The Power of Debt Reduction
Did you know that the amount that you owe on revolving accounts determines 30 percent of your credit score? It’s true. FICO, the most widely used credit scoring system, uses the amount owed as a key variable in determining your score. While this is just one of the credit scoring models, FICO’s data is widely used by the major credit bureaus. When you have multiple credit cards and each is nearly maxed out, your credit score can drop significantly.
Managing how much debt you have is important to maintain a healthy credit score, not to mention a healthy mind because you’ll also be reducing your stress levels! Take a long, hard look at your monthly spending on credit cards to see if you’re doing everything that you can to reduce your overall debt. Make a note of how much you’re paying off each month and the interest rate. If you’re paying 20 percent interest on a $2,000 balance, this could cost you $400 a year in interest alone. By making a payment above and beyond the minimum payment, you’re reducing the amount that you owe, called the principal.
If you are looking for a tool to help you rebuild or strengthen your credit, the UNITY Visa Secured Card is a great place to start. In addition to reporting to the 3 major credit bureaus, we also offer our How to Rebuild Credit Program. The program has a number of tips on reducing debt and improving your overall credit health. One of these tips involves paying down debt:
Start by paying off low-balance loans and then move to reduce the balances of larger loans. Do not overextend yourself to pay down debt. Remember that making regular payments can improve your credit score…and making late payments can decrease your score. If you have additional funds after making your monthly payments, then pay down debt.
Take a look at your last several credit card statements while you’re in debt-reduction mode. See if there are any recurring charges you can eliminate that may help reduce the amount that you’re spending on your card. If you are regularly charging unnecessary purchases like unused video streaming services or music accounts, these can add up over time. You may also want to look at your cable and landline phone bills to make sure that you’re not paying for channels or services that you don’t use. That unwatched $20 a month premium cable channel is costing you almost $1,000 over five years! Are you still paying $50 a month for a landline that never rings? That’s $600 per year, money that can be used to pay down your debt and improve your credit score.
One way to look at your bills is that every dollar you pay to someone else for a service is profiting them and may be harming your budget. So look at all of your expenses to only pay for things you absolutely need or want and use the money saved to pay down your debt.
Debt reduction improves your credit score, which allows you to qualify for lower rates on home loans, credit cards, auto loans and other services, which in turn saves you money!