Updated: Aug 11, 2020
We’ve all been impacted by COVID-19, but some people have experienced additional financial hardships due to a lost job, lowered income or caring for a family member. For many, surviving has meant going into debt. Others were already having a financial crisis and now things are even worse.
If you are in one of these situations, there is hope! There are many things you can do to recover from debt. Here are some ideas to get started:
Get Out of Debt
One simple approach to getting out of debt is using a “debt snowball.” With this debt reduction strategy, you pay off your debts from smallest to largest while throwing everything you have at your lowest balance until its gone. When that smallest debt is paid in full, take the amount you were paying on it and throw it at the next debt. Using this process will “snowball” the amount you have to put toward each debt. The reason it works well is because you get to see progress faster and it gives you motivation to keep going.
If you don’t have money to start your snowball, you will need to take some other steps including:
Make drastic cuts to your spending
Earn extra money by having a garage sale, selling items online or getting a part-time job
Find a better job/change your career
If after taking all of these steps, you still can’t gather enough chase to make extra debt payments, you may need to refinance your debt or negotiate with your creditors to bring the overall amount down. In some cases, you can do this yourself, but it’s also helpful to find a reputable debt negotiation service to help.
Build Back Your Credit
There are no quick fixes to clean up your credit and rebuild your credit score. But there are some small steps that you can take now that will have long-lasting effects.
Carefully review your credit report from all three credit reporting agencies for any incorrect information. Dispute inaccurate or missing information by contacting the credit reporting agency and your lender.
Review the factors that make up a credit score and look for ways to improve each one if possible. The factors include:
- Bill payment history – 35% of credit score
Delinquent payments, even if only a few days late, and collections can
have a significantly negative impact on your FICO Scores. Stay on top of
payments and utilize payment reminders through your bank’s online
banking portal if they offer that option. You can also enroll in automatic
payments through your credit card and loan providers to have payments
automatically debited from your bank account.
- Level of debt – 30% of credit score
As a guideline, you should keep your credit card utilization at 30% or less,
meaning you should only charge up to 30% of any card's available limit.
- Credit history age – 15% of credit score
This considers both the age of your oldest account and the average age
of all your accounts. Opening new accounts or closing existing accounts
can lower your average credit age.
- Types of credit on your report – 10% of credit score
It's better to have loans for different types of assets in addition to credit
cards. Those other loans could include a home, auto, personal loan or
- Number of credit inquiries – 10% of credit score
One or two inquiries won't hurt much, but several inquiries, especially
within a short period of time can cost you many points off your FICO
score. Keep your applications to a minimum to preserve your credit
Use financial tools to build your credit like getting a low interest, secured Mastercard. A secured Mastercard is a credit card that uses your own money as collateral. In other words, you'll deposit a certain amount at account opening, and then that money will be returned to you when you close your account or switch to a non-secured card.
Research the option of transferring other credit balances to a lower interest card to reduce interest payments.
Rethink How You Think About Money
Finally, take time to honestly consider how you think about money. Your attitude and mindset about money can determine your financial future. Some things to ask yourself are:
Do you really want to get out of debt? If you do, then are you willing to do what it takes to make things better?
What sacrifices are you willing to make to accomplish your goals?
What were the circumstances that caused you to get into debt? Did you make emotional decisions trying to fill a void?
Ultimately, what you believe will drive your behavior, which can lead to positive financial results. Every single day you have the power to change your thinking and make decisions that will move you forward financially or set you back. It’s up to you!