Managing Your Debt to Increase Your Credit Scores - and Get Out of Debt Faster!

We know you are busy, so I will jump right into Debt and Credit Scores:

There are basically three methods you can use to pay off your debts:

  • Emotional Method - Take the smallest credit card debt you have, and pay it off first while making the minimum payments on your other credit cards.  After paying the smallest one, apply the exact same payments to the next smallest credit card balance.  This will give you a feeling of accomplishment so you can continue to pay off all of your debts.  This is not the cheapest and fastest way to pay off your credit cards, but it works for some folks.

 

  • Rational Method - Take all your outstanding credit cards and list them by highest interest rate to lowest.  Start paying the highest first and work your way down.  This is a pretty good method, often pushed by financial people on TV, etc.

 

  • Credit Score Method - Looking at your Credit Report, you can easily see what your % of total credit limit is currently on each credit card.  Remember, 35% of your current Credit Score is based on your debt "utilization", meaning of the total debt (credit limits) available to you on each card (credit limit), how much are you using as a percent?  Using the Credit Score method requires you to figure out on which credit cards you are closest to your credit limits, and pay these debts down first.  For example, if your credit card has a 20K limit and you are in debt 17K on this card, you would pay that credit card first before paying another one with a 20K limit and only 3K in debt.  You do this regardless of interest rates, so it will be more expensive than using option 2.

You are probably here because you have less than perfect Credit Score, so you will probably want to use the Credit Score option above.  However, we think you can raise your Credit Score AND save money like the rational method above  by following these steps:
  • If you don't already have your credit report yet, get your Credit Report and FICO Scores from Equifax today, so you can see all of you outstanding credit cards and see how much utilization you have on each one.
  • You will need to make some balance transfers so you can move your debt around so that you don't show a high utilization on any one credit card.  However, I would recommend calling the credit card company first, and telling then you are moving money to another card because their interest rates are too high.  9 times out of 10 the will actually reduce your interest rate right there and then, since they don't want to lose your business!  (We have had our and other customers interest lowered many times - just by making this simple phone call and threatening to move the balance to another card)

  • On the flip side, call a credit card that you have low utilization rate with, and tell them you want to do a balance transfer if they give you a low interest rate.  (they will usually offer you something for a year or less)
  • Do not transfer all of the debt from one card to another, leave a small amount on the original card and pay it off over a period of 3 months.  This methods works best for higher credit scores.
  • Depending on the deal each credit card gives you (play them off each other!) figure out the best situation for YOU that will give you both the lowest interest rates and best credit limit utilization (try to stay under 50% utilization if you can on each card).
  • Also, ask for an increase in credit limit up to an amount where they DONT need to run your Credit Report.  I have had Credit Card companies give me 5K in additional credit limit just for asking  - on the spot!
  • Another smart move is to borrow from your 401K, then pay down your credit card limits.  Wait for your Credit Scores to rise, then apply for a better credit card with lower interest rates because of your higher credits scores.  Borrow from this new Credit Card and pay back your 401K - You might be able to cut your interest costs from 20%+ to 0% if you do this correctly! However, be very responsible with your debt and DO NOT add more debt to your credit cards!

Getting out of debt while paying high interest rates is like trying to run up an escalator backwards.  Your goal is to get the top of the escalator, but it's moving against you pretty fast - the higher the interest is.  The interest on your credit card is the speed of the escalator, you need to lower the speed as much as possible so you can get to the top easier.  The lower the interest rates, the faster you will be out of debt.

Another very important piece of advice:  Pick one Credit Card to use for everyday purchases, and pay it off monthly.  DO NOT use a credit card with a balance on it to purchase more items because the second you purchase that item, you will be paying interest on that purchase.  If you use a Credit Card you pay off every month, you will never pay any interest.  Save that money for paying off your debt, not paying interest on immediate purchases which gets you nowhere!

Remember, your debts are reporting to the Credit Agencies once a month, so this is one of the fastest way to raise your Credit Score quickly if you have the cash to pay down your Credit Card debts. 

Also, if you only have limited credit history and less than 4 open credit cards, you should apply for the Orchard Bank Credit Card since they specialize in people with less than perfect credit.

The above is for only current debt, meaning debt that is not more than 120 days late and NOT at a collection agency. 

Some helpful Tools:

  • Do you have your 3 Credit Reports and FICO Scores yet?  Use Equifax to run your Credit Reports and FICO Scores today.
  • Lots of items to dispute?  Use The Lexington Law Firm to legally remove Bad Credit Items for you, saving you time and hassle!
  • Need a Credit Card for less than perfect Credit?  Use the Orchard Bank Credit Card, by far the best credit card for people with lower credit scores and also reports to all three credit agencies!
  • Disputing Items Yourself or have Debt in Collections? - The Credit Secrets Bible has all the tools you need if you decide to do things yourself.