(7) How To Pay Off Debt Fast To Help You Build a Higher Credit Score

How to pay off debt fast is integral to build credit. But before you can create a plan on how to pay off debt quickly, you need to fully understand the scope of your debt. Begin by creating a table, similar to the one below in which you will add all of your debt, all of the money you owe on one page.

Summary of Debt
Lender Debt Interest Rate Min. Payment
Home Loan $250,000 4.4% $1600
Car Loan $23,000 6.7% $436
Personal Loans $20,000 3.5% $240
Student Loans $80,000 5% $500
Credit Card #1 $9,980 8% $200
Credit Card #2 $15,000 7% $349
Credit Card #3 $6,700 3% $143
Credit Card #4 $3,800 5% $99
<strongtotals< strong=””> $408,480 $3,567

Good debt vs. bad debt. After you put down all of your debt on a page, you must then differentiate between good debt vs. bad debt. Good debt is the kind of debt that has the potential to increase in value, such as the home mortgage in the above example. Examples of good debt include:

mortgages
student loans
other real estate loans
business loans

Examples of bad debt include all of those debts that have no prayer of increasing in value, such as:

credit cards
store credit cards
auto loans
boat loans

So in the example above, let’s assume that the personal loan was to start a business. So there are three examples of good debts about including the mortgage loan, the student loan and the personal loan to start the business. The bad debt above, the debt that you should tackle immediately, is the auto loan and the credit cards. You must keep up with all of these payments to maintain and build credit. You have $3,567 in monthly debt payments. Of that, $2,536 is in good debt, debt that may increase in value; $1,031 is is bad debt payments. You need to get rid of that $1,031 as soon as possible to build credit. Further, if you get rid of that debt, you will have an ongoing monthly $1,031 that you can add to your emergency fund, long-term savings or your retirement account. Plus, without this debt, your credit score will rise and in all likelihood you can get a lower rate mortgage loan should you go back to refinance, which will allow you to save even more.

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