Should You Pay Down Your Debts?

One of the biggest issues that many consumers face is figuring out how much debt they should be carrying. As Americans struggle with mounting debts, the focus has shifted towards paying them down and getting them under control. While there are many benefits to paying off your debt, there are a few things to keep in mind before you get started. The first step is to determine just how much you owe and how this amount affects your credit score.

You can use this as an indicator to help you decide what you need to do. For example, if your credit score is being dragged down by the amount of debt you have, it is a good idea to start thinking about getting rid of that debt to bring your score back up. Having a higher credit score can help you in many ways, from getting better interest rates to easy approvals from banks when you need a mortgage or a personal loan.

Once you have determined just how much debt you have, the next step is to figure out some scenarios. If you pay off all of your debts and close down the accounts, you may notice something strange happening to your credit score. Instead of going up, it may actually go down. You need to have open accounts on your credit report in order to have a good score.

By closing those accounts down, you may actually be shooting yourself in the foot and all of that money and work will be for naught. Instead of taking the all or nothing approach, it is best to work out a strategy for paying your debts in increments. The first step to take is to get the cards with the highest balances paid down. You don’t need to pay them off necessarily, but you do need to free up your available credit.

As you pay those debts down, you should notice a change in your credit score quite quickly. The more available credit you have, the less of a risk you pose banks and this is reflecting in your score. We recommend using a credit score monitoring service to help you determine how your score is doing, especially when you are paying off your debts. You’ll be able to tell instantly how an action affects your rating. This will allow you to make necessary changes in your strategy.

One mistake that many people make when they are rushing to pay down their debts is to consolidate them all onto one card. While this may be beneficial, especially during the introductory period when rates are low, you may impact your score adversely with this strategy. Again, you’re dealing with the amount of debt, versus available credit. It is best to simply pay down as much as you can on your open cards and go from there.

If you are finding it impossible to make ends meet with your current debt load, then quick action is required. Otherwise, if you have a small amount of debt and have no problem making payments on time, keeping those debts can actually work in your favor.

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