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Financial Literacy - Credit scores
A bright future ahead
Systematically beat down card balances and put bills on auto pay to bump up credit score.
Credit scoring, demystified
Profile: Angel Smith
The problem:
Low credit score limits mortgage-financing choices.
The plan:
Boost score with auto bill pay and by zapping card balances.
 The plan in 6 steps
 Start a budget.

Track all spending, big and small.
Create a written budget of all expenses.
Tip: Use this work sheet to create a budget.
next >>
  The plan

Get current on bills
Although credit repair is the ultimate goal for Angel, she needs to begin by getting her finances under control. The only way to do that is to create a budget. This will give her greater control over her undocumented spending habits. She will need to keep track of her spending and limit her impulse purchases on those high-interest credit cards. Once she knows where the money is going, she can attack the credit scores. The two largest factors in most credit scores are timeliness of payments and the amount of outstanding balances. Angel can take steps to improve both of these.

Angel has made a good start by setting up electronic bill payment through her bank. What she must do now is have an automatic payment made to each credit card account on a monthly basis. As long as this is a reasonable amount, and she can check by looking at past statements, she will cover the monthly minimum payment and reduce some of the outstanding balances. By setting up automatic payments she does not run the risk of missing payments again and will improve her scores. This strategy has the added benefit of taking the cash out of her account, which lowers the temptation to withdraw it from ATM machines.

Dealing with emergencies
While Angel feels she needs four cards to fall back on if she has a financial emergency, she would be well served to reduce her total level of debt. She should make extra payments to reduce the principal on the card with the highest interest rate first. Then she should work at them one at a time until the debt is reduced. Paying off the credit card debt will improve her debt-to-available-credit ratio, which will help her achieve better rates in the future. She should aim for outstanding balances of less than 25 percent of her credit limit.


Keys to success

Create a process for tracking every dollar made and spent.
Consistently spend less than you make.
Use the debt pay down calculator to create a complete schedule to zap debt.
Go electronic and end late fees. Put all monthly payments on automatic bill pay.
Don't hide from creditors. Call and negotiate payment options.
Start an emergency savings account.
Contribute to tax-deferred retirement accounts.

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