RECLAIM

PAY DOWN, SCORE UP

WRITERS:

High credit balances and hefty finance charges can be a real drain on your finances and limit your ability to achieve important goals like taking a vacation or buying a house. Improving your credit is a lot like getting healthy: it’s a process that takes time and consistency and there are no shortcuts. There are many so-called quick fixes that can actually damage your credit score, and we recommend avoiding any advice that claims to be able to improve your credit quickly.

Don’t be disheartened if you have bad credit because it doesn’t mean that you’re out of options. While the best way to improve your credit is to pay bills on time and keep your credit balances low for years, paying off high-interest credit debt can be the first step toward financial health and prosperity.

In order to know how to improve your credit, it’s important to understand how your credit score is calculated. Credit agencies calculate your credit score by taking into account a number of positive and negative factors in your credit history.

The amount you owe on credit cards and other types of debt, known as your credit utilization, contributes 30 percent to your credit score calculation. High balances can damage your score, which means that paying off debt and staying below 25 percent of your total available credit can significantly improve your credit score.

Getting organized is the first step to paying down your debt and boosting your credit score. Check your credit report for free at annualcreditreport. com and report any errors to each credit bureau. Since an estimated 79 percent of credit reports contain a mistake, getting any errors cleaned up could quickly make a difference in your score. Check your most recent credit card statements to determine how much you owe, the interest rate on each card, and how close you are to the limit on each. Calculate a total amount that you can afford to put toward paying off your debt each month.

Getting a handle on your credit card debt can be challenging, and we strongly recommend consulting a qualified financial professional who can help you understand your current financial circumstances and develop a plan to stay financially healthy in the future.

Here are three different strategies that can help you systematically reduce your debt and start improving your credit score:

Pay off the card that’s closest to its limit first.

Your credit score is also affected by how close you are to the credit limit of each card. If you have cards that are nearly maxed out, paying them off first can boost your score. Using this strategy, increase your payment to the card that’s closest to its limit first while making minimum payments on the other cards. Once you have paid off one card, move on to the card that’s next closest to its limit.

Pay off the card with the highest interest rate first.

This strategy will help you reduce your monthly finance charges by paying down your most expensive debt first. Increase your monthly payment to the card with the highest interest rate first while making the minimum payment on your other cards. Once you have paid off the first card, move on to the next.

Pay off the card with the lowest balance first.

This strategy can help you build momentum by accomplishing a goal quickly. It’s easier to pay off a small debt, and successfully paying a credit card off will give you a psychological boost. Increase your payments to the card with the lowest balance while continuing to make minimum payments on the other cards. Once you have reached a zero balance, move on to the next card.

Whatever debt reduction

SOURCES: “Tips for a Better FICO Score”; Fair Isaac Corporation. www.scoreinfo.org/FICO-Scores/Pages/Tips-for-a-Better-FICOScore.aspx (Accessed September 2, 2013); “Mistakes Do Happen: A Look at Errors in Consumer Credit Reports”; National Associatio n of State PIRGs. georgiapirg.org/sites/pirg/fi les/reports/MistakesDoHappen2004-1.pdf (Accessed August 31, 2013) strategy you choose, it’s critical that you stick with it.

Maintaining consistency in your credit payments is key to successfully reducing your debt. Once you’ve calculated how much you can afford to pay off each month, keep the momentum going until your balances are paid off. It can be tempting to ease back on your payments once your balances get low, but it’s important to remember that your goal is to lower your debt and boost your credit score.

When working on a debt reduction plan, it’s vital that you curb your spending and not add to your balance each month. Pay with cash, check, or a debit card to avoid accumulating more debt. Manage your credit responsibly in the future by only charging what you can pay off in a month or two.

ROBERT AND THOMAS

FROSS founded Fross & Fross

Wealth Management with the shared vision of creating a truly world-class experience for their clients. Specializing in offering comprehensive financial planning to high net-worth retirees, Fross & Fross manages over $300 million in assets and maintains a stellar reputation of professionalism and experience throughout The Villages.