A ‘workout plan’ to shed debt, build credit scores
Credit needs attention to stay in tiptop shape
By Gary Foreman
The New Frugal You
Gary Foreman is a former financial planner who currently edits The Dollar Stretcher Web site and newsletters.
Dear New Frugal You,
I am getting married in about a month, and my fiancee and I both currently have some semi-solid credit scores (about 715 for each of us). However, I would really like to raise the score to at least 750 by the end of the year for the both of us. We both have quite a few credit cards to multiple stores (many with a close-to-zero balance, but a couple that need some work to get the balances down). My primary goal is not only to raise the credit score, but also cancel all of these small credit cards that we hardly use and consolidate the line of credit into one main new card (such as a Visa or MasterCard). My question is how do I cancel these cards after they are paid down to a zero balance without hurting my score? Many of them are old lines of credit, which I understand is good to have but I like to keep things neat and clean and would like to have just one major line of credit that we can share for future use. Is it possible to achieve this without dropping my score? I surely do not want to drop into the 600s. What would be a good plan of action? — Kevin
I’m with you, Kevin. Over a lifetime, a good credit score is far more valuable than a diamond ring. But unlike a diamond, it’s not forever. Good credit scores are more like our bodies — they need regular workouts and attention to keep them in tiptop shape.
Right now your scores are about average. Generally, a score over 690 is good enough to get standard borrowing terms. But — especially in today’s market, with lenders tightening their lending standards — if you really want to get the best terms, a score in the mid to upper 700s is better.
So let’s construct a workout plan — but instead of losing weight and building muscles, you’ll lose debt and build your scores.
Start by shedding that that debt: There’s nothing attractive about all that debt hanging around your midsection. Thirty percent of your credit score is based on the amount owed. Paying off existing balances will give both you and your bride-to-be strong financial cores.
Just as you can overdo losing weight, it can be financially unhealthy if you lose too much credit. While you may not like having store cards, be careful closing them. Fifteen percent of your credit score is based on the length of credit history. So you’ll want to close the accounts slowly, especially older accounts. Closing all of them at once could give you a financial heart attack.
Start by slowly eliminating cards that have annual fees. After that, close the most recently opened accounts. About one per quarter.
Keep the other cards. Just don’t carry them. However, you should use them occasionally — card issuers these days are quick to close inactive accounts. Having an old account with a zero balance won’t hurt your financial bodymass index. In fact, having available credit that you’re not using positively affects your credit score.
Staying consistent with your workout program is important, too. Paying your bills on time each month makes up 35 percent of your FICO score. Being late with a payment is worse than missing a workout. Your personal trainer will forgive you. Your credit card company won’t.
Adding a new bank credit card to your mix shouldn’t hurt. But, only add one card. Since 10 percent of your score is based on new credit, it would be unwise to add too many new exercises to your program all at once.
Ultimately, there’s no quick and easy way to get an attractive credit score. It takes months and even years of effort. But those rock-solid financials are worth the work.
The good news for you and your fiancee is that you’re workout partners. You share a common interest in your financial health, so get financially fit — and stay that way!