Young debtor, learn the basics before it's too late

Question for the expert Dear Credit Care,
I have $5,000 worth of debt in collections. I want to take care of this. My grandma told me to go to an attorney, a friend told me to do a debt relief program. I am 25 years old and don't make a lot of money. What should I do to get out of this and have it not affect my credit anymore in a bad way? -- Kimberly 

Answer for the expert Dear Person,
Paying off a debt in collections is a terrific goal. Getting out of debt and staying out of debt is an even better one.

Even though you don't make a lot of money, that $5,000 debt is a problem you can overcome -- if you learn the basics of handling money and debt. Because you're young, this is an ideal time to learn from your mistake and establish good, basic money habits that will serve you for a lifetime.

With all that in mind, I suggest that you contact a consumer credit counseling agency for a free, comprehensive budget analysis. You can reach an accredited, nonprofit credit counseling agency by visiting the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling. (My employer, Money Management International, is accredited by both.)

Your credit counselor will help you develop a budget so you know exactly how much you can afford to pay each month on your debt. The knowledge of where you spend your money each month is essential to successfully managing your finances. For example, many people are surprised to learn how much they spend each month on eating out, their morning coffee or entertainment expenses. Once you know how you are spending, you may be able to cut back on nonessential expenses enough to begin paying your debt.

Or, you may have only enough income to cover your basic, essential expenses such as housing, utilities, transportation, insurance and food. If that is the case, you might want to explore opportunities to increase your income through a higher-paying job or maybe a second job. You might even consider ways to lower your housing costs (typically the largest monthly expense) such as living with a roommate or moving back home with your parents until you can pay off your debt.

Now for your question about your credit. The fact that your debt is in collections means that most of the damage to your credit from these accounts has already occurred. Once the debt has been placed in collections, it is typically more than 180 days past due. Paying even 30 days late has the potential to drop your credit score more than 100 points. However, adding positive information to your credit report will eventually help your credit score to rise. Paying regularly on your accounts instead of leaving them unpaid, will also, with time, help improve your credit.

To add positive information to your credit report, be sure you are making payments on all your other open accounts on time and as agreed. If you have any accounts that are being reported late, but have not yet gone to collections, make the past due payments as quickly as possible to catch up your payments so your account will be reported as paid as agreed rather than 30-day, 60-day, etc., late.

Once you are back on your feet financially and have a plan to pay down your debt, be sure you include in your budget saving at least a portion of your monthly income in an emergency savings account. Your savings will allow you to pay for unexpected expenses instead of relying on credit.

See related: Interactive: The life cycle of a delinquent credit card account

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Updated: 01-18-2018