Due to proprietary formulas and algorithms determining exactly how your actions increase or decrease your credit score isn’t easy. Faced with this shroud of secrecy how can you eliminate your debt? How can you increase your FICO score? This is what worked for me….
In 2018, I found myself starting over from scratch. I moved to a new state with only what I could pack into my 4-door sedan. What didn’t need to be packed was my debt— roughly $10,000. My credit score was just above 600 which was enough to get approved for an apartment, but my budget was extremely tight. Making the minimum (or just above minimum) payment each month on my credit cards didn’t make a dent in my balances, which continued to grow with interest rates ranging from 19-29.99% on my three credit cards. I took the suggestion of those around me to take a deeper look into debt consolidation and obtained a $10,000 personal loan through my bank with an interest rate of 12%. The fixed monthly payments were set up at roughly $270 for 4 years—something I could reasonably afford at the time. I cashed in that personal loan check, paid off all my credit cards, and made my payments on time every month. Four years later, I am debt free with a credit score around 800!
Debt Consolidation
If your debt is continuing to increase due to an inability to make payments larger than the amount of interest applied each month, and you don’t have the funds available to pay the debt off within a shorter period of time, this is an option worth investigation. The monthly payments are fixed, which means you can budget for that monthly expenditure, rather than guess what your next bill might look like. Finances should never be a guessing game if you’re looking to take control of your expenses.
Keep Those Non-store Cards Open!
Do not close a Visa, Mastercard, American Express, etc. if avoidable and if you have the self-control not to run up that balance again. Closing these types of credit card accounts negatively impacts your score because you are closing off an avenue of data to the credit bureaus. Also, many mortgage products require three active lines of credit with at least a two-year history to establish that you make payments on time to your creditors and will likely pay your mortgage on time too.
Actively Use Your Credit Cards Within Your Budget
Continue to use your credit cards. This sounds crazy, right?! We just got them paid off! The adage of “if you don’t use it, you lose it” applies here. Not using your cards could cause them to close automatically (check that pesky fine print!) and this negatively impacts your score. Additionally, while not using your active lines of credit often won’t hurt your score, it also won’t help improve it. A great practice to implement is using your credit cards for all the regular costs you would normally have such as groceries, gas, Internet, etc. Just make sure you check your balances frequently and pay your balance in full every month. Treat your credit card like a debit card; if you don’t have funds in your bank account to cover the expense you’re contemplating, walk away!
New Accounts
Be cautious and calculated when opening new accounts. Do you really need that extra line of credit? Will you use it regularly and within reason? What benefit is it offering? Cash back, mileage and other points cards may be worthwhile – if they have low or no fees. Make sure you read the details of any card you’re considering to find what is best suited for you. If you can’t find the benefit, it’s probably not worth it.
Monitor, Monitor, Monitor
Make sure to monitor your credit score regularly. Most banks and credit card companies will show you an updated score weekly or monthly through their online portals, or there are free services such as our S1FinFit App which is incredible if we do say so ourselves! Staying up to date with the changes will help you to understand what is helpful and what is harmful. It will tell you why your score increased or decreased since the last result, allowing you to gain more knowledge and understanding of the maze that makes up credit scores and reporting.
Hopefully these tips give you a little bit of hope if you feel stuck or overwhelmed like I did. You CAN achieve financial freedom and growth with a little bit of work and time. It is possible! As always, our team is here to help, as well as connect you with credit experts if additional assistance is needed. Go forth—but be cautious with that swipe!