Why Did My Credit Score Go Down When I Paid Off My Credit Card
In general, the only time you should see a decrease in your credit score when you pay off credit card debt is if you also close your account. Why? Once again, it mostly comes down to utilization.
As we saw, your credit utilization decreases when you pay off credit card balances. But this only works if your total available credit stays the same.
When you close a credit card, you lose access to that credit line. This means your total available credit decreases. If you have balances on your remaining credit cards, a decrease in your total available credit can cause your utilization rate to rise.
To avoid this, you may want to pay off credit card balances without closing your accounts. Of course, if you have problems using your card responsibly or the card has an annual fee, it may be worthwhile to close the account despite the potential impact to your utilization. In this case, try to pay off all of your credit card balances to keep your overall utilization low.
Commit To Low Cost Of Living Choices
This is the thing no one likes to talk about when it comes to debt payoff. Most people don’t want to accept the reality that debt means you’re living a lifestyle you simply cannot afford.
For instance, when this article first went viral in 2015, the trolls came out. They complained it wasnt a realistic story for people who had kids, who didnt have jobs with a $60k salary , those who didnt have time and energy to hustle the way a single, childless woman can.
But I also feel people tend to forget that they dictate the set of circumstances in their own lives.
- I had to PRIORITIZE my debt repayment.
- I knew that by making it THE PRIORITY in my life I had to make big sacrifices.
- So, I committed to putting my Broadway dreams on hold for a year so I could take care of THE PRIORITY.
I chose to live in Harlem because it was cheaper. I chose to live four people to a three-bedroom house to save money. Making those sacrifices allowed me to make enough money to pay off the debt, and save enough room in my budget as well.
Transfer The Balance To A Low
A few months without interest may be all you need to get on top of your debt and pay off your balance. If you have good credit, you may qualify for a good balance transfer interest rate.
This will allow you to transfer the balance on one card to a new credit card with a lower interest rate, sometimes even no interest for an introductory period.
Read the fine print to understand how long you have low- or no-interest rates available. You want to pay off your entire balance within that time otherwise, you will start accumulating interest again.
Dont limit your search to balance transfer credit cards. Rewards cards often have good balance transfer rates as well.
If you dont have enough available credit to transfer an entire balance to a single credit card, moving a portion of it can still lighten the load and help you pay off your debt sooner. However, you should only do this if you are confident in your ability to limit your spending and not run up debt on two cards instead of only one.
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How To Get Rid Of Credit Card Debt How I Paid Off $7000 In Just A Few Months
Have you been wondering how to get rid of credit card debt? Lets face it. If youre anything like me, the lure of easy money can call your name especially when youre looking for a little high from some retail therapy.
Or maybe youve just had a string of bad luck. I can tell you firsthand that it isnt hard to end up with credit card debt.
What you need to do now is make it go away, and this guest post by my friend Amanda will show you how she did it.
Amanda Irish is a friend of mine from college and she, like me enjoyed spending money a little too much.
When she finished school she kind of went a little crazyher words not mineand ran up a lot of credit card debt.
In time, she realized she needed to do something about it, so she came up with the plan she writes about below.
I think youll get a lot of good out of it.
So.take it away Amanda Irish.
How Do I Pay Off Debt With Balance Transfers
When you have credit card debt, one option is to transfer your credit card balance to a different card.
If you have an account with a high interest rate, for example, you can transfer its balance to a card with a lower interest rate and spend less money on interest over time. This is like paying off one credit card using another card.
- Step 1: Identify the credit cards where youre paying interest on a balance
- Step 2: Decide how much money you can or want to transfer
- Step 3: Apply for a new balance transfer credit card, offering 0% APR on balance transfers for a set amount of time
- Step 4: Transfer the balance, or balances, from the older cards to the new card
- Step 5: Pay off your balance on the new card try to pay it all off before the 0% period ends
After performing a balance transfer youll open up the credit lines of those cards but dont use your newly available credit to rack up more debt.
A lower-rate balance transfer card can fit well with the avalanche method. Since you can use a balance transfer to strategically reduce the interest rate on your highest-interest debt, it can buy you time to focus on the next-highest interest account. This can reduce the total interest you pay.
Many balance transfer credit cards even offer a 0% APR for an introductory period . A 0% APR offer allows you a chance to pay off your credit card balance without incurring extra interest charges.
MoneyFactBalance Transfer Benefits
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How Can I Pay Off Credit Card Debt Fast And Then Live Debt Free
It isnt just about paying off credit card debt. You have to live debt free in order for all of this work to make any difference. The key to remaining debt free once youve paid off credit card debt is to break the paycheck-to-paycheck cycle. This means you have to spend less than you earn and save the difference.
Fixed V’s Minimum Payments
The beauty of using a fixed payment approach is that you can plan for the monthly expenditure as part of your household budget. You will know exactly how mush is due to leave your bank account and when.
In comparison, repaying the minimum amount will mean that you typically pay slightly less each month (NOT ALWAYS!!!< if the PAR percentage is high, repaying the minimum could actually cause your debt to increase!
The true comparison comes in how you pay off the loan, yes, a credit card is a loan. Minimum payments will only reduce the total of your credit card loan by a very small amount, especially when the minimum repayment amount is 1% or less. Most of your monthly repayment is actually spent on interest rather than repaying the debt. at 1.5%, your monthly minimum payment is split roughly 50/50 on interest repayment and reducing the Principal . Above 1.5% and you are repaying more off the Principal than you are on Interest charges.
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American Credit Card Debt Statistics And Key Findings
- Average American family credit card debt: $6,270
- Total outstanding U.S. consumer debt: $4.2 trillion
- Total credit card debt: $807 billion
- 45.4% of families carry some sort of credit card debt.
- Families with the lowest quartile of net worth hold an average of $4,830 in credit card debt, although only 44% have card debt.
- The West holds the highest average credit card debt, averaging over $7,000.
Rainy Day Fund Vs Paying Off Debt
If you do not already have a rainy day fund set aside, it might be more beneficial to add your disposable income to such an account. A rainy day fund is generally used to cover unexpected expenses and can be invaluable in the event of a job loss.
Paying off your debt, such as a credit card balance, is not a practical substitute for a rainy day fund, as the credit card company can reduce your credit limit.
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Enable Autopay For Your Debt Payments
This point is important.
Looking back on it, as I write this piece, it almost seemed easy to pay off that first $10,000 of debt in NYC. It was way easier than trying to pay off $8,000 in 90 days.
Really, there was no magic to paying off this amount in a little over a year. I committed to a timeline, set my payments to autopay and just let online banking do its thing.
Autopay is what made this a reality for me. I had autopay set to minimums, and then I did the Debt-snowball method: once I paid off a card in full, I routed that minimum to the next card and so on.
Should You Pay Off Your Car Or Invest
Whether you should pay off your car or invest depends on the loan’s interest rate and your overall financial situation. Paying off the loan early gives you full ownership of your vehicle, which can come in handy if you need to sell it quickly. If you have high-interest debt, you may want to pay that off before you pay off your car or invest. If your car loan has a high interest rate, it would make sense to pay it off before you invest.
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You Can Improve Your Credit Score
A poor credit score limits your future financial opportunities. Those with low credit scores find it more challenging to secure a mortgage or rent an apartment. Finding a reasonable auto loan without good credit is also problematic. Even if you do find lenders willing to work with you, theyll likely charge higher interest rates and fees, costing you more money in the long run.
Paying off credit card debt reduces your credit utilization ratio, which will improve your credit score and overall financial options.
Rewarded Myself Along The Process
Even though I had my laser-focus on wiping off my credit card debt, I still managed to save a little of my income aside on things that I love such as Starbucks gift card, a new book or a new item of clothing . These small rewards allowed me to work on my goal without getting tired or frustrated at it. I had to be smart about my rewards too however , otherwise Ill undo the progress Ive made so far.
There you have it! Last month , I paid $789.47 halfway through the month effectively erasing my $7,000 credit debt!
I hope you find this useful. Financial goals can be fun if you make it that way so be creative.
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Next See If You Can Pay More Than The Minimum Payment
Many credit card issuers allow cardholders to carry a balance month-to-month and make minimum payments partly for the cardholders convenience, but also because it benefits the issuer to create a big interest charge. If you can, try to pay more than the minimum so you can lower your balance and pay less in interest over the life of the loan. A credit card payment calculator like this one can help you estimate how fast you can pay off debts if you pay more than the minimum each month.
How Paying Your Credit Card Debt Helps Your Credit Score
When consumers pay down their debt, their decreases. Your credit utilization rate, also referred to as your debt-to-credit ratio, is a measure of how much credit you are using compared to how much credit you have available.
The amount your utilization rate decreases depends on just how much of your credit card debt you pay off.
Let’s take a hypothetical example where two people with the same credit utilization use different amounts of the $1,200 stimulus check to pay off their credit card debt.
In our scenario, Julie and John both carry the same credit card balance of $2,000 and have the same credit limit of $5,000 thus, they share the same credit utilization rate of 40% .
|24 percentage points||12 percentage points|
The lower your utilization rate, the better your credit score. Your goal as a cardholder is to aim for a high credit limit and a low balance across all your credit cards. Experts recommend maintaining a utilization rate below 30%, with some even suggesting trying for a single-digit utilization rate to get the best credit score.
In the scenario above, John’s new utilization rate would be just below 30% while Julie’s would be closer to 10%. How exactly this transfers to their individual credit scores depends on their overall credit profiles. Credit utilization makes up 30%, or one-third, of a credit score on the FICO model. However, both John and Julie would both see a noticeable increase in their scores.
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Should You Use A 401 To Pay Off Debt
Whether you should use a 401 to pay off debt depends on several factors. If you’re younger than age 59 1/2, any withdrawals will be subject to income taxes and an early withdrawal penalty. After age 59 1/2, you pay income taxes. You also lose all the potential interest those funds could earn. If you have high-interest debt , it might still make sense to use 401 funds to pay it off. A financial advisor can help you decide which option makes the most sense in light of your financial goals.
How Long Does It Take To Pay Off Debt
Figuring out how long it takes to pay off debt depends on three factors:
- how much debt you have
- the amount of extra money you have to pay it off
- if you’re good at not adding anything to the balance
So, it’s hard to answer this question because it depends on each individual’s circumstances. This article from Debt.com shows how it can take five years to pay off $1,000 if you only make minimum payments. Student loans are often calculated on a ten-year repayment timeline, but again, it often takes borrowers twice as long.
TL:DR How long does it take to pay off debt? Decades if you only pay the minimums. And play with your own debt payoff timeline using a handy online calculator. This way you can visualize how extra payments can make a difference.
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Lowered My Interest Fees
I called my credit card company to negotiate my interest rate. Although I really liked my cash-back rewards MasterCard, it wasnt conducive to my goal because the card required me to actually spend on it. I ended up converting my card to a low-interest MasterCard instead, effectively . Thats a difference of $107/month versus $48/month in interest fees!
I was able to do this with my first credit card however not my second credit card they wouldnt budge. It was still worth the attempt though!
Note: The second credit card company however did offer me an increase on my credit limit. I accepted it because it positively affected my debt utilization ratio !
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Should You Pay Off All Credit Card Debt Before Getting A Mortgage
When possible, its a good idea to pay off your debts before applying for a mortgage. Thats because the less debt you have, the better your debt to income ratio, which measures your ability to pay off your debts based on what you earn. Someone with a lot of debt that exceeds their ability to quickly pay it off will be considered a risky loan prospect and may not qualify for the best offers on a mortgage.
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Set Up An Emergency Fund
Its one of the biggest money questions do I save or pay off debt? Ive been there: you pay off all your debt and work hard to do so, and then your car breaks down. Or your dog needs a stitch in his paw, or you break up with your long-term boyfriend and need cash to move out.
This is why it helps to have an emergency fund. Even a small one can go a long way to helping people stay out of credit card debt. Even though experts recommend 3-6 months pay in an account, I suggest starting small. I did this with my $1000 in 45 Day challenge and recommend it to all. Its ideal to have $1,000 saved up before you start paying off debt, but after works too.
Work With Your Creditors
Reach out to your creditors to explain your situation. A credit card issuer may be willing to negotiate payment terms or offer a hardship program, especially if youre a longtime customer with a good track record of payments.
If your issuer offers a hardship program, it may provide relief when circumstances beyond your control like unemployment or illness impact your ability to manage payments. Whether you negotiate with your issuer or accept the terms of a hardship program, either option could lead to more affordable interest rates or waived fees, depending on the issuer.
These small changes might be just enough to help you get a handle on your debt, and the worst that can happen is they say no.
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