Chicago Home and Lifestyles – How to pay off debt without lowering your credit score

Have you ever made a seemingly positive financial move, like paying off or canceling a credit card, and then watched in horror as your credit score went down? Thousands of people find themselves in the same position, confused and upset by the credit system. It can be tedious, but understanding just how your FICO credit score works pays off in the long run. Here’s some basic things you should know:

You need a history of using credit wisely in order to have a good score. The FICO system goes from 350-850. Your payment history and your credit usage make up the majority of that score (65%). The length of your history (15%), the mix of your credit (10%) and new inquiries on your credit (10%). The length of time you’ve had credit and paid it off is very important. That’s why it can be good for younger people to start having credit in their name early on, as long as they use it wisely. Some people say I pay cash for everything; my credit should be great! Not so! You need a history of using credit wisely in order to have a good score.

Keep your lines of credit open but with a low balance. You would think that paying off the credit line and closing it would be the way to go, but no. Doing that will throw off your credit utilization score. That’s the percentage of credit against what you have used. If you have 2 credit cards equaling $10,000 in available credit and you have a $1,500 balance, your utilization is 15%. If you cancel 1 card it lowers your available credit to $5,000. Depending on the balance you still have it could raise your utilization score quite a bit—meaning it now looks like you are using too much of your credit at once, which looks irresponsible. Instead of canceling, best to pay off as much as you can and leave the account open with a very small balance. This also prevents the length of your credit history from being lowered. 

Have a mix of different types of credit. You know the saying: don’t put all your eggs in one basket! That applies here too. It’s always good to have another form of credit other than credit cards. A car loan and a mortgage are two good different types of credit to have. This reflects well on your FICO scoring system too.

Pay off your higher interest debt first. Of course, it is always a good thing to pay off debt, but be mindful as to how you do it. Credit cards with high interest debt should be paid off first, not double payments on your car loan where the interest is low. On your mortgage, if you pay a few hundred dollars extra to PRINCIPLE every month it will shorten your term quite a bit. 

Kathleen Weaver-Zech and Dean’s Team Chicago