Basically, when you are free from debt, that means you do not owe anyone money. But in the financial industry, there is more to just borrowing money to consider yourself to be in debt. Probably the more important question that needs to be pondered right now is whether it is possible to stay out of debt in the society that we live in.
The truth is, the importance given to credit scores makes debt elimination hard. A good credit score is valuable because it allows you to enjoy a lot of financial opportunities. This score is calculated based on how you use debt responsibly. When you completely eliminate debt from your life, there is no debt to record and observe. Your score will naturally go down.
But here is the truth about being debt free. You can consider yourself free from debt without having to eliminate it completely from your life. It is all a matter of learning how to use debt so it never becomes a burden or a threat to your financial security.
Can you be debt free and still have a high credit score?
So how can you be considered free from debt and still have a high credit score?
The key is to use credit without paying the interest. At the very least, you want the interest to have a minimal effect on your finances.
How is that possible? Here are a couple of things that you can do.
Use a credit card and pay it off within the grace period
This is one of the best ways that you can consider yourself debt free and still have a high credit score. You can continue to use your credit card and the purchases will be recognized by major credit bureaus. It will be recorded in your credit report. But to ensure that you remain free from debt, you need to ensure that you can pay the whole balance within the grace period of your billing cycle. If you do this, you only have to pay the amount that you borrowed – and maybe a couple of dollars more for credit card charges. None of what will be billed includes the finance charge or interest rate.
Doing this will not only minimize the amount that you spend. It will also help you have a high credit score for paying your dues on time.
Paying down your debt payments on time until you pay it off
As mentioned, paying on time is a great way to increase your credit score. The payment behavior influences a huge part of your credit score and will ensure that you are current with your payments. Once that happens, your credit score will benefit and slowly go up as you continuously make on-time payments. You can do this by making sure you follow your budget carefully.
Your household budget needs to have a comprehensive list of your payments including due dates. You can make use of your smartphone to help remind you of your pending payments. It is also a good idea to look into debt consolidation to manage your payments better. This way, you only have to focus on one payment every month.
Regularly checking your credit report
As you go through your repayment journey, it is a good idea to regularly check your credit report to help you catch mistakes early on. It will give you the chance to get ahead of identity theft before it blows up under your name. Not only that, it will help you spot mistakes that might have been dragging your score down.
The Consumer Financial Protection Bureau shares that you can get a free copy of your credit report once every 12 months from major consumer reporting companies. This will allow you to check your reports without incurring any additional costs. With three major credit reporting bureaus, you can request for your copy once every four months. This way, you get to monitor your credit report all year round.
Managing your credit utilization ratio
As you aim to be debt free, you need to monitor your credit utilization ratio as well. The ideal rate is 30%. That means if you have a credit limit of $10,000, your balance should never go beyond $3,000. If you are able to keep it within that range or even lower, your credit score will benefit at the end. You also get to keep your charges on your card at a minimum.
If you consciously keep your charges at a minimum, you are also helping your budget from going over. You are able to limit the charges you make on your card. As a result, you can always afford to pay your balance completely. That will keep you from being too overwhelmed with debt.
Tips to be smart with debt
The truth is, as long as you are smart with your debt, you will never compromise your financial security. There are smart money moves that will involve the use of credit but as long as you understand how to use it to your advantage, it will help improve your financial position.
Here are some tips that you might want to keep in mind so you never use debt the wrong way.
Never charge what you cannot pay off at the end of the month
If you want to be debt free, do not charge more than what you can afford to pay at the end of the month. As mentioned, this will keep you from paying the finance charge that is calculated based on your interest rate. You only have to pay for the amount that you really borrowed – which is like you paying in cash.
Never be late with your payments
Being late with payments is never a good thing. You will not only have to think about the late penalty charges that will be added to your balance. You also have to deal with the negative report in your credit history. According to Experian, late payments will be reflected on your credit report for the next seven years. If you have plans that require a good credit score, you need to keep yourself from being late on your payments.
Learn to negotiate with your lenders
There are times when you have to get out of your comfort zone and negotiate with your lenders. It is just a matter of talking to your lenders and asking them for a lower rate or even adjusting a late fee. You need to remember though that you have to make your case with your lenders to get their approval on your request.
Have you been paying on time for the last year? Are you a loyal client for the past couple of years? These are just some of the things your lenders will look at to help them arrive at a decision. The bottom line is that you need to prove that you deserve what you are requesting for.
You can be debt free and still come out with a high credit score by playing it smart as you pay down your financial obligations. If you do that, you are well on your way to hitting two birds with one stone.