“I want to start a business, but I have so much debt, I can’t afford to build one.” “I can’t get approved for a business loan, how else can I grow my business.”

These are just two statements that I mostly hear or read when it comes to funding a start-up business or growing one. They all have one thing in common – debts that went out of control or became difficult to manage.

Your debts affect your credit score, and your credit score affects your creditworthiness.  A good credit score is important for your business because lenders will cautiously look at that score when you apply for a business loan.

How does one get into so much debt?

Mostly by being lured into buying something that we heard advertised by the media. We live in a society that constantly inundates us with advertisements for this or that gizmo; why we deserve to own it NOW, coupled with the added enticement to pay later (“we accept credit cards” or “get easy installment payments”).

Those ads convincingly enticed you that you need it, so, therefore, you should buy it and buy it now. With no second thought, you pull out your wallet, pick out one of your assortment of plastics and proudly proclaim, “charge!”. You correctly guessed what you ended up with, mounting credit card debt.

Living debt-free does not happen in an instant. It will take planning, self-discipline, and constantly reminding yourself why you are doing this – the “reward at the end of the tunnel”, so to speak. Though debt includes all money owed to someone or an institution, we will focus on credit card debt since that is the one debt most seemed to lose control.

Six Steps To Become Debt-Free

1.  Stop Using Credit Cards.

Obviously!  But, it would be initially hard for you to do if you are so used to carrying plastics more than cash. I know, that happened to me, too.  I think the reason we loved to pay with credit cards is it felt like we were spending someone else’s money that was willingly given to us spend.

In more ways than one, that is true, except we tend to forget that the money, with interest, has to be paid at some point in the future.  With cash, payment is immediate.  You see how the cash flows out of your wallet to some cash register, which forces you to assess if you really need what you are planning to buy.  It cuts down on impulse buying.

2.  Cancel or Put Away Your Credit Cards

I chose to cut up all of my credit cards except for my VISA card that charges the lowest interest and an American Express Blue card, which I usually use for travel.  I sent the cut up card back to the bank that issued them with a note that I want the credit report to show the account is closed.  If you do this, make sure you follow it up with a phone call to the bank to ensure that they did what you asked them to do.

Now, that might not be a good chose for you to do. If you can avoid the temptation to use those credit cards again, it might be wiser to put them away in a safe place and not use them.

Canceling your credit cards or returning them to the bank that issued them might hurt your credit score.  Remember, a low credit score will make it difficult for you to obtain business or personal loan.

So, why is that? Potential lenders take into account your balance-to-limit ratio, also called “credit utilization ratio” when assessing your credit worthiness. In the balance-to-limit ratio, balance is the total amount you owe on all your credit cards. Your limit ratio is the sum of all your credit card limits that the issuer granted you. If you cancel a card with a high credit limit, the sum of your credit limit will be lower, which might increase your credit utilization ratio depending on your outstanding balance.

• 15% of your credit score depends on the length of time you have the credit cards. So it would not be wise to cancel the card that you had for a long time.

The rest of the factors that affect your credit score are:

• 35% – your past payment history
• 20% – the amount of your outstanding debt
• 20% – divided evenly between new credit and the type of credit accounts you have.

Paying on time and paying more than the minimum limit will help more with your credit score than canceling your unused credit card/s.  It goes without saying that you should not use any credit card if you do not have enough money to pay the balance in full each month unless it is an unforeseen emergency that you do not have enough emergency fund to cover the expense.

3.   Analyze Expenses

Once you realized that debt is a symptom of your overspending, find out where your money is going (your expenses) before you can control your spending. To create a good spending plan, first to track your income and expenses.   My post on budgeting will show you how this is done.

4.  List Down Everything Owed

In your case “everything you owed” could be more than credit card loans. Loans include car loans, student loans, mortgage, etc. You can list them using pen and paper, or you can use an Excel spreadsheet or some other spreadsheet. List the name of the debt, the balance, the minimum payment and the interest charged for each of the money you owed.

5.  Pay Down Your Credit Card Debt

Start with your credit card debts. Focus on the smallest amount and try to pay that off first while paying the minimum on the other loans. Use the money you saved from reducing or cutting your expense (see Step 3) as additional money for payment of your debts. Some financial gurus suggest paying the card with the highest interest first. Both ways have merit. The first one gives you a sense of accomplishment in a shorter period, enabling you to celebrate your success and motivating you to move forward. Choosing the latter will save you the extra money that you would have paid for the higher interest rate by paying it sooner.  Pick the one you are more comfortable with.

Once the loan with the smallest amount (if that is what you choose) is paid off, focus on the next one and repeat Step 5 until all loans are paid off.

Always watch your spending and stick to your budget. If you overspent on one category, you will need to adjust by cutting down on a different category to even out the expense layout. For example, if you bought more food than what your budget planned, you will need to cut down on entertainment or dining expense by the same amount.

6.  Pay Down Your Fixed Debts
If you have debts that require you to pay a fixed X dollar amount every month for Y number of years, you have fixed debts.  Examples of these are installment loans, car loans, student loans, and mortgage. Pay them in that order. The interests from your student and mortgage loans in your tax returns ( which is still allowed at the time of this writing) are deductible, thus, they are the last debts you pay

How do you pay all those debts? It could mean foregoing some of your expenses that are not life-threatening like frequent dining out, buying the latest gizmo or trend and the likes.

Some more ideas to jump-start paying your debts:

• get a second job without damaging your relationships with your family and loved ones
• sell one or more of your high-value assets like your car or home and using the proceeds or equity to pay off as much debt as possible, if that will not severely inconvenience you,
• use your creativity to make products, like crafts, paintings, sculpture, etc., that you can sell and use the profit to pay your debt