Steps

 

Contact your creditors. Preferably not after months of harassing calls, but as soon as you realize you won't be able to make the requested payments. Most creditors are not as cut-throat as you think, and they will work with you to schedule smaller payments that fit your budget. After all, they'd much rather receive $20 payments for the next year than risk getting nothing in bankruptcy court. This is one of the places having a written budget can really pay off -- tell them you've worked out a budget, can afford to pay them $X, and offer to send them a copy of your budget. They're much more likely to accept your offer of lower payments if you can show good faith.

 Get any agreement in writing. If you are able to negotiate lower payments, interest rates, or balance payoffs, request they send a letter confirming it. Having it in writing is your defense against changing minds, lost records, new management being more aggressive, or any number of other things. Once you pay off your debt, make sure you get a settlement letter and send a copy of it to the credit bureaus so they can update your credit report.

Cut up the cards. Even if you do nothing else, stop charging, and keep paying at least the minimum on everything. Eventually, you will get them all paid off. Keep one card available, but difficult to use, (e.g., put it in a bowl of water in the freezer), for those times when you have to have a credit card.

1. Keep some credit accounts open. Close no more than one or two every six months or so. A sudden burst of activity of any kind reflects poorly on your financial stability. When deciding which accounts to keep open, keep at least the one or two oldest accounts -- the third-biggest factor in your credit score is length of credit history. Having 5 accounts with zero balance on four and $500 on one lowers your credit risk, as opposed to 2 accounts with a $250 balance each.
2. Pay off your debts. Once you've decided how much you can pay against your debts, and negotiated any lowered payments, you must allocate that portion of your budget to each creditor. Pay the minimum (or agreed amount) to each and every creditor, every month, on time. Then pay any extra against the lowest outstanding balance. Each time you pay off your lowest balance, celebrate, then "snowball" your payments onto the lowest remaining balance. Total debt outstanding constitutes nearly one third of your credit score.
3. Get a secured credit card, if you don't have a traditional one, and need to build up your history. You're unlikely to be turned down for one because you supply the money up front as a collateral. If you deposit $300 with the bank, you'll have $300 credit limit on your secured card. Beware of the high interest rate and various fees often associated with a secured card. Pay in full, on time, every month to avoid most of those fees.
4. Join a credit union. They're more likely to give you loans in the future than a regular bank.
5. Make all payments on time. Don't arrange a lowered settlement amount you can't pay. It will only reflect badly on your credit. Payment history is the number one factor in your credit score -- over one third of your score.
6. Avoid bankruptcy if at all possible; it shows up on your credit for 10 years. Don't take the easy way out now, you'll pay for it later. It takes a lot more hard work and dedication to rebuild your credit than it does to declare bankruptcy, but you'll be glad you did.
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