Oprah's Debt Diet Step 7: Prioritize Your Debts and Raise Your Credit Score
June 17, 2009
Part 1: Prioritize Your Debts
By now, hopefully you've found some money. So, the next logical question is where do you put it? Where do you put it so that it will make the most difference in your credit score, naturally, but also in your life?
You've already been given a plan for paying back your credit cards. Sometimes though, those cards should not be your top priority. Here's why: You have two types of debts. Secured debts are those that have assets backing them up—they can be repossessed or taken back. They include your home and your cars. Unsecured debts are those with no assets backing them up. If you don't make a payment on your credit card, the bank is not going to come and take back the blue jeans you bought at the mall. It might make your life miserable to have a collector call you at all hours, but the credit card company is not going to take away your place to sleep or your transportation to work.
Your secured debts need to be at the top of your priority list.
Debts for which your wages can be garnished. These include IRS, student loans and any child support payments. If you don't satisfy these, your paycheck is at risk.
Any services you need to continue using. If you are not paying your doctor bills, that particular doctor is not going to be willing to see you again, right? That's a problem if you're relying on that doctor for care for a chronic condition.
Unsecured debts, like credit cards. Once you've satisfied all of these urgent debts, you can begin to really focus on making headway with your credit cards. Use Step 3 to get them paid off as fast as possible.
Family and friends. Hopefully your family and friends are the most understanding of your creditors. Confirm your commitment to repay the debts, but make them a lower priority and choose accounts that can improve your credit score first.
Part 2: Raise Your Credit Score
Working on your credit score is also an important part of this process. Why? The higher your credit score, the lower you can reduce the interest rates you're paying to all of your creditors—mortgage lenders, auto lenders, credit card companies. If you're in debt, then servicing those debts takes a big chunk out of your monthly nut. A high credit score can make that chunk as small as possible.
What is a credit score?
A credit score, sometimes referred to as a FICO score, is a numerical representation of the information in your credit report. FICO credit scores, which look a lot like SAT scores, range from 300 (though it's rare to see one below 500) to 850 (equally rare). These scores pack a powerful punch. Last year, 25 billion credit decisions were made based on FICO scores alone. These weren't just decisions about whether you'd be approved for a new credit card but:
How much you can borrow
What sort of interest rate you'll pay
Whether you'll qualify for an increase in your credit line
Whether you'll qualify to rent an apartment
Whether you can get a cell phone
Whether you'll qualify for a cash advance
Whether you'll actually get the credit card for which you're "pre-approved"
Whether an employer will hire you
What sort of auto insurance premium you will pay
In other words, your score is a really powerful piece of information. And because what it really is, for lack of a better description, is a snapshot of your borrowing and bill-paying behavior over the previous 24 months, as time goes by you have the power to change it for the better.
35% of your score is based upon how well you pay your bills.
30% of your score is a measure of how much credit you have available to you and how much of that credit you're using.
10% is based on your search for new credit—how recently have you opened (or inquired about opening) new accounts?
10% is the composition of your file. What percentage of your file is bankcard debt and what percentage is installment debt?
15% is a measure of the length of your credit relationships. How long have you had the cards in your wallet?