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Don't Throw Money Away Paying Down Your Debt

July 29, 2016

There's no doubt that your credit score plays a very important role in your life. The amount of interest that you pay on your mortgage, car loan or credit card balances depends on your credit score. But what do you do if you're in urgent need of a loan and your score isn't high enough to help you qualify for the best rates?

Many people would try to tackle their debts head on in an effort to try and improve their score. However, what most individuals don't understand is that not all debt pay-offs are likely to have a significant impact on their credit report. Imagine paying off hundreds of dollars worth of debt, only to realize that your score has improved by just a few points! We're sharing a priority list of payoffs in order to help you increase your score in a relatively short period of time.

  1. Overdue Bills: Clear all overdue debts by paying back the most recent past-due bills first. This won't improve your credit score right away, but may help you get a new loan, as new lenders feel reassured when they see that a consumer was able to repay what was owed. If you’re not able to pay off the entire balance, many lenders will work with you to create a repayment plan that fits your budget.
  2. High Interest Rate Debts: Credit cards with the highest interest rates are likely to get you into even more debt, thereby hurting your credit score. Pay off these balances first and you'll see a marked improvement in your score.
  3. Small Balances on Multiple Cards: You may think that your credit score won't suffer if you have small debts. However, if these small debts are spread over multiple credit cards, credit scoring models will view them in an unfavorable manner. Hence, if you have debt on more than one card, it may be a good idea to bring them down to zero.
  4. Credit Cards with Low Credit Limits: Along with your total debt, credit bureaus also evaluate your debt-to-limit ratio. It is always advisable to keep your debt low compared to what you are allowed to borrow. Thus, if you are close to maxing out a card with a low limit, you should pay that one off first or transfer the balance to an account with a higher limit. For example, if you have a $900 balance on a card with a $1,500 limit, you can pay it off or transfer the balance to an account with a $10,000 limit.
  5. Any Debt that Brings Your Credit Utilization Ratio below 30%: High revolving balances – basically any balance higher than 35% of the account limit – have a detrimental impact on your credit score, even if you pay your credit cards regularly and on time. If you're using more than 30% of your available credit, it's time to pay those balances down. Your credit score is likely to show significant improvement when you hit a credit utilization ratio of 10% or less.
  6. Student Loans: You don't have to pay off your entire loan, though we do recommend making larger than the minimum required payment. Paying your student loans on time will not only reduce your debt-to-income ratio, but will also help you establish good credit history. It will continue to help your score, even after the debt has been repaid. Moreover, student loans cannot be discharged by declaring bankruptcy; hence the amount owed may cause your wages to be garnished if you don't repay it. At the same time, you should be aware that paying off student loans may bring about a change in your debt mix. Student loans fall into the category of installment loans, while credit cards are a type of revolving debt. Credit bureaus would like consumers to have both kinds of debt in their file. Thus, eliminating student debt may, in some cases bring down the credit score.

Get Larger Business Loans Proactively
If you have a business, perhaps the best strategy is to acquire large amounts of revolving credit before you get yourself in a situation where you have delinquent debts or a lopsided debt-to-limit ratio. One way to do this is with Fund&Grow, where companies can get $50,000 – $250,000 at 0% at little or no interest. For more information, contact Fund&Grow.

I take tremendous pride in building positive and lasting relationships in my businesses and personal life. Every member of my team is committed to helping our clients get the maximum amount of funding possible and achieve their highest growth potential.

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