Credit scores are one of the key components in applying for loans or new lines of credit, as they show lenders you’re an accountable borrower and could lead to lower interest rates.
There are various steps you can take to reduce debt and build credit, some of them quick and straightforward – for instance setting due-date reminders can make an immediate difference.
Pay Your Bills on Time
Paying bills on time is key to improving your credit score, though this may seem obvious. Without an efficient tracking system in place – whether that means setting reminders in your calendar or using dedicated money management apps – payments could easily slip through the cracks and impact negatively upon your score.
Keep your credit utilization low by maintaining balances below your credit limit. Your debt ratio has an impactful effect on your score; to manage it successfully, prioritize debts according to your budget and use a snowball approach when paying them off. Alternatively, consider consolidating them through personal loans or balance transfers that offer lower interest rates.
Keep Your Credit Utilization Low
Credit utilization–or the percentage of available credit that is utilized–comprises 30% of your score. If you consistently use more than 10% of your available limit, this indicates overextension and could potentially lower your score.
Credit mix factors into your score through age of accounts, so incorporating different kinds of debt into your profile may help increase it. Be wary when opening new accounts or applying for too many loans as this could decrease it further.
Instead, to improve your credit utilization you should apply for a debt consolidation loan and clear all outstanding credit card balances. On-time rent and utility payments will also add positively to your score.
Avoid Closing Old Accounts
Your oldest accounts make up 15% of your credit score. Closing one that has been open for an extended period could diminish this percentage and have detrimental repercussions for your score.
Closening a card with a high credit limit would significantly increase your credit utilization rate and harm your score, so pay down balances to reduce credit utilization rate while considering getting an increase on one or more existing cards.
Over time, taking just a few simple steps can significantly boost your credit scores. Prioritizing payments, keeping utilization low, and verifying accurate credit reports will help you reach your financial goals faster. If additional support is required, credit counselors can create an action plan tailored specifically for your situation.
Make a Budget
Create a budget is key to managing and eliminating debt. Add up all expenses such as rent/mortgage payments, utilities and food expenses as well as entertainment and retail purchases and compare this total with your net income to make any necessary adjustments.
An effective strategy for debt repayment is the snowball method, in which you make minimum payments on all debts while applying any extra money toward paying off the smallest balance first. Once this debt has been eliminated, its payment amount is redistributed towards repaying its successor, continuing this pattern until all your debts have been cleared away.
Debt consolidation loans may also help. By consolidating all of your unsecured and secured debts into one payment with the lowest possible interest rate, this strategy could save you considerable interest payments over time.
Avoid High Interest Rates
Financially managing and debt reduction are effective ways of lowering interest rates, which you can do by paying down what you owe and creating a budget to track income and expenses.
Reducing debt and credit utilization is the cornerstone of building your credit score, so reducing them as effectively as possible is vitally important. One effective strategy to help maintain low balances on your credit card would be paying it off right after making purchases with it. You should also avoid applying for loans too frequently since multiple hard inquiries could reduce your score further.
Consider debt consolidation as another solution, which involves taking out a new loan that pays off your existing balances. This can be accomplished either yourself or with professional help.