The 29% factor
As mentioned in a previous article (‘Your credit score and you’) debt to income ratio makes up 30 percent of your total credit score. The score is made up from your credit use. Debt to income can also affect the amount of what lenders would allow for your mortgage/household needs. The exact amount depends on the lender but a good way to look at it is to base the high end of your mortgage and other household needs (utility bills included) and fit it into 36% of your income. Something else that seems to be calculated into this bracket is how much of your available credit you are using.
If you are looking to raise your credit score quickly, you should pay down all of your credit accounts to 29% of use. At this point, the lender is no longer even looking at that account. It might as well be closed completely. From my experience, paying down this debt lowered the interest rate of my loan significantly and it only took about $1000 to pay down multiple credit cards to below 29%.
If you are just trying to get out of debt, you should pick your highest interest rate credit card and pay that off. Then take your minimum payment from that highest card and pay down your 2nd highest card with that money. Then continue to get rid of each of your card’s minimum payments and shuffle that into the next card. This is called “snowballing” your credit card debt. You also have the option of using an alternate option and pick your lowest balance card and working backwards. It’s up to you. If all your accounts have about the same interest rate, then you will probably feel more empowered by paying off the low card.
bankrate.com covers this in Credit Cards: Which debt to pay off first:
“The amount you owe doesn’t really matter when you’re paying an enormous amount of interest,” Sherry said. “Try to pay the highest interest rate ones first. Muster all the funds available and get the debt out of your life.”
They go on to say:
What about knocking off some low-balance bills first and eliminating a bill or two from that thick monthly pile? Experts respond: Go ahead, especially if it will give you the boost you need to stick with a pay-down plan.
Like they say in that article, none of it’s going to matter if you don’t stick to the plan. We’ll cover some budgeting thoughts in upcoming posts.