I have talked about paying down your credit cards in the past. In previous posts, I talked about paying off your highest interest rate cards first, paying off the card with the second highest interest rate next and so on. Obviously, my main goal with that system of repayment is to help you get your cards paid off while saving as much as possible on finance charges. If you are looking to pay down your credit cards while also improving your credit score, on the other hand, you might want to take a slightly different approach. I’ve included a few suggestions or tips below for paying down credit cards that might help to accelerate improvement in your credit score.
If you are looking to make a major purchase, such as buying a home for instance, you need to take immediate steps to make sure your credit score is in proper shape. If you are, in fact, looking to make a big purchase, and you need to improve your credit score quickly, you might consider a different method of paying off your credit cards instead of simply paying off the highest interest cards down entirely in order. Instead of paying the credit card with the highest interest completely off, pay it down until you are carrying a balance that is about 30% of your available credit line. In other words, if you have a $4,000 credit line, pay off your balance until you are carrying a debt of $1,200 on that card (because 30% of $4,000 is $1,200). Then, focus on the card with the next highest balance and pay it down until you have reached the 30% mark. Do the same thing on all of your cards until each one is only at about 30% of your available credit line.
The reason I am making this suggestion is quite simple: the lower the percent of debt to credit ratio on your card, the better your credit scores will be. While you will have to pay a bit more in finance charges on those balances with higher interest rates, if you’re simply looking to quickly improve your credit score, lowering all of your outstanding balances to below 30% of your available credit limits might well be worth the extra expense that you’ll have to pay in additional finance charges on those high interest cards. At the same time, you are still working toward paying down your debt and getting out of debt as quickly as possible.
Once you have all of your credit card balances down to 30% credit utilization or below, repeat the same process until they are all down to 20%. Then, do the same until they are all down to 10%, so on and so forth. Once you reach the point where you are only carrying a balance that is 10% of your credit line, you should find that your credit score has increased by anywhere from 30 to 70 points. In addition, if you have a previous history of making late payments, getting these payments in on time consistently moving forward can help your score jump up as much as 40 or more points.
When it comes to the credit score game, every little point counts. If you can manage to get your score to 730 or more, you will be eligible for the lowest interest rates that lending institutions typically have to offer. So, if you are already at 730 or higher, you don’t have to worry too much. If you are at 675 or below, on the other hand, you can be hit with interest rates that are one or even a full 2 percentage points higher than those with a 730 or more. If you are getting a mortgage, this couple of percentage points can translate into thousands of dollars in potential loan savings by the time the loan is paid off.
The news is even worse if your credit score is below 620. If you are in this bracket, you can expect to pay 3-4% more than someone with a score of 730 or better. So, if you play the game right and raise your score from 620 to 675, you can shave off a few percentage points off your loan rates and you can take off even more if you get your credit rating up to 730. But the most important thing to remember is that every little point counts when it all adds up. The whole process will take some time – probably more than a year depending upon how much you owe and how much money you have coming in – but it will be well worth the time.
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