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Managing debt is a lot like managing a weight problem. There are no quick fixes. The only way to effectively deal with the problem is thoughtful, long-term thinking and actually following through with your debt management plan.
Managing your debt relative to your income is a critical part of maintaining a strong credit score. That said, the calculations behind your credit score involve a lot more than just comparing your current debt and income. Credit rating agencies consider a broad range of factors, including past debts, number of credit accounts, and even the kind of items you’re buying, when determining individual credit scores.
The good news is that the complexity of the credit-scoring system means there are actually a number of concrete steps you can take to manage your debt and improve your credit score.
Five Debt Management Tips to Help Boost Your Credit Score
- Only Use One or Two Credit Cards – It is generally a good idea to make all of your credit card purchases on just one or two primary cards. That’s because the number of your credit cards that have balances is a factor in the calculation of your credit score. This means that charging $60 on one credit card for dinner and $30 on another for gas, instead of using the same card, can actually hurt your credit score over the long run. The best idea is to choose just one or two cards with low interest rates to use on a regular basis, and pay off the balances on the rest of your cards before storing them in a safe place.
- Keep Your Credit Card Balances Low – This tip is pretty obvious, but it bears repeating. Remember that the amount of revolving credit you have versus how much you’re actually using is a key factor in your credit score. The smaller that percentage as small as possible to improve your credit score. A credit utilization rate of 25% or less is ideal.
Also keep in mind that even if you pay your balances off every month, you may actually have a relatively high utilization ratio due to the fact many issuers use the balance on your statement to report to the credit bureau. This means despite paying your balances off every month, your credit score still reflects your monthly credit balances. One way to deal with this is to make two or three payments to your card issuer to always keep your credit balances as low as possible.
- Leave “Old Good Debt” On Your Credit Report as Long as Possible – Many people incorrectly believe that old debt on their credit report is a negative factor, but that’s not true. Negative reports do hurt your credit score, but positive reports about how you’ve paid off debts help your score. This means that “old good debt” (debt you’ve paid off as agreed) is good for your credit. In fact, the longer your history of good debt is, the better it is for your credit score.
Make a point to leave old debt and all active accounts on your report as long as possible. One actionable tip to boost your credit score is to not close old loan or credit accounts that you paid on time and in full.
- Make Your Credit/Loan Applications within a Two-week Period – When you’re looking around for the best deal on a loan, make sure to do all your comparison shopping within a couple of weeks. This is because every actual credit application you submit causes a small decrease in your credit score for around a year.
That said, for mortgage, auto and student loans scoring formulas are designed to reflect the fact that consumers today often make multiple credit applications but just take out one loan. A FICO score ignores all loan-related credit inquiries made in the previous 30 days. When it comes across credit inquiries that are over 30 days old, the system counts all inquiries made within a typical shopping period (ranging from 14 to 45 days) as just one inquiry. Also remember that any inquiries you personally make regarding your credit report do not have an impact on your score, so it’s a good idea to order a report at least two or three times a year.
Avoid Charging Items that Might Hint at Risk – According to Dave Jones, a retired president of the Association of Independent Consumer Credit Counseling Agencies, you definitely want to avoid missing a payment or start to pay less (or charge notably more) than you have in the past.
Other actions to avoid as they might suggest risk to your card issuer (but may or may not actually damage your credit score) include cash advances or using credit cards at locations that might suggest financial stress, such as a pawnshop, casino or a divorce attorney.
You don’t have to be rich or a financial genius to have and keep a good credit score. If you carefully manage your debts using these tips and keep expenses within your budget, it’s actually easy to maintain a high credit score.