A 2023 study revealed that Americans owe a record-high $986 billion in credit card debt. Among rising credit card interest rates and fluctuations in the economy, it’s understandable that people are struggling to stay on top of their debts.
The good news is that there are ways to power through financially challenging times and even make them work for you.
Good Debt is Strategic Debt
Good debt can come from investing in something that will pay a higher return than the debt you accrue from it, such as buying a property and leasing it to renters. You might also have good debt if you refinance debt that you currently have to enter a new arrangement with a lower interest rate.
Good debt can also be debt you take on to achieve a goal, such as opening a credit card to build credit.
Credit Cards Can Work for your Credit Score
Some simple tricks with your credit cards can help you take charge of your debt and your credit score. If you’re mindful about what you’re charging to your credit card, making certain purchases on a card can help you build credit.
Asking to raise your credit minimum is also a helpful trick if you’re doing well charging mindfully. Increasing your credit limit doesn’t have to mean increasing your spending. A higher credit minimum paired with unchanged spending habits can lower your credit utilization ratio, or the percentage of the credit available to you that you’re using. Decreasing this ratio could help to increase your credit score.
Make payments as you can, and pay at least the minimum. 35% of your FICO credit score is based off your credit history, so making on-time payments can easily boost your score. In the U.S., you can’t be charged interest during the 30 days of a debt, so making payments as soon as possible can help you handle interest rates.
Canceling a credit card isn’t always beneficial, even if a card has no balance or you never use it. The system that calculates your credit score won’t understand why you got rid of a credit card; only that you’ve now decreased your credit availability, which can reflect poorly in your score.
Cutting up a credit card can also prevent you from reaching a credit goal that could increase your score. FICO tracks a metric called months revolving, which is how long you’ve had credit. Most types of debt, like car loans, are paid off in a certain term, so the only way to reach 99, the highest amount for months revolving, is to have a credit card. You can’t reach this maximum and potentially elevate your credit score if you cut up a card.
Learn How to Play the Credit Game
Finally, a tip for paying off debt. Whether you start by paying your highest or lowest debt is up to you, but focus on paying off one debt at a time.
Lendistry CEO Everett K. Sands likes to think of managing debt and your credit score as a computer game. You can hear him talk about the game and how to play it on this episode of Tavis Smiley’s podcast on KBLA 1580.
The game is all about knowing the moves you can make and what their end results will be. Playing it can help you see your money grow, but only if you know how to play it strategically.