At America Saves, we consider paying down debt to be saving because
- You can save money on interest and fees,
- You can build your credit score, and
- Eliminating debt builds your net worth.
With planning, patience, priorities, and a plan, almost anyone can reduce their debts and start to accumulate wealth.
If you choose to prioritize saving money by raising your credit score, you’re taking a delayed gratification approach. That’s because having a higher credit score can save you money once you attain it.
Tom Quinn of FICO explains that “when you raise your credit score, you can reduce your interest rate significantly and save money over the life of the loan.” If you’d like to see for yourself how much money a different credit score can save you, check out myFICO’s calculator.
If you specifically want to raise your credit score, you should first pay off your credit card with the smallest balance. “From a score perspective, focus in on those lower balances first, get them down to zero. Then focus on the higher balance cards to begin to lessen your credit utilization, which will make the biggest difference for a person’s credit score,” Quinn explains for the saver who wants to raise their credit score.
To save money by raising your credit score, you need to complete these steps:
- Gather all your debts.Write yourself a list, include the total balance on each debt and indicate to yourself whether it’s installment or revolving credit.
- Assess your revolving credit balances. Looking at just your revolving credit (credit cards, mostly), write them in order of the smallest balance to the largest.
- Now,re-write your list and pay off accordingly. At the top of your list should be the revolving debt with the lowest balance, keep the list going. Aim for putting any extra cash or payments just to the card with the smallest balance.
“The vast majority of your credit score is made up of payment history and credit history,” Quinn explains, so if you specifically want to raise your credit score, “it’s going to be most beneficial to pay off your smallest balance cards first, because then the user will get incremental points for less credit cards with balances and less cards with credit utilization.”
If you’re not sure whether you’d like to save by raising your credit score or saving money now, you can pull your credit reports for free at www.annualcreditreport.com. Saving is a habit, not a destination, so whichever way you choose, remember that you are saving!
Credit Resources:
1. myFico.com financial calculators
2. The Importance of Credit History
ABOUT THE PERSONAL INVESTMENT ENTERPRISE (PIE) PROGRAM
The Personal Investment Enterprise (PIE) program is a local savings program provided through Community Action Programs of Boulder County and Mile High United Way. The program is designed for low-income families to enroll in financial literacy classes and save through a matched saving account at a rate of 4 to 1. The first step in applying to the program is to attend an orientation meeting with Community Action Programs at Boulder County. They can be reached at 303-441-3998 or at [email protected]. For more information on the PIE program visit https://www.bouldercounty.org/families/community-action-programs/personal-investment-enterprise/ or https://unitedwaydenver.org/personal-investment-enterprise-pie-program/. To see if you qualify, take this survey: https://www.surveymonkey.com/r/PrelimPIE.
