Friday’s Credit Tip #5: Pay Down Your Debts

If you have a lot of debt, your credit score will suffer. Paying down your debts to a minimum will help elevate your credit score. How does this work you may ask? It has everything to do with credit utilization ratios.

Ideally, you want to keep your credit utilization ratio fairly low, between 20 and 30 percent. If you have a $1000 limit on your credit card and you regularly carry a balance of $900, your credit utilization ratio for this card is 90 percent. This makes you a less attractive credit risk to lenders than someone who has the same credit card but carries a smaller balance of $100 or so. The person with the balance of $100, would only have a credit utilization ratio of 10 percent.

So, if you are serious about improving your credit score, then start with the largest debt you have and start paying it down so that you are using a smaller percentage of your total credit. In general, try to make sure that you use no more than 30% of your credit. If possible, reduce the debt even more. If you can pay off your credit card in full each month that is even better. What counts here is what percentage of your total credit limit you are using—the lower the better.

What about You?

What are you doing to pay down your debts?

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