High Credit Score, or Low Debt? |
 |
by: Janna Weiss
The world of credit cards is full of contradictory advice. “Keep one card for emergencies.” “Keep several cards for a high credit-to-debt ratio.” “Pay off big balances first.” “Pay off the small cards before you tackle the big ones.” It’s no wonder so many of us feel a little confused.
To figure out the best way to proceed, you must first figure out your credit card goals. Do you want to prune your credit score for maximum buying power? That’s a great idea if you plan to take out a loan for a major purchase, like a house or car, within a year. But maybe you’d rather stay out of debt. Those goals aren’t mutually exclusive of course, but you can take different paths to get there.
To Build Your Credit Score…
Experts advise maintaining a high debt-to-credit ratio. That is, take out several credit cards and try for larger credit limits. Keep charges to a minimum. The theory behind this technique is that lenders want to see that you have a lot of available credit and the discipline to use it responsibly. If you have a large amount of credit and a small amount of debt, you’ll look like a good candidate for a loan. This can help you out when major purchases are on the horizon.
To Stay Out of Debt…
To avoid revolving debt altogether, or to dig yourself out of a hole if you’ve already overspent your limits, you need to minimize the number of cards you carry. Making minimum monthly payments won’t get you anywhere. You’ll need to double or triple your minimum payments to make headway. Pay off your lower balances first to get them out of the way. Then your resources can go into tackling the higher balances. Once your cards are paid off, you can decide which ones you really need, and cancel the rest.
Staying out of debt in the first place is much easier than climbing your way back to a debt-free existence. Pay off your credit card balance each month to avoid interest charges, and use your card only when you really need to.
To Do Both…
Always make your payments on time and in full. Avoid carrying a balance on any of your cards. Look for low or no-interest cards, and transfer your existing balances to them. If you need to pay off your debt fast, ask your bank for a low-interest debt consolidation loan. This will keep negative marks off of your credit report, and your credit score will improve as your debt declines.
The path to good credit may twist and turn, but the rules are pretty much the same no matter your goal. Make good credit decisions and reap the benefits for years to come.
|
Did you find this article helpful? |
| 
