The First Thing You Must Do Before Paying Off Debt

You’ve made up your mind: It’s time to tackle your debt. You have researched ways to get out of debt, perhaps weighing the pros and cons of snowballs over avalanches to pay off your debt faster. Maybe you’ve thought about calling a credit counseling or debt settlement agency, or even a bankruptcy attorney, to see what they can offer.

Before you decide on your plan of attack, though, there’s one crucial step you won’t want to miss. It can make or break your efforts to get out of debt: Get your credit reports and scores. (You can use’s Free Credit Report Card for an easy to understand overview of your credit report along with your credit scores.)

Here are three reasons why this step is so essential to your success.

You’ll Have a Starting Point

Any debt counselor will tell you that consumers struggling with debt often underestimate how much they owe. If that describes you, don’t feel too badly. You’ve probably just been focused on making sure you can make the monthly payments. But in order to create a plan to get out of debt you’ll need a list of all your creditors and what you owe. Your credit report can help you identify who you owe, along with recent balances. (You can get free copies of your credit reports once each year from all three credit reporting agencies.)

You may also find debts listed on your credit reports that you had forgotten about, such as collection accounts. Forget to include those in your plan, though, and your efforts may be derailed if those collectors suddenly decide to pursue you for payment but you can’t afford to pay them.

Plus, no matter which approach you choose to get out of debt, you’ll have to know what you owe. Your credit report can help you with that task.

You’ll Understand How Your Debt Impacts Your Credit

If you’ve been making your monthly payments on time, you may assume your credit is “good.” But, in fact, the balances you are carrying may be dragging down more than just your net worth; they may be hurting your credit scores.

You won’t know that by looking at your credit reports, though. Your credit report just contains information about your accounts, balances and payment history. It won’t analyze whether your debt may be too high.

Your credit score, on the other hand, will show you the impact of your debt means to your scores. For example, in our Free Credit Report Card, one of the five factors that make up your score is “debt usage.” That factor takes into account how close your balances on your credit cards are to your limits, for example. As your balances on your cards approach the limits, your credit scores suffer.

Getting out of debt will usually help your credit scores in the long run. But in the immediate term, your goals — get out of debt and build better credit, for example — may be at odds. Take bankruptcy, for example; it’s not great for your credit, but it may be the fastest way to become debt free. Understanding where you are now, as well as how debt relief options may affect your credit, can help you make a more informed decision about which approach is best for you.

You Can Track Your Progress

Paying down debt is usually a marathon, not a sprint, and most of us are going to need encouragement along the way. Monitoring your credit score each month is one way to get that regular dose of motivation. Over time, as your balances decrease, your credit scores will hopefully get stronger. But even if your credit scores suffer because you choose to settle your debt or file for bankruptcy, keeping track of your score can help you monitor your progress as you work to rebuild your credit and your financial life.

Image: iStockphoto

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