Whether you built up that pile of credit card debt due to a job loss, an illness, a family emergency, or just plain overspending, you will need to come up with a plan to deal with that debt before it becomes out of control. Credit card debt can be very expensive, but you might not realize that outstanding credit card debt could be damaging your credit scores as well. Even if you make your monthly payments on time, your balances are likely lowering your scores.
If you can afford to do so, then paying off your credit card balances in full each month is the best way to go from a credit scoring perspective. Credit scoring models give a lot of weight to your revolving utilization ratio (the relationship between your credit card balances and account limits) and will reward you whenever that ratio remains low. Even if you cannot afford to simply wipe out all of your credit card debt at once, there are still some strategies which could help you to chip away at that pile of debt, a little bit at a time.
Strategy #1: Balance Transfer
If your credit is in good standing, you may be eligible to qualify for a new credit card with an attractive interest rate and an introductory balance transfer offer. Transferring your outstanding balances onto a single credit card with a low interest rate has the potential to both save money and also to improve your credit scores. Assuming that you are able to eliminate your existing credit card debt before any teaser rate expires, a balance transfer might save a lot of money. Of course, you have to make a commitment to not continue piling up the credit card debt after your balance transfer or you could create even worse problems for yourself in the future.
Strategy #2: Consolidation Loan
Using a personal loan to consolidate your credit card debt boasts several of the same perks as with a balance transfer. A consolidation loan may also save money by eliminating balances on high interest credit card accounts and may improve your credit scores by reducing your number of accounts with balances and lowering your revolving utilization ratio.
However, while a balance transfer might reduce your revolving utilization ratio some, a consolidation loan can potentially bring it down to 0% – assuming that the new loan is large enough to pay off all of your outstanding credit card debt. Consolidation loans are considered installment accounts and because this type of debt is statistically less risky, even if you carry an outstanding balance on an installment loan it will not have the same negative impact on your scores which credit card debt might have.
Strategy #3: The Debt Snowball
If you can’t qualify for a balance transfer or a consolidation loan, the debt snowball method could also be a good choice to consider. With the debt snowball you focus on paying extra money on your credit card accounts each month, as much as possible, but you begin with the account with the lowest balance first and then move up the list.
By using the snowball method you may be able to improve your credit scores in 3 different ways. First, you will lower your overall or aggregate revolving utilization ratio on your credit card accounts. Second, you will lower your utilization ratio on each individual account as you pay them down. Third, you will reduce the number of accounts with balances which appear on your credit reports. All 3 of these moves could be viewed positively by a credit scoring model.
-By John Ulzheimer
Better Day Consultanting, The fastest growing credit repair firm in the U.S. Call now: 833-522-0200 www.betterdayconsulting.com