When you’re trying to get out of debt, you might worry that your credit score will be affected. Worse, you might think getting out of debt can hinder your ability to purchase a home.
Don’t worry, we’re here to help and explain exactly how you getting out of debt and paying off your credit cards is going to improve your score. We’ll talk about payment management, debt-to-income ratios and how to monitor your credit score for free (Stop paying a third party!).
How our clients went from having different financial goals to being on the same page, paying off debt and buying a home!
We had clients who were married who came to us with different goals. He wanted to invest and be able to invest back into his business and she wanted to start paying taxes early, get out of debt and buy a home.
They were worried that paying off their debt would mess up their chances to improve their credit and buy a home.
We gave them a very simple budget and a paycheck plan so they could stop living paycheck to paycheck and finally feel like they had money for everything! That was fun.
We also helped them systematically pay off debt. Guess what? Their credit score improved!
Now they are in a home and otherwise debt free except one big debt owed to the IRS (btw please be careful when you own your own business).
They communicate about money better now, they have cash envelopes, digital envelopes, an emergency fund, a health savings account, other savings accounts and better peace over their finances.
So, what does that mean to you? We’re going to show you a few ways that your debt snowball will improve your credit score.
The credit score is a debt score and you don’t need it.
The credit score is made up. It was only invented in 1989! They made it up to classify how good people were at managing debt. What’s more, the first “credit card” was only created in 1949. This entire thing is a sham and made up! Your great-great grandparents probably didn’t have debt. They didn’t believe in it.
Now, many people are focused heavily on their credit score. Well, it’s really a debt score. That name just makes it sound better than it actually is. Furthermore, the purpose of a credit score is to get more debt so you can increase your credit score so you can get more debt so you can increase your credit score. Get it?
You can become your own bank instead. That’s an entirely different topic though, isn’t it? If you are worried you need your debt score to buy a house, just know that manual underwriting is a way to get approved for a mortgage without a credit report.
But also, your credit score will improve as you pay off debt.
First, paying off credit cards shows you’re good at making payments. Since the debt score is just scoring how good you are at borrowing other people’s money and how well you manage debt payments, paying things off works really well to improve it. Trust us, having 30 credit cards and loans under your name isn’t making you look attractive to lenders.
By the way, you don’t need a credit monitoring service. Many banks or credit cards will tell you your score for free. You can also go to annualcreditreport.com and pull your credit report.
When you pay off debt, you will also lower your debt-to-income ratio. That shows creditors you have room to take on more debt, so they’ll increase your score. (but don’t take on more debt!)
To figure out your debt-to-income ratio:
- Add up your monthly debt payments: This includes your mortgage or rent payment, car payment, student loan payment, credit card payment, and any other debt payments you have.
- Calculate your gross monthly income: This is your total income before taxes and other deductions. It includes your salary, wages, tips, bonuses, and any other sources of income.
- Divide your total monthly debt payments by your gross monthly income, and then multiply the result by 100 to get your DTI ratio as a percentage.
- For example, if your total monthly debt payments are $2,000 and your gross monthly income is $6,000, your DTI ratio would be:
We hope you’ll get started right away on getting out of debt and not let your credit score act as a stumbling block. If you have any further questions, email us at firstname.lastname@example.org or use the link below to book a free call.
Book Your Free Call Now!
We are excited to create the time & space to talk to you about your current money situation. This is a free, no-obligation call where we can answer questions you may have and maybe find some quick wins for your budget.
What do you have to lose?