07/24/2013 05:30 pm ET

"I Have Limited Funds and a Lot of Debt -- What Should I Do First?"

If you've been following my blog, you know that I'm a big proponent of paying off your credit cards (or, at least pay them down to 20 percent of the credit limit) and paying your bills on time. But some people have expressed a very valid frustration that it takes money to do this well, and not everyone has all of the cash they need to pay everything off all at once.

They ask the question I posed in the title of this blog: "I have limited funds and a lot of debt. So what should I do first?" Good question. They recognize that they can't pay everything down immediately but they need to do SOMETHING.

Here is my advice (but I need to mention that there might be extenuating circumstances when this doesn't work for everyone). But this list is a good general rule of thumb to follow:

Do whatever you can to make sure that your bills are paid in full and on time (or in the case of credit cards, make sure that the minimum payment is paid in full and on time). And with any money you have left over, try to pay down that debt on your credit cards.

If you do those things in that order or priority, most people should see a positive impact on their credit even if money is tight and debts are high. The positive changes won't be massive, and they won't happen overnight but you'll help to ensure that your score is moving in the right direction.

That's because the largest influencer of credit scores is payment history -- specifically how often you pay on time (or late) and how often you've paid in full (or not in full). This can account for up to 35 percent of your FICO credit score, making it the highest weighted of five credit score factors. The second factor, accounting for up to 30 percent of your FICO credit score, is balances, which is why it's also included in the rule of thumb I mentioned above.

If money is still tight and you're not able to pay all of your bills in full and on time then you might need to revisit your financial commitments. There are many other debt and financial experts out there who can speak to this -- my focus is on credit scores.

You should also consider examining your credit score and working to improve that score. In doing so, you may gain more access to money at a lower rate -- perhaps allowing you to consolidate your debts at a lower interest rate (i.e. through a line of credit, for example).

  • Check your credit reports for errors and inaccuracies, which can lower your credit score and keep you from accessing more money at better terms.
  • Make sure you keep your credit accounts active (resist the common-but-bad advice to stop using your credit cards altogether. Rather, learn to use them and pay them off).
  • Protect your identity from identity thieves because their thievery will impact your credit score. (Don't share your credit card information, including PINs, with anyone).

Credit improvement doesn't happen overnight. It takes careful discipline and the development of good habits. But it's a so worthwhile and it IS possible, even when money is tight.