5 tips for dealing with bad debt to improve your credit score

Debt can have a negative impact on your credit score, especially if you’ve got lots of it and you have a history of failing to make repayments.

If this sounds like a familiar situation, chances are your debts have become bad ones.

Good credit turns into bad debt when you can’t afford to repay it and it’s important to take action as soon as possible.

Of course, this can be easier said than done.  To help you get started, here are 5 tips to help you sort out your debts and put your credit score back on track[1].

1. Create a budget

It might sound obvious but before you can do anything you need to make a budget. This means creating a list of what you need to spend each month to cover essentials and existing commitments. Be sure to shop around when you’re creating this to see if you can get any of the necessities cheaper than you currently do.

Once you have your list, add it all up and commit to not going over the total sum. You can then work out how much money you have left each month to start clearing your debts.

2. See what you’re eligible for

There are lots of benefits and government schemes out there that are designed to support people and ensure they can make ends meet. If you’ve never had bad debt before, chances are you might not be aware of them, so take the time to investigate. Citizen’s Advice has an online benefit checker that can help you understand your entitlements. If you’re falling into mortgage arrears, you should also check out the Support for Mortgage Interest scheme and if you’re struggling to pay your utilities bills, read this Low Income Grants guide from the MoneySavingExpert to see if your utilities company offers a grant.

3. Talk to your lenders

If you speak to your lender to let them know you’re not going to be able to make monthly payments, they may offer to extend the length of your loan (thereby reducing payment size) to help out. Ultimately, they don’t want you to fall into debt so always make sure to communicate as much as possible.

4. Consolidate debts to cut costs

You need to repay your debts as quickly as possible to improve your score but you want to do this while paying the minimum amount of interest, right? Of course. So is this possible? Yes, if you’re able to consolidate your debts onto one credit card or loan. The difficulty is that if you have bad debt and a low score, getting approved for credit can be a challenge and every time you’re rejected for credit, your credit score can take a hit.

If you use our credit card matcher, you’ll be able to see the credit cards you’re eligible for and your chances of being approved. Find the one that’s right for you and transfer the balance of your debt to it. However, be sure you can make the monthly repayment sums.

If you’re unable to take out a new card or loan, see if you can shuffle the debt around on your existing cards to reduce interest payments. You have to make sure the rates on doing this are affordable and that you transfer the debt in the right order, but if done correctly, it can save you money.

5. Create a payback plan

Once you’ve explored all of your options, you need to create a payback plan. Prioritise your most urgent debts and work out a way to either pay them off in full or meet monthly repayment targets. There are lots of free advice centres that can help you do this, such as Step Change Debt Charity and the Debt Support Trust.

Tracking change

Check your credit report regularly to monitor how your actions are improving your credit profile. While it can take months for changes to appear, lenders will often see that you’re taking positive steps to clear your debt and factor that into any future decision on an application for credit you make.

 

[1] It may take months for any changes you make to appear on your credit report.