There are many benefits to paying off debt, like its ability to increase credit score. Of course, rebuilding your score is not an overnight thing. It involves a set of behaviors that you need to implement in your life. It may even involve changing a couple of habits and developing new ones.
There are various reasons why you need to improve your credit score. For one, it will help you get a good rate when you decide of buy a home. A low credit score is one of the reasons why some people have to delay buying a home. It can even affect your ability to get a great job. If you have a bad credit score, it can compromise a lot of future financial opportunities. You should not let that happen.
According to the data published on ValuePenguin.com, the average credit score in the country is 695. There are a lot of scoring models in the country but the range is between 300 to 850. The average score across different scoring models are between 660 to 720. While the average score is not low, it is not high either. It leaves a lot of room for improvement.
With the debt levels quite high, you have a lot of opportunities to improve your credit ratings. But you have to make sure that you will choose the right debt payment strategy. There are strategies that will help you hit two birds with one stone: pay off debt and increase credit score.
5 ways you can make debt payments while improving your credit history
Here are five different ways that you can improve your credit history while solving your debt situation.
Just pay on time.
This is probably the simplest way that you can go about paying off debt and increasing your credit score. Just pay it off on time. In the FICO score model, late payments affect 35% of your score. If you can pay your dues on time, this 35% will be high. It can have a huge influence on your credit history. According to the data from CreditCards.com, borrowers making late payments increased in the past 12 months leading to 2016. Although the delinquency rate is not as high as that of the Great Recession, the fact that it is increasing should make us pause and assess our credit behavior. Sometimes, late payments are caused by credit management issues. If you have organization issues and you forget due dates, make sure you set up reminders that will help you meet your payment deadlines. You can also arrange to have your due dates fall on one day – just so you only have one date to remember.
Work on delinquent accounts.
Another debt payment technique that will help you increase credit score ratings is through your delinquent accounts. In case you have missed payments, work on these first. Sometimes, creditors and lenders will not mind a late payment as long as it is made current immediately. They know that it can be caused by forgetfulness or another petty reason. This is why you need to make your payments current because a short stint of lateness can possibly be overlooked and not reported to the three major credit bureaus.
Tackle the high-interest debts first.
If you want to improve your credit report, tackling high-interest debts can also help. For one, these high-interest debts will put you at risk of adding more to your debts. If you focus on these, you are actually solving three problems: pay off debt, increase credit score, and save on interest. You can use the Avalanche Method as your debt payment plan. This is when you rank your debts according to priority, in this case, the high-interest debts first. You will pay the minimum on all your debts and anything extra should be paid towards the priority debt. Since you are paying more towards that debt, you will completely pay it off faster. When that happens, the money that is freed will be added to the second priority debt. You will continue rolling over the money until all the debts are paid off. As you work on your debts, you will also see an improvement in your credit history.
Pay off the ones with lowest credit limit
The fourth strategy involves any credit account with the lowest credit limit. When credit bureaus look at your debt, they only compare the amount in relation to the limit. If you have a low debt level compared to your limit, you can get approval or a big loan. But maxing out your limit is a bad sign. This is why if you want to lift your credit score, make sure you pay off the balance on those with the lowest limit.
Keep your credit utilization under 30%
In connection with the last one, you have to keep your credit utilization lower than 30%. A balance is acceptable and will not harm your score too much if you keep it within the 30% level of your credit limit. For instance, if your limit is $10,000, your balance should never be greater than $3,000. So if you find it hard to pay off your debt completely, you can target this 30%. That way, your goal will not be too hard to meet and by the time you reach it, you would be motivated to completely get rid of your debt. And even before you do that, your credit score would have improved already.
3 simple ways to maintain a high credit rating
Of course, when you pay off debt and increase credit score, that is a good thing – but it is not the end of your efforts. You have to make sure that you will continue to exert effort to maintain your debt level and credit rating.
Here are three tips that will help you accomplish this.
Start by educating yourself. This is very important. If you want to keep your credit rating up, it is very important that you know how to do it. According to a study done by NFCC.org, 4 out of 10 respondents cannot give themselves an A or B grade when it comes to their knowledge and confidence in personal finance. If you do not know anything about it, how can you possibly maintain good financial and credit behavior? Read about personal finance so you know the right habits to practice.
Practice the right credit behavior.
It is also very important to practice the right credit behavior. After all, this it the only way you can keep your credit score up. To show the best credit behavior, you need to pay your bills on time. You also have to keep your credit balance low. There are various techniques to help you keep your score high. Make sure you always practice them so you will not have a hard time maintaining the good credit score you worked hard to achieve.
Monitor your credit.
Finally, you have to monitor your credit all the time. There are certain details about your financial life that you need to monitor regularly. Your credit report is one of them. Sometimes, people end up with a low credit score, not because they had bad credit habits, but because they were victims of identity theft. One of the best ways to combat this is to monitor your credit report regularly. You can immediately report any unauthorized credit transactions done in your name. You can also check for errors that could be pulling your score down. If you have them corrected, you may be able to improve your score and keep it high.