Pandemic Opportunities for Boosting Credit/Paying Off Debt
You’re holed up in your home these days (maybe venturing out, but probably not as much as pre-COVID-19). As long as online shopping hasn’t made you victim No. 1, your spendy-spend habit might be all but gone. You aren’t planning month-long trips to the Seychelles and racking up mounds of credit card debt at the tiki bar, anyway.
This is your chance.
It’s the absolute, most pure moment in time to boost your credit and pay off debt.
Why This is the Perfect Time to Attack Debt
Besides spending less (hopefully), maybe you:
- Experienced a change in your income.
- Lost your job.
- Realize your expenses are quickly outpacing your income.
Regardless of your situation, when life changes, it’s a good idea to change with it. (Especially when you’re making moves for the better.)
Attacking debt puts you in control of your own money. You get to make your own decisions about your money, not your lenders. Why would you want to let a lender decide where your money goes for the rest of your life?
Why This is a Great Time to Boost Your Credit
Time to talk about credit scores. Your credit score, a three-digit number that lenders use to determine how well you pay off debt, is a number you should guard with every atom of your body.
And guess what? You can pay off debt and boost your credit at the same time because paying off debt and boosting your credit go hand-in-hand.
Anything you do to pummel your debt will benefit your credit score. Here’s a two-second snapshot of how it works: Your credit utilization — or the ratio of your credit balance to your credit limit — gets a positive bump as you pay off debts. It’s a good idea to keep your credit utilization ratio below 30%. Paying off a credit card (or any line of credit, for that matter) can significantly improve your credit utilization and raise your credit score.
How to Boost Your Credit
Did you know you can intentionally boost your credit score? You can! Here’s how to do it.
Step 1: Pay your bills on time.
Any lender wants to make sure you’re going to pay your bills on time every month. Late bill pay can negatively affect your credit scores. This means paying rent, utilities, phone bill, car payments and more.
Late or missed payments appear as negative information on your credit report for seven years, according to Experian. Older late payments have less effect than more recent late payments.
The bottom line: Pay everything on time.
Step 2: Make it automatic.
Use automatic payments or calendar reminders to help ensure you pay on time every month. Automatic payments fix everything if you find that you have a hard time remembering to pay on time.
Step 3: Keep balances low.
When you have a credit card, keep balances low and try to pay off the credit card every month. Try to stay way, way below your credit limit and make a conscious effort to do that every time you spend money.
Step 4: Don’t apply for new credit.
Any new credit you apply for can affect your credit scores. Every credit card application you make appears as a hard inquiry on your credit report. Too many hard inquiries during a short amount of time can do even more damage if you’re trying to improve your score.
Step 5: Check for inaccuracies.
Have you ever done a credit check? You’re entitled to one free copy of your credit report every 12 months from each of the three nationwide credit bureaus — Experian, TransUnion and Equifax. Order online from annualcreditreport.com, the only authorized website for free credit reports. You can also call 1-877-322-8228.
Why do you want to do this?
Easy: To make sure you’re not harboring someone else’s credit woes. (In other words, you want to be sure someone else’s name and debt aren’t mixed up with your own.) You also want to make sure debt you have indeed paid off isn’t still listed as “open.” Many Americans find these and other mistakes on their credit reports, so take advantage of your free credit report every year.
How to Pay Off Debt
Now, what’s the best way to pay off debt during a pandemic? You might have fewer dollars coming in, so what can you do to pay off debt, potentially with fewer dollars at your disposal?
Step 1: Figure out which type of debt you’d like to pay off first.
It’s a really good idea to start with your credit card accounts when you’re ready to begin paying down your debt. This debt is likely the most expensive due to stratospheric interest rates. In addition, carrying large balances on your cards also wreaks devastation on your credit scores.
Step 2: Pay off the most expensive debt first.
Or maybe you don’t have credit card debt. What debt has the highest interest rate? A lagging personal loan? A HELOC? Whatever that debt is, tackle it first, because you’ll pay more in interest over the long run if you have a higher interest rate on a particular debt. For example, let’s say you have a 15% interest rate on a credit card. However, your student loan interest rate is only 4%. You’ll naturally want to pay off the 15% interest rate debt first.
Step 3: Pay more than the minimum balance.
If you want to get out of debt, you need to pay more than the minimum amount. Paying only the minimum amount will keep you in debt. You’ll also save money over the long run if you pay more than the minimum balance. Any balance at the end of every month accrues interest, making it even more difficult to pay off your balance.
Also, when you only make the minimum payment, it can take a long time to pay off your balance completely.
Here’s an example from Experian: Let’s say you have a $5,000 credit card balance with an 18.9% interest rate. Your minimum monthly payment is $200.
If you only made the regular $200 monthly minimum payment, it would take you almost three years to pay off completely. You’d also pay an additional $1,410.23 in interest on that $5,000 balance.
Let’s say you pay $460.54 each month toward that same card. You’d pay off the entire balance in a year and pay only $529.69 in interest. You’d save yourself $880.54.
Do as much as you can, even if you only have a few dollars extra at the end of each month.
Finally, you’ll improve your credit utilization ratio if you pay more than the minimum balance. It isn’t the total amount of debt that matters, it’s the percentage of available credit that you’re currently using that counts.
Step 4: Get debt counseling if you can’t go it alone.
No matter what, remember you don’t have to do it alone. Credit counseling organizations can help you manage your debts, encourage you to develop a budget and provide educational workshops. Certified counselors trained in consumer credit can discuss your entire financial situation with you. An initial counseling session typically lasts an hour and you’ll also be able to schedule follow-up sessions.
It’s important that you verify that you’re working with a reputable credit counseling agency. If a firm doesn’t send you free information and wants you to pay up front for services, it’s a red flag.
Check out the credit counseling organization you’re considering with the state Attorney General and local consumer protection agency. The United States Trustee Program also handles a list of credit counseling agencies approved to provide pre-bankruptcy counseling. Next, ask some questions:
- What services does the firm offer? Avoid organizations that push a debt management plan (DMP) as your only option.
- Are educational materials available for free? (They should be.)
- What are its fees? If an organization won’t help you because you can’t afford to pay, look elsewhere for help.
- Is the firm licensed to offer your services in your state? Ask for specific proof.
- Are the counselors certified? Ask detailed questions about certifications and verify them online.
- How does the firm pay employees? Do employees get paid more if you sign up for certain services, pay a fee or make a contribution to the organization? (Is the answer yes? It’s a red flag — go elsewhere for help.)
See the Federal Trade Commission website for a longer list of questions you can ask.
Get Your Financial House in Order During the Pandemic
Can you improve credit and pay off debt at the same time?
Yes! Yes, you can do both at the same time. Remember, paying off debt can also boost your credit. So really, when you do one, you do the other.
Benzinga can help you get your finances aligned during the pandemic. Check out Benzinga’s debt management courses, and once you’re ready to invest, you can learn more about the best S&P ETFs and more.