Personal debt is something that can affect everyone's access to capital, even businesses owners. Depending on the loan and the loan amount, lenders will often factor in your personal credit to determine your business's creditworthiness. Whether your credit score is holding you back for personal or business reasons, here are four steps you can take to pay off debt and help out your credit score.
Step 1: Lower Your Expenses
The average American has just under $6,000 in credit card debt. Often, it is due to lavish spending that gets out of hand. The first step is to write out all of your expenses and determine what you can do without, at least for now.
Americans spent $30 billion on entertainment in 2020, so there is likely something (or multiple items) you can cut. It can also be helpful to group your expenses into categories such as "eating out," "entertainment," "clothing," etc, and visualize which category is eating up your budget the most. Determine what it is and decrease your spending in that area(s).
Step 2: Temporarily Increase Your Wages
Perhaps you already live on a tight budget, or the expenses you cut don't add up to the amount you need. If that's the case, increase your wages. If your current position enables you to work overtime, consider picking up extra shifts. If you can't work overtime, you will need to find a second job or side hustle.
Many companies have switched to remote work or hybrid work models. Look for remote positions in the evenings or weekends. Pick up a part-time job at a local business in town, use your expertise to teach a class, freelance, deliver for Uber or DoorDash, etc. Whatever way seems best, you need to find ways to make extra cash until your debt is manageable.
Step 3: Follow A Debt Pay-Off Strategy
There are many opinions on the best way to pay off debt. One popular method is the debt snowball method. With this method, you begin by making minimum payments on all of your debts and focus extra money on the smallest debt first. Once that is paid off, you move on to the next. This strategy gives you a morale boost each time you pay off a card. It can be best for people who need to see consistent victories to stay focused.
Another strategy is the debt avalanche method. This method can be best for people who are more analytical and patient. Start with the debt with the highest interest rate and work your way down. Continue to make minimum payments on the rest. A third method is to consolidate your debt into one personal loan and make one monthly payment. Whatever method you choose, use the money that you freed up (or earned) to pay off your debt, and be consistent.
Step 4: Re-Create Your Budget
The last step is to re-create your budget and stay consistent with it. It's critical to stay within the confines of your income, especially while paying off debt. Account for all of your expenses and your income and ensure it is balanced. Once your debt is paid off, following an accurate budget is the best way to prevent unnecessary debt in the future.
Paying Off Debt Isn't Complicated, but it Takes Commitment
The steps outlined in this article to decrease personal debt are straightforward and manageable, but they take commitment. A commitment to lowering your expenses, increasing your wages (if necessary), sticking with a pay-off strategy, and re-creating an accurate budget will result in your debt decreasing. This will positively reflect on your credit score, which can open more doors for you and your business.
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