matter of fierce religious debate–some say there’s no such thing as good debt and some say you should carry good debt–but if we can pay off a $108,000 mortgage in 7 years, we could have paid back $108,000 in almost any other kind of debt in a similar length of time.
Start today, give yourself seven years, and resolve to pay at least a little extra on one bill per month. I guarantee that after doing that for 7 years, you’ll be in a far better situation than you’re in today. And that debt can soon stop standing in the way of you doing things you want to do–sometimes in a matter of months–once you start doing that.
David Farquhar is a computer security professional, entrepreneur, and author. He started his career as a part-time computer technician in 1994, worked his way up to system administrator by 1997, and has specialized in vulnerability management since 2013. He invests in real estate on the side and his hobbies include O gauge trains, baseball cards, and retro computers and video games. A University of Missouri graduate, he holds CISSP and Security+ certifications. He lives in St. Louis with his family.