Credit score – Improve by paying down debts
A credit score is a financial reflection of an individual or else you can say that a report card that displays an insight into the earning potential, financial strength, and transparency in the financial market of an individual. The higher you score, the better is your credibility in the market and you become more eligible to get easy loans and credit cards locking in an appealing interest rate.
An Interconnection between Debt and Credit Score
The linkage between the debts and the credit score has a deeply hidden secret folded in your blind desires and extravagant expenditure. When you spend blindly considering that the loan amount and the credit card is your money, you tend to land up into severe trouble with high debts and interest payments. However, this is not the only thing that influences your credit score but certainly, about 30% is on your credit utilization. This clears the picture of how much credit you have, how much you can afford to payback timely, and how much debt you have. If in case you own a credit card with a limit of $1000 you are eligible to use the amount as per your limit but later if you fail to make the payment, you are liable to pay interest, and this automatically reflects in your credit score report.
Further to this, if this keeps on going, then it becomes difficult for you to rebuild or improve your score. This indicates the issuer that you are not a candidate to trust regarding the use of borrowed finances. You lose your credibility and your chances of further getting another card or loan.
Many scoring models work to maintain and build your credit score. The most renowned is the FICO scoring model and then the VantageScore with a clear focus on what kind of account do you behold and how much debt you have.
With all the scoring models, it is evident that higher the debt lower is the credit score. However, there are yet many options and opportunities to improve your credit score even with high debt levels.
Discover the Measures to Pay Debts for Improving Credit History
Here are some of the best tips that can help you in paying down debts to improve your credit score:
- The simplest and the most convenient way of paying debts and enhancing credit score is to make timely payment. As per the scoring model of the FICO, payments made late influences more than 35% of your credit score and directly affected your credit history. If in case you tend to forget due dates, make sure to arrange your finances in a manner that all due dates fall on one single date and you can manage to pay down the debts just on time.
- The rate of delinquency is gradually increasing, so you need to keep aware of your delinquent accounts. If in case you miss any payment due to forgetfulness and any other petty reason make sure to clear off your delinquent accounts first before the short stretch of lateness is reported to all three major credit bureaus, and your credit score gets into influence.
- If you have more than one debt, then make sure to pay off the debts with higher interest first. This will help you save a lot on interest payments because high interest will keep adding to your debts if not paid timely. You can even make use of the Avalanche Method to set certain prioritize your debt payment. This will help you ease the distribution of your finances into different accounts as debt payment while ensuring to pay extra funds in priority accounts as defined by you in series.
- Always make sure to keep your credit utilization to less than 30% of your credit limit. For example, if you have a credit limit of $1000 then use 10% or a maximum of 30% of your credit limit of $1000. This means that you can use about $100 to $300 without any stress, but if this utilization goes up, you are sure to line up with debts and then you will have a tough time paying the debts. Keeping track of this will undoubtedly help you improve your credit score over a period.