4 Simple Rules for Managing Debt

Too much and/or poorly managed debt can lower your credit score, which can negatively impact your ability to get a job, buy affordable insurance, or qualify for low mortgage or car loan rates. In most situations, fortunately, managing your debt and building a good credit score is achievable with discipline and adherence to best practices, such as these four simple rules.

• Pay off credit card balances strategically
  
  Consider making larger payments on the card with the biggest balance or paying off the card with the highest interest rate first, further reducing the amount of interest accumulating each month. As soon as you’ve paid off the balance on one card, consider closing it; then pay off the card with next highest balance and so on. Using this strategy, you might even have extra cash on hand to put toward other accounts.
  
  
• Pay more than the minimum
  
  Making minimum payments may put money more in your pocket, short-term, but it is a damaging financial habit in the long run. Ultimately, you will pay much more in interest, and it will take longer to settle the debt, whereas when you pay more than the minimum amount required, the extra money goes directly toward the principal balance. Additionally, limiting yourself to minimum payments carries the potential to negatively impact your credit score if your credit utilization ratio is high.
  
  
• Pay your bills on time
  
  Most credit accounts include penalties for late payments, which can be significant on higher balances or depending on how late the payment is. Some credit card accounts, in fact, may increase the account’s annual percentage rate (APR) — a figure that represents an account’s total cost of borrowing — resulting in substantially more interest accumulating on the balance. On top of all that, payments that are more than 30 days late are reported to crediting agencies and damage your credit standing. A history of on-time payments, meanwhile, will improve your credit score.
  
  
• Pay as you go
  
  Credit is a useful tool, but if you’re struggling with debt, it can add to an existing problem. Certainly, credit utilization is a piece of your credit score, but it’s more about keeping your utilization ratio low.
  
  So, ask yourself questions about what led you into the credit quagmire: Are there certain items you pay for with credit that you don’t need? Do you have any cards or accounts with overly high interest rates?
  
  Depending on the answers, it may be time to rethink your spending habits and rely less on credit – at least until your debt troubles are resolved. As much as you can, pay as you go. You may not be able to use cash for everything, but if you can develop a budget that successfully pays down your credit accounts – and uses them less frequently – you should begin to see a positive impact on your overall finances.
  
  When your debt returns to a more manageable level, you may want to consider a new credit account, such as a secured credit card designed for helping individuals with a shaky credit history to rebuild their credit score. And once again, credit can be a tool, rather than a burden.