3 Tricks To Pay Down Debts And Boost Your Credit Score

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Credit score rules the financial world. It shows its power when you apply for a loan or a credit card. If your credit score is good, you’ll get loans at a low-interest rate. Usually, credit score ranges between 300 and 850. Anything over 800 is considered as a stellar credit score.

Will your credit score improve after paying off debts?

A significant question. Many people ask this question in debt and credit forums. So, let me answer this question properly.

Debt has a direct connection to your credit score. If you have a credit card with credit limit of $1000 and you have $400 worth of credit card debt, then your credit-utilization ratio will be 30%. This credit-utilization ratio affects 30% of your credit score.

The credit-utilization ratio is the ratio of how much debt you have in comparison to how much credit you have exhausted. A good credit-utilization ratio is below 30%.

A high credit-utilization ratio will lower your credit score. So you should always try to maintain your credit-utilization ratio between 10% and 30%. But how will you do it?

Well, there are 2 simple ways to have a low credit-utilization ratio.

Your first option – Pay off your debts and drop your credit-utilization ratio

Your second option – Increase your credit limit

The second option is slightly difficult especially when you have a high debt-to-credit ratio. So the easier option is to pay off debt and increase your credit score gradually.

pencil writing pay off debt

3 Tricks to pay down debts and boost your credit score

Here are the few tricks to repay debt and increase your credit score.

1. Opt for the debt avalanche method: Many experts say that you can get rid of debts quickly by debt avalanche method. In this method, you list your debts from highest-interest rate to lowest-interest rate. Make minimum payments on all your debts. Contribute additional money toward the highest-interest debt till it is eradicated.

You’ll save more in the long run since the highest-interest debt will be eliminated fast. But you need to have the patience for completing this method successfully. It may take some time to get rid of the highest-interest debt.

2. Embrace the debt snowball method: You’ll come across the phrase ‘debt snowball’ a lot of times in Dave Ramsey’s talk shows and blogs, which is the exact opposite of the debt avalanche method. In the debt snowball method, you make a series of your debts from the smallest balance to the lowest one. You make minimum payments on your credit cards and other unsecured debts but pay extra on the smallest debt until is paid off.

After you have paid off the smallest debt, your goal is to pay off the next smallest debt. The total money you were spending on the smallest debt gets rolled into the payment of the second smallest debt.

For instance – You have 3 credit cards.

Credit card A – $700 (outstanding balance)

Credit card B – $800 (outstanding balance)

Credit card C – $950 (outstanding balance)

You make a minimum payment of $50 on all your debts and pay an extra $100 on the credit card A until it is paid off. So basically you’re paying $150 on credit card A every month.

Once you pay off credit card A, you apply that $150 on credit card B. So the total amount you have to pay for the credit card B is $200 ($150 + $50) till it is eliminated.

The debt snowball method gives you an emotional boost since it is easier to pay off the smallest debt quickly. It keeps you motivated and gives you the much-needed energy to pay off the next debt.

3. Go for credit counseling: Credit counselors can give you advice on how to manage debts smartly. They will calculate your income, expenses, debts, and savings. Then they will analyze your current budget plan and suggest the necessary changes. Once they get a clear idea about your debt scenario, they will tell you the ways to pay back your creditors.

Go to a certified credit counseling agency and follow the tips given by the counselors. The counselors may charge a nominal fee for the initial counseling session. If the session isn’t helpful, then you can think about enrolling in a debt relief plan.

Conclusion

There is yet another way to get out of debt. This method is not as popular as debt snowball or debt avalanche, but this is nonetheless an important one. It’s called the debt snowflake method.

In the snowflake method, all you have to do is make additional payments on your debts as soon as you get extra payments. For instance, you get a $10 rebate on something. You should immediately put the amount towards your debt. As you make extra payments on your debts throughout the month, the total amount makes a big difference on your debt balance.