Millions of Americans have large amounts of credit card debt and other obligations that they're dealing with in their everyday lives which may be a hindrance to their abilities to get a good credit score. However, many may not know that the ways in which they repay these balances can actually have a large impact on their ratings overall.
When it comes to paying back credit card balances and other debts, something borrowers may not keep in mind is that tackling some debts before others can not only help them reduce their overall obligations more quickly, but also improve their credit scores. It is for this reason that consumers with a large number of accounts in their names should carefully consider which ones they decide to pay off first, and why.
High interest accounts should be paid down first
One thing that can significantly add to consumers' debt loads and consequently lower their credit ratings is having credit card accounts that charge high interest rates. This factor, coupled with the potential for higher balances on them, can quickly lead people to carry sizable debts that can impair both their finances and their credit. And it is for this reason that borrowers will have to take special care to cut into these debts first when they want to repair credit.
The simple truth is that when consumers have many accounts that need to be paid off every month, the amount they can contribute to each may not be as high as they would like it to be, or potentially even need to get a better handle on their finances. For instance, borrowers paying only the minimum every month can take years or even decades to pay off their balances in full, and that in turn can lead to appreciably lowered credit ratings as balances continue to grow.
In fact, the amount of money consumers owe versus their total credit limits — when viewed as a percentage — makes up a full 30 percent of their credit score, and as such it is imperative for these borrowers to keep balances on their accounts as low as possible; the best way to maximize this aspect of one's rating is to keep debts to about 30 percent of limits or less. And to do this, it's often wise to put the largest monthly payments toward the accounts that carry the highest interest rates. New federal laws mandate that any amount paid into credit card balances above the minimum listed on the bill must go toward reducing the principal rather than the interest charges accrued. That, in turn, allows borrowers to reduce their debts far more quickly.
Doing this for accounts with the highest rates will obviously be the most beneficial move for consumers because it will reduce the balances that rack up debt the most quickly, and that in turn allows them to not only enjoy lower debts, but keep them from increasing more appreciably even as they concentrate more of their efforts on getting their balances under control.
Once the account with the highest rate is paid off, or at least down to a more manageable level, people can then move onto cutting into the account with the next-highest rate, and continue down the list until they've dealt with each in turn. That, then, will likely allow them to have gained a far better handle on their balances than they might have had before. Moreover, with high-interest accounts seeing far lower or even non-existent monthly bills, borrowers can also avoid the likelihood that they might fall behind on payments simply because they can't afford to reach the minimum required of them. That, in turn, will lead to late payments, which themselves make up another 35 percent of a person's scores. Once such an incident occurs, it is often far more difficult for consumers to get their credit back in order in a short period of time, as it can take months or more of steady, on-time payments to prove to lenders that the previous misstep was a one-time mistake that will not be repeated.
The other key to maintaining healthy credit
Of course, when it comes to making sure credit ratings are as healthy as possible, it's also vital that consumers make sure they're checking their credit reports with regularity. These documents contain all the data used to compile credit scores, and therefore keeping an eye on them and checking for any unfair markings which might be lowering their ratings without cause. If any such entries are discovered, it might be helpful for consumers to contact a credit repair law firm, which may in turn be able to help correct these issues and return borrowers' ratings to where they should be.