WEEK 2: CREDIT IMPROVEMENT
New to the Live Richer Challenge: Credit Edition? Learn more about it HERE.
Need to catch up? Click on yesterday's task and then come back.
Day 10: Amounts Owed
Today’s Easy Financial Task: Learn how to reduce the amount of debt you owe to improve your credit score.
How to rock this task:
- Review the amount of debt you owe in total (credit cards, auto loans, personal loans, mortgages, etc.)
- Use the debt snowball to reduce your debt
- Request a credit limit increase on your credit cards to reduce your credit utilization
- Apply for an installment loan to reduce your credit utilization
Welcome to Day 10 Dream Catcher! We’re just about halfway through this Challenge. Woot, woot!
Yesterday, I gave you the method that I use to make sure my bills are always paid on time. Remember, paying your bills on time is the biggest part of your credit score, so it’s something you want to be super vigilant about.
The amount of debt you owe is the next component that has the most weight on your credit score. For a quick recap:
- Payment history: 35% of your score
- Amounts owed: 30% of your score
- Length of credit history: 15% of your score
- Type of debt: 10% of your score
- Inquiries: 10% of your score
There are three factors that make up the amounts owed component of your score including your credit utilization, amount owed on installment loans, and your balances overall.
To improve the amounts owed portion of your score you can do these three things:
1.) Pay off some of your debt (a.k.a. reduce the amount you owe)
2.) Request a higher credit limit on your revolving accounts (i.e. credit cards) to reduce your credit utilization
3.) Use an installment loan to pay off your revolving accounts
Let’s cover them in detail.
Reduce the Amount You Owe
Lowering the amount of debt you owe may sound easier said than done, but I have a tactic you can use to get the ball rolling (pun intended) on your debt repayment plan.
It’s called the debt snowball method!
The debt snowball is when you pay off debt from the smallest to largest balance. By default, your mortgage will likely be the debt you tackle last.
If you have credit card debt with high interest, you don’t want to ignore it entirely while you repay other debt. So, next week, I’ll teach you a few ways you can reduce interest rates on your revolving debt.
For now, let’s focus in on setting up your debt repayment plan.
Here’s what to do:
1) List out all of your debt from lowest to highest balance.
2) Figure out how much money you can squeeze from your budget to put towards debt. Think about savings you can find from cutting excess. (If you need help coming up with a budget that will allow you to devote more money to debt, check out my bestselling book, The One Week Budget, available on Amazon)
3) Pay the minimum on all of your debt. Set up automatic payments to make the minimum payment on each debt.
4) Pay the minimum and a little more on the smallest debt. The debt that’s at the top of your list should get more attention. Put any excess cash you can find in your budget towards this debt.
5) Move on to the next debt on your list. After you pay off the first debt, apply all the money you used each month to pay off the first debt towards the second debt on your list. This means the automated payment for your second debt should now include the minimum payment from your first. Put all excess money you can find from day-to-day towards the second debt as well.
6) Keep the snowball rolling. Once the second debt is paid off, follow the same cycle for the third. Automate the money that was going to the first and second debt to the third debt.
You should keep going with the debt snowball until it pays off all of your debt. You’ll begin to see positive results in your credit score as your debt decreases.
Need more help? I’ve created a My Debt List spreadsheet that you can access for free HERE!
Request a Higher Credit Limit
To calculate your revolving credit utilization, you need to:
- Add up the credit limits on your revolving accounts
- Add up the balances on your revolving accounts
- Divide your balance by your credit limit
- Multiply by 100
You want your revolving credit utilization to stay below 30%. If your revolving credit utilization is above 30%, there are two variables you can change to lower it.
You can pay off some debt, which we discussed above, or you can ask your credit card company for a higher credit line.
To do this, pick your oldest card with the best payment history and call the customer service number on the back. Ask the customer service representative for a credit line increase.
You’ll have the best bet at getting a credit limit increase approved on an account with good standing, but it doesn’t hurt to ask. One thing to keep in mind is that a credit line increase may trigger a hard inquiry on your credit report which can impact you a few points.
Be sure to ask the customer service representative whether or not the increase will require a hard pull.
Pay Off Credit Card Debt With an Installment Loan
If you qualify for an installment or personal loan that has lower interest than your credit cards, using one can alleviate the debt that’s calculated in your credit utilization to improve your score.
Remember, there’s a difference between revolving debt (credit cards) and installment loans (i.e. personal loans, auto loans, and mortgages.)
Credit card debt is used to calculate your credit utilization which has the most impact on the Amounts Owed part of your score. If you transfer your credit card debt over to an installment loan, your scores will increase because your credit utilization will decrease.
The benefit of a personal loan is also twofold. Your credit utilization will decrease and you can get a lower interest rate with a personal loan saving you money.
Here’s how to find an installment loan:
1) Go to Google to search for a personal loan that has low fees and a lower interest rate than your credit cards.
2) When you find a personal loan that has favorable terms, make sure you read the details and confirm:
A. The loan interest rate
B. How long the loan term is
C. Whether applying for the loan will trigger a hard inquiry on your report (don't worry - none of the providers used in the tool with NerdWallet use a hard pull)
D. If there are any fine print fees you should be aware of
Important Tip: Factors that determine the full cost of an installment loan include the interest rate, your monthly payment, and how long the loan term is.
Make sure to ask how much you’ll pay in interest for the entire loan term to find an installment loan that will save you the most money.
Now, it’s time to get to it.
First, follow the steps above to set up your debt repayment plan.
Next, automate your minimum payments and focus in on repaying your smallest debt first.
Lastly, reach out to your credit card company to request a credit line increase or shop around for a personal loan to reduce your credit utilization.
That’s it for Day 10 Dream Catcher!
Remember, if you need help during today’s task reach out to your accountability partner(s).
Share what you’ve learned today with your social media friends and tag me @thebudgetnista
Today I learned how to reduce the amounts owed on my credit report. Day 10: #Liverichercredit
P.S. Don’t forget to get your free Live Richer Challenge: Credit Edition Starter Kit. Get it here.P.P.S. Here’s a copy of the Challenge Calendar. It’s a fun way to keep track of your progress.
You can also reach out to me here:
My Lisa Rule: I have 4 sisters and Lisa is the baby (well she’s not a baby anymore). Of all of my sisters, I’m the most protective over her. Before I share any product or service with you, it must pass my Lisa Rule.
What’s the Lisa Rule? If I would not advise Lisa to use a product or service, I won’t advise you to either. YOU are my Lisa's. I feel protective over you and your financial journey.
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