Debt is a double-edged sword in the world of credit repair. On one side, proper management can strengthen your score and increase your borrowing power. On the other, carelessness and excessive spending can obliterate your score result in deep financial trouble. Which side are you on? Review the warning signs below to see if they sound familiar. If so, the time to change is now. Don’t let debt take over your life. Get serious about credit repair and allow your accounts to work for you.
• Warning Sign #1
Borrowing too much. A $20,000 credit limit does not equal $20,000 in the bank. In fact, in order to optimize your credit score, you should keep your credit card debt as low as possible and this impacts what the credit companies term your “utilization ratio.” Consumer advocates often advise keeping that ratio below 25% or under $5,000 if your amount available is $20,000. This credit scoring factor accounts for 30% of your credit score. For that reason, the more money you owe on your credit cards and other revolving accounts, the less appealing you are to future borrowers. In fact, the rules of this factor alone has the power to reduce your credit score drastically. Take a lesson in discernment and spend with caution. Your credit score depends on it.
• Warning Sign #2
Cashing in on cash advances. Ballooning debt is among the top reasons for credit repair. When your spending rages out of control, a vicious cycle begins. Soon, your need to rely on credit intensifies, only plunging you further into debt and increasing your vulnerability. Consider the following example:
Megan is renovating her kitchen and her bank account is suffering. The contractor she hired has stopped working, saying he can only accept cash or check as payment for any future work. Distraught, Megan makes a hasty decision by asking her creditor for a $5,000 cash advance to finish the construction job.
Megan is already strapped for cash, and her decision to borrow $5,000 will only make things worse. Not only will she have to repay the money, but her creditor may have charged an interest rate of up to 20% or even more on the balance owed. By the time she’s finished, the remaining cost of her kitchen remodel will total at least $6,000. Why create further stress by spending money you don’t have? Protect your credit score by finding alternative solutions.
• Warning Sign #3
Operating without an end goal. Spend, spend, spend. If this sentiment is your mantra, you are probably living life without an end goal in sight. Making the minimum payments and adopting a spendthrift mindset will only hurt your credit score. In addition to increased debt, the state of your bank account is probably dismal, leaving you with no funds in case of an emergency. While living on credit may suit your immediate needs, what happens if an unforeseen expense shows its face? Will your credit limit save you in times of trouble? If you are following the utilization ratio advice, mentioned above, the answer is no. Changing your creditworthiness means changing your lifestyle. Stop avoiding the bottom line and focus on your credit score. That three-digit number is more powerful than you think.