If you’re focused on improving your credit scores, paying down your debts can be an effective way to do it. Starting with revolving debts, such as credit cards, should make the biggest impact on your scores. However, you still want to figure out which revolving accounts to pay down first, and see if there are any strategies that can save you money in the process. Start By Paying Off Credit Card Debt Your current balances on various types of debt accounts impact your credit differently.
To start, it’s important to understand how credit scoring models distinguish between the two broad types of credit: Installment accounts and revolving credit accounts.
- Installment accounts typically have a fixed loan amount and repayment schedule. Mortgage, student, auto and personal loans are common examples.
- Revolving accounts, such as a credit card or personal line of credit, have a credit limit that you can repeatedly borrow against.
The balances on either type of account play a role in your credit, but your revolving credit accounts factor more heavily into your credit scores. That’s because they impact your credit utilization ratio, which is a major scoring factor in both the FICO and VantageScore scoring models. The remaining balances on your installment loans also impact your credit, but paying down those balances may not move your scores as much. To calculate your credit utilization ratio, you’ll compare your revolving account balances and limits. For example, if you have two credit cards with $5,000 credit limits ($10,000 total) and a combined balance of $2,500, your credit utilization ratio is 25%. Your overall credit utilization and your credit utilization on individual revolving accounts both can impact your credit scores. In either case, a lower credit utilization rate is better. As you pay down your accounts, keep in mind that the balances and limits used in score calculations come from your credit report. Your creditors report account information to the credit bureaus every 30 days or so, which may cause the information in your credit report to differ from the amounts you see when logged in to your credit card account.
Decide Which Credit Cards to Pay down first off your goal is to lower your overall credit utilization rate, any additional credit card payments you make could help. However, other factors can also impact which card you want to pay down first:
- Paying down the card with the highest interest rate first could help you save money.
- Paying down the card with the highest utilization ratio could help your credit scores, as the individual account utilization is considered by credit scoring models.
- Paying down the card with the lowest balance could help you decrease how many of your accounts have a balance, which may also improve your credit scores.
Consider your goals and then choose an account to start with—while still making at least the minimum payment on the rest of your credit cards. How to Pay Off Credit Debt? You could pay off your credit card debt by paying down one card at a time (and making minimum payments on the other cards). Once the first is paid off, you take the freed-up funds and focus on the next card on your list. Two ways you can create your debt payoff plan using this approach is to utilize the debt avalanche or debt snowball method. The debt avalanche method has you start with the highest-rate accounts first, which can help you save money. Alternatively, the debt snowball method focuses your efforts on the account with the lowest balance first. This strategy may be more motivating and easier to follow through with because it could allow you to pay off individual debts more quickly.
- Trade lines: Trade lines can help providing payment history, debt management (utilized under 10%), and also very import length of credit history. In addition to the ladder it can get you 10-6o points up to 180 in some cases.
- Debt settlement plans: If you can’t seem to get a handle on your credit card debt, a credit counselor may be able to help you get set up with a debt management plan (DMP). A DMP can help lower your collection payments and set you on a path to paying off the debt while deleting the account(s).
Monitor Your Progress – Reviewing your credit report can be a helpful first step, as you can see all your current debts, balances and credit limits. However, you’ll also want to review your statements or online accounts to figure out the interest rate on each credit card or loan. Once you make a plan and start paying down your debts, you can also monitor your progress by signing up for a free credit score from Experian.
A Goal without a Plan is just a Wish. Give us a call TODAY at 844-FIX-URCR or click on the following link creditservicesofamerica.com to schedule your FREE consultation and create your personalize plan to achieve your credit and debt GOALS! *Individual results may vary. Please call for details and to discuss your own individual situation.