More often than not, it’s your behavior as the credit holder that determines the score you get in every credit report. That being said, the way you manage your debts accrued in each of your credit cards will play a huge role in calculating your credit score.
In short, promptly paying your debts is a surefire way to boost your credit score rating. However, that’s easier said than done. The accumulated credit card debt around the world has reached the $1 trillion mark as of 2018 with a major portion of that amount coming from Europe and the US.
If you really want to pay your debts to increase your credit score, you are going to have a follow a demanding yet easy to follow strategy. But first, there are a few things that you have to know about.
Don’t get the wrong idea: debt is an inescapable factor when it comes to credit cards. As a matter of fact, that’s the whole point of having a credit card in the first place, paying for things without having to carry money on the promise that you’d eventually pay for it later on. However, there is a point when the debt you incurred becomes too big for you to handle. More often than not, your debt can increase when….
Setting a limit for what you spend is an integral tool in helping you plan and track your expenses. More often than not, a budget can help you determine if something is worth spending on to avoid getting yourself into tight financial situations.
With that in mind, having no budget at all is a recipe for disaster as you no longer prioritise where to use your credit card at. Things like dinners at an expensive restaurant, buying items online, and ordering large furniture and other pricey fixtures into your house can add thousands to your credit balance every year.
Creditors often apply interest and penalties to encourage you to pay your debts on time without actually telling you so. For instance, you may have put £1,000 of debt onto your card. Credit card standard purchase APR rates vary from around 6% to a whopping 59.9% with the average being 21.6% (according to ThisisMoney.couk March 2016). With an average (21.6%/ 12months)1.8% interest rate for every month that you fail to pay it. If you fail to pay it in a month, that amount would have increased by £1,018.
Now heres the kicker – What if you fail to pay it for another month? You get another 1.8% interest charge but not for the original debt £1,000. Instead, the credit card company will increase your payment according to its current compounded figure. So, your £1,018.00 has now increased to £1,036.32 and so on and so forth.
This one hurts severely as a loss of an income source can severely affect your ability to pay your debts. Things like losing a job or having to declare bankruptcy on a business means that the pool from where you can draw money to pay your credit card debt has been considerably reduced. The worst part? It can happen to the most diligent of credit card holders and can leave them buried in debt for years.
Supposed that you received injuries or suffer from illnesses not covered by your insurance or when you have to go through a lengthy, expensive divorce process. Or how about when your drunk neighbour crashes their car at your front garage door and it’s taking a while for the insurance company to process your claim?
In these instances, you might feel the strong urge to use your credit card to pay for these emergency expenses since they are necessary; only unplanned. The lack of an emergency fund can also push some credit card holders to use their cards for such expenses.
Now, having to use your credit card to pay for emergencies is never a bad idea. After all, you didn’t exactly ask for that problem to pop up and yet it’s your obligation to address them to the best of your abilities. This only becomes a problem when you have more unplanned expenditures than planned ones, which segues well into the next instance which is….
The temptation to spend more than what you are able to pay for is too strong for a lot of people who apply for a credit card. The prospect of having to “buy now and pay later” can lull a lot of people in a fall sense of security, causing them to make some irresponsible purchases here and there.
This can be exacerbated if you, as a buyer, are impulsive. A new flat-screen LCD TV on display at the local shop might provide you with the urge to buy it ASAP, causing you to whip out your credit card. Or how about when you’re browsing online and stumble upon a sale at an online store, with the promise of an instalment payment option to boot? Whether you think it was a good deal or not, the price for every purchase you make will be transmitted on to your card and added on to your current balance.
The problem even gets worse the more you become dependent on your credit card for almost all of your transactions. Going to the movies? You use the card. Having a coffee break at the cafe near your office? You use the card. To put it simply, using the credit card with no plan at all tends to increase your annual debt by a few thousand pounds.
Any of these instances is enough to raise your debt on their own. A combination of them, on the other hand, is a surefire way to cause your credit card to balloon to the point that it becomes difficult to remove from your credit balance.
Managing your credit card debt will require you to make a lifestyle change. Below are some of the best yet simply tips that you can use to remove entire chunks of your credit card’s debt easily.
Dealing with your credit card debt often begins with your mind. It can be daunting to look at your total debt and tackle it in its entirety so don’t. Instead, you should chop it down to chunks that are easier to manage.
The easiest way to do this is to separate each debt by the cards where they were charged to. If you have one card only, then you must separate the amount per entry. This way, you can look at your entire debt as a series of smaller yet easier obligations to meet as opposed to a massive, unmanageable one.
To quickly remove portions of your debt, you need to classify them by order of priority. The biggest, most onerous, and most pressing debts should be at the top of your list and then work your way down.
If possible, the debt with the highest interest rate should be dealt with first as this means that you will be erasing the most amount of interest relative to your current balance of the list. Also, never move on to another debt until you have paid both the principal balance and the interest.
As a rule of thumb when it comes to credit card payments, the longer you can clear off your debts, the more exhausting it will be. If possible, aim to pay more than the minimum as every amount you pay above the minimum goes to your balance. The smaller your balance gets, the interest you’ll have to pay in the next succeeding payments is reduced.
By combining several high-interest debts into a singular debt with a low-interest rate, you can gradually reduce the interest you have to pay for your debt in time. The easiest way to do this is for you to move debts from high-interest cards through a balance transfer process. The key here is (if possible) to take full advantage of the balance transfer rates, especially if they are lower than 3 to 5% as the savings you get here are quite considerable.
While you are in the process of doing any of these, it’s important that you also control your spending. Adding new debt while you’re still dealing with old ones tends to complicate matters on your part.
The key to having a good credit score, then, is to make sure that you are as debt-free as possible. But how is this possible in an environment where accruing debt is unavoidable? The truth is that being free from debt as a credit card holder does not mean that you don’t make debt because, well, that’s impossible.
The truth is that being debt-free means that you are in full control of your debts, not the other way around. Prioritising where you use your credit card at as well as quickly dealing with outstanding payments can go a long way in making sure that whatever debt you incur does not negatively affect your credit score in the next few reports.
Have you ever had problems dealing with payments in your credit card? What other methods do you know of or used yourself in dealing with balances? The comments section below is open for all sorts of discussion.