If your credit score is between 0-579, you will not be eligible for personal loans or balance transfer credit cards.   The minimum credit score for these products is typically 580.  In the short-term, you will need to pay the current interest level of your loans.  However, we can help you work with a strategy to pay your current balances, increase your credit score, and then consolidate your debt.

Step 1 – Confirm your current credit score

Go to Credit Sesame, enter your information.  Boom.  Now you know your score, and knowing your accurate score is essential to building it up.  Oh, and it’s also free.  Let’s move on to Step 2.

Step 2 – Figure out how much you spend each month

Figuring out what you spend each month is tougher than it sounds.  In this situation, we advocate the old-fashioned method which uses envelopes to track what you spend.  Please note:  I AM NOT ASKING YOU TO KEEP A BUDGET!  You don’t need to change what you’re spending….yet.

You can read more about the Envelope Method in our free Debt Elimination Guide.  But the goal is to use cash and checks to buy everything during the month, and to create an envelope for each category of spending.  You then place your receipts in the proper envelope and tally it up at the end of the month.

While your spending varies every month, this will give you a very good idea of the amount you need to spend each month in order to live.  If you subtract this amount with what you make, is there enough left over to pay your current debt obligations?  Maybe the minimum payment?

Regardless of how you answer, what you do next is the same.  Step 3 – Identify Savings.

Step 3 – Identify savings

Did you know that American households spend 62% of their money on just three expenses?  This is from a Business Insider article using data from the Bureau of Labor Statistics.  You probably won’t be surprised by the categories once you see them.

1. Housing
2. Transportation
3. Food

Housing is a tough one to change only because it requires long-term planning and significant lifestyle changes.  The rule of thumb is to not spend more than 30% of your net income (meaning, after taxes) on your rent or mortgage.  This can be tough for many, but because housing represents such a large portion of our spending, EVERYONE should make sure to spend a lot of time researching and thinking before signing a mortgage or a rent lease.

And remember, historically, houses have appreciated at only 3% per year.  So do not buy a house because it’s a good investment.  Putting your money in the stock market will typically be a better investment, as it has increased 6% on average every year.

But the other two items – transportation and food – are ones that we more readily control.  In our article The Top 5 Expenses Where You’ll Save Money Today, these are two of the five categories where you should look for savings.  The others are cable, phone plans, and gym memberships.

Step 4 – Open a Secured Credit Card

What’s a secured credit card?

A secured credit card is one that links to a checking or savings account.  There are secured cards that require as little as $100.  You should use the card only on essentials – just as if you were using cash – and it gets paid from the money in the checking account.  These monthly payments actually help build your credit.  Over time, they will improve your credit score.  However, you must treat the card as cash.  Most of them have high APR rates like any credit card, and they are betting that at some point, you will use it as a credit card.  You cannot spend more than you have, as the interest rates will be high, you may have trouble paying, and if you miss payments than all your hard work to rebuild your credit score will be lost.

Not all secured cards are equal.  Make sure you obtain a card from a reputable bank.  It should not have any fees or interest rates when spending below your approved credit amount.  Also, don’t get confused with a prepaid credit card like Green Dot.  These cards are best for people without a checking account who just want to use a substitute for cash.  They do NOT improve your credit score.  Finally, take note of the interest rate and, if the secured amount is one you can afford, go with one that has a lower rate.  However, remember that this shouldn’t be a factor, as you don’t want to pay any interest for this card at present.

We recommend the First National Bank Secured Visa Card.   You can request your own credit limit between $300 and $5,000, depending on how much you deposit.

• No annual fee
• As little as $300 to deposit
• 99% APR – not as high as some, but it shouldn’t matter if you use the card like cash

One year of on-time payments on a secured credit card – with no additional late payments – can give your credit score a big boost.

In Summary

Finding yourself with unmanageable debt payments is a tough situation for anyone, but it’s made even tougher if you do not have a good credit score.  If the situation is bad enough, bankruptcy is an option.  But this is an absolute last resort.  And if you do not fix the issues that created your debt problems, you may only be delaying the issue until next time.

Reducing your debt payments means getting your financial affairs in orders.  It’s difficult, but these four steps will offer you a strategy to make it possible.  Then, once you have that 580 credit score, you will have more options in lowering current payments.