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Building Credit While Paying Down Debt

Build credit

If you’re deeply in debt, you might think that your chances of improving your credit are nil, at least for the moment. But, being in debt and building credit don’t have to be mutually exclusive. Your focus at the moment might be on reducing your debt. While doing so, you can also build your credit, paving a solid path for your future.

Focus on Missed Payments First

When it comes to your Fair Isaac Corporation (FICO) credit score, your payment history matters a lot. It accounts for 35 percent of your total score. That means that if you have a history of missing payments or paying late, your FICO score will drop. The best way to build credit is to focus on paying off debts for which you have missed payments in the past. Pay any amounts that are past due, then continue to make on-time payments on those debts.

If you need help to remember to pay your bills, try using a calendar that sends you automatic reminders a day or two before the payment is due. You can also set up automatic payments, so that you don’t even have to think about the bills. It will take some time for your credit to jump back up if you have a history of late or missed payments. Commit to paying regularly and on time, and you’ll see your credit score increase.

Keep an Eye on Your Debt-to-Credit Ratio

How much debt you have compared to how much debt you could have is another thing that plays a part in determining your credit. When working on building credit, you want to have some debt, but not too much. Your debt-to-credit ratio, sometimes called the credit utilization ratio, should be less than 30 percent. The lower the ratio, the better.

Keep in mind that your debt-to-credit ratio is across all accounts and on individual accounts. That means if you have a balance of $2,500 on a card with a $5,000 limit, your ratio on that card is 50 percent. But, if you also have a card with a limit of $10,000 and no balance, your total debt-to-credit ratio falls to just over 16 percent.

Focus on paying off your debts, starting with the card with the highest balance or highest interest rate. Once you’ve paid off a card, don’t celebrate by closing it, however. Leaving the card account open and unused will help boost your credit utilization ratio and your credit score.

Work With a Credit Counselor

Making timely payments and reducing your debt-to-credit ratio may be easier said than done; you may be struggling to come up with a way to make those payments. If that’s the case, working with a nonprofit credit counselor might be the most helpful step. A credit counselor will offer advice to help you establish a budget, pay down your debt, and work toward improving your credit.

Building your credit is just one step on the path to financial security and independence. CESI can help you achieve that independence by getting on top of your debt and other financial obligations.

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