Some people are good at it, and others do not even want to think about it, but managing credit card debt is one of the most important aspects of your journey to financial freedom.
Ideally, you want to pay off your credit card balance every month to avoid interest payments. But, if you must carry a balance from month to month, there is a smart way to do it.
Today in the United States, over 38% of consumers carry some amount of credit card debt from month to month, so you are not alone if you have credit card debt.
Why Your Credit Score Is So Important
Establishing and maintaining a good credit score is important if you ever want to purchase a new house or car, it can also help in securing credit cards with low interest rates. Your credit score follows you for your entire life, so it is important not to damage your financial reputation. Once you damage your credit score, it can take a substantial amount of time to rebuild it.
Your credit score has affects in almost every part of your life. Your credit score will be looked at when looking for a home, no matter if you are renting or purchasing, your credit score will be part of the approval process. If you need a new car, your credit score will affect your options and even the amount you pay.
The savings can add up quickly if you have a good credit score. But, the interest rate on your loans and credit cards can also take away from savings just as fast if your credit is not so good.
People with good credit can save several percentage points on interest rates offered to them, just a few percent can turn into several thousand dollars over a few years. The benefit of lower interest rates, for some people is the number one reason for worrying about their credit score.
Factors Determining Your Credit Score
It is fairly easy to damage a good credit score in a short amount of time. The same cannot be said for rebuilding your credit, rebuilding your credit can take a significant amount of time and money.
There are several different types of credit scores, but the most well-known and widely used is the FICO score. There are scores other than FICO, but most are relatively close to what your FICO score is. Every score has different parts that make up the score itself, a FICO credit score is made up of 5 parts; payment history, credit utilization, length of credit history, credit mix, and new credit.
Payment history makes up 35% of your FICO score. This takes into account the amount of debt you have repaid, while also looking at the timing of your payments. If you have not borrowed and paid back much debt, or if you have not made your payments on time, your payment history may not be as good as it possibly could. Missing just a few payments can hurt this portion of your credit score, and since it accounts for 35% of your credit score, it is wise to make sure your payments are made on time.
Your credit utilization is the percent of available credit you currently have borrowed, your credit utilization is the second largest factor in your FICO score, making up 30% of your score. If you have a majority of your available credit currently borrowed, this could hurt your credit score. Also, having a large chunk of your available credit could make it appear risky to lend you money, you want to keep the amount of total debt you owe to a minimum. It may be helpful to use a service such as Bills.com, which can help you compare loans, loan options, and the effect they may have on your credit.
Length of Credit History
Having a history of borrowing and repaying the money is a positive sign for lenders and also helps improve your credit score. The length of your credit history accounts for 15% of your FICO score and is still a significant factor in determining your score. There is nothing you can do to improve this other than start getting credit at an early age, just be sure you are responsible when taking on any new debt.
Credit Mix, or the type of credit that makes up your account, is a 10% factor in your FICO credit score. There are several types of credit accounts that you could have, from auto loans and mortgages to student loans and credit cards. The type of credit accounts you have open may only make up 10% of your score, yet it is still important to have various types of accounts.
All credit accounts are new at some point in time, it is just not smart to open several new accounts within a short time period. Opening several new lines of credit could be another risky sign for a lender, and it will also hurt your credit score to the tune of 10%. If you do have to borrow through a new credit account, it is important to use a reputable lender with a history of helping borrowers like yourself such as Freedom Debt Relief.
How to Rebuild a Damaged Credit Score
A damaged credit score can be very difficult to rebuild. It is best that you follow steps that will help you stay out of any situations that may hurt your credit score. In the event that you do damage your credit score, there are tips and resources available to help you along your path to rebuilding your credit.
Since 35% of credit score is calculated based on your payment history, it is critical that you make payments on time.
Paying Down Debt
Paying down debt is just as critical as making your payments on time. Just making the minimum payment each month will not significantly help reduce your credit utilization, which makes up 30% of your credit score. If consolidating your debt is not an option, or you still cannot make the consolidated payment, an option such as Freedom Debt Relief may be able to help. Freedom Debt Relief can negotiate a settlement with lenders on your behalf, in return, you may get a substantial reduction in the amount you owe.
After you have started to rebuild your credit score, and anytime really, it is best to borrow wisely. Rebuilding your credit score can be a monumental task, even with the right help and resources it can take a very long time. To save yourself a future headache, it is important you only borrow what you can comfortably repay.
After you have rebuilt your credit, it is important to follow the steps to maintain a good credit score and never get back into a situation harmful to your credit score.
Andrew Housser serves on the board of directors for American Fair Credit Council (AFCC), which Freedom Debt Relief is an accredited member of. He has held this position since 2006. In 2010, he was awarded the President’s Award for outstanding voluntary service to the organization and contributions that “benefits the consumer”.
Through his role with the AFCC, Andrew has helped promote consumer legislation at the state and federal level. This includes work the industry conducted with the Federal Trade Commission on federal regulation for the industry.