Watch individual credit balances as well as the overall picture
If you are on the path of improving your financial situation, chances are you are working to reduce your debts. There are obvious reasons to do this, such as lessening what you pay out in debts every month, having financial peace of mind, and creating less risk to you if your income drops.
Lowering your debts may also improve your credit score. There is no way to calculate how individual actions affect your score, but one alteration in your debt reduction plan might improve your chances of raising your score faster.
The main reason you want a higher credit score is because having a low score can be costly even if you are not borrowing money. A lower credit score can affect how much you pay in insurance. It can affect whether or not you can make some purchases, such as a smart phone. Utility companies might charge higher deposits to turn on service if your score is low and some landlords won’t rent to people with lower scores.
And of course, a low score can result in you paying a higher interest rate when you borrow for a car or house.
A general rule of thumb, or at least a goal you should shoot for, is to keep your credit balance at 30 percent or lower of the credit you have available. For example, if your overall credit limit is $10,000, keep your overall debt balance below $3,000.
There is a good chance if you are working hard to reduce your debts you are employing the “snowball” technique; spending all your extra money on one debt at a time until you bring each balance to zero. That is a good strategy, but you might consider the balance you owe on each of your debts individually. Doing this will require paying specific attention to each account, and we can’t guarantee one action will affect your credit score. But focusing on the balance of each debt can have a positive impact.
The alternative angle is applying the snowball technique on your cards until you bring them all below the 30 percent mark. Then work to wipe them all down to a zero balance, one at a time.
When FICO, the main scorekeeper of an individual’s credit history, measures credit, it does compare your overall credit available with your overall debt. But FICO scores are also based on how much the ratio of credit-to-balance is on individual accounts.
For example, if you have a few credit cards and have a good FICO credit score, you can lose points by maxing out a single card. That can mean the difference between a having a super low interest rate and something higher.
If you want to learn strategies that can help you improve your credit and reduce your debt, talk to a credit counselor at American Financial Solutions today to determine what plan will work best for you.
Published Jan 29, 2014.