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Bad credit and debt is not the end of the world

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By: Amy
on 27th Nov,2013

It signifies that the person is more likely to default on loans or miss payments.
Bad credit and debt is not the end of the world

Bad credit puts a person into a "high credit risk" range. It signifies that the person is more likely to default on loans or miss payments. It indicates to potential lenders or loan agencies that this person has missed payments in the past and might have even defaulted on a loan or two and should be avoided. When you are looking at how to get out of debt fast, bad credit can be your worst nightmare.

The Effects of Bad Credit

When you have bad credit you will find it much harder to apply for a new auto loan or credit cards. You can almost forget about a mortgage loan and if you are lucky to obtain any kind of loan, you can bet you will be facing high interest rates. When you have bad credit, you basically have high debts that you still need to pay off.

Tackling Your Debt

1. Know your Credit Score- The first thing you need to do is check your credit history and your credit score. When you know what your credit score is and what is on your credit history, it equips you with knowledge about what you may be up against and what your first action plan step should be.

2. Organize your Debt- When you are looking at a bad credit history, it can seem insurmountable and overwhelming. You need to get organized and get a grip on it. This can be done by organizing your debt from small amounts first to larger amounts and then begin by paying off the smaller debt first. You can start paying off high interest debts before cleaning up the lower interest rate debts. No matter what you decide to do, get organized and get started.

3. Pay more than the Minimum- You need to get out of the habit of only paying the bare minimum each month on your debt. By paying only 2% or 3% minimum of your outstanding balance, you are only paying on the interest, basically, and hardly any of your payments are being applied to your principle. Besides, this is exactly what your creditors want you to do. They make more money when you are only paying the minimum amount.

Instead, pay as much as you possibly can every month. For example, if you have a monthly minimum payment of $100, try paying $200, if you can. If you take a look at your monthly expenses you may find extra money there to add to your payment. Bring your lunch to work with you rather than eating out. Forget about happy hour or desserts. Everyone has something they splurge on, try giving it up for a while and apply it to your balance instead.

4. Combine Credit Card Debt- Evaluate your credit cards, and find out which ones have the lowest interest rates. If you have not reached your limit on that card, consider taking the debt from your higher interest cards and transfer it over to the lower interest card. It just makes more sense to pay off debt with a 12% interest rate instead of an 18% rate.

5. Quit Creating More Debt- If you already have a monthly balance that you are trying to keep up with, stop making new purchases on your credit cards. Cut your cards up, freeze them, or put them away if you can't find the discipline to stop using them.

6. Borrow from your 401(k)- You are usually allowed to borrow up to 50% of your 401(k) plan, or up to $50,000, depending on which is smaller. These types of loans are much cheaper than credit card loans since the interest rates on them only run a couple points above prime. Not to mention you are basically paying yourself and all money that you repay on the loan goes right back into your account.

The only real downside of this type of loan is if you switch jobs. You typically are allowed around five years to repay the debt on this type of loan and if you lose or switch your job, all debt is immediately due. If you are unable to pay the debt, the amount will be considered a distribution and you will end up with a tax bill on it and penalties if you are under the age of 60. Therefore, it is best to settle this loan before switching your job if at all possible.

Consider Debt Consolidation

Quite frankly, an easy way to tackle your debt is to just get a debt consolidation loan. Bad credit debt consolidation is an option to which many people turn. The great bonus to these types of loans is that they give you motivation to eliminate your debt since you only have one monthly payment to worry about. They usually offer a manageable interest rate, too, so you are putting more towards the principle than you are interest.

Having bad credit does not have to be the end of your financial world. Learning how to get out of debt is a step-by-step process and is not going to happen overnight. The key is to get started now in improving your credit. Bad credit can be frustrating and overwhelming, but you have to constantly remind yourself that once you start paying off that debt and making improvements, it opens up doors to new opportunities.

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