According to NASDAQ
, outstanding revolving debt for the U.S. as a whole equaled roughly $880.5 billion in July of 2014 and was primarily a sum of credit card balances. The same data reveals that residential American adults have approximately $3,600 in credit card debt each and $5,700 worth of debt per household. There's no point trying to explain: we love our debt. If you are interested in learning more about turning around your credit situation, keep reading to learn how credit scores are factored and pick up some simple tips to begin the long road to credit recovery.
Q: What is credit?
In order to truly improve your credit score and get out of debt, you must understand credit. Put simply, credit is borrowed money. This money is typically used to purchase goods and services as needed. An entity, typically a bank or other financial institution, grants a certain amount of credit to you on a contractual basis and specifies how and when you will pay the money back.
Having good credit is important for various reasons. Sometimes, you may not have enough cash on hand to handle major purchases such as a car or a home. Having a positive credit history allows you to borrow this money from the bank and pay it back according to an agreement.
Q: How are credit scores factored?
A credit score is a number that banks use to determine your credit worthiness. They use your credit score to make decisions about whether they should lend to you and the likelihood of you paying the money back on time. There are actually several credit scores, not just one: the three main reporting agencies that calculate credit include Trans Union, Experian, and Equifax.
A credit score, also called a FICO score, ranges from a very poor 300 to an excellent 850, with average scores somewhere in the ballpark of 723. The score is derived from the following five factors: your payment history, sum total of the debt you currently owe versus the amount of your credit limits, the length of your credit history, new credit attempts and the type and mix of credit you currently owe. Overall, payment history, making regular, on-time payments, and the amount of debt you have accrued in conjunction are the largest influences on your credit.
Q: How can I improve my credit score?
Considering that the two largest factors affecting credit include your payment history and the amount of debt you currently owe, it's smart to start here. First, stop creating more debt immediately.
Next, tackle the debt you have with a vengeance, making sure to make payments on time and regularly. Set up reminders through useful mobile apps or in your calendar as to when bills should be paid. Some institutions even offer automatic withdrawals if you have a tendency to forget payments.
Lastly, choose one debt, typically the one with the largest interest rate, and put all the extra income you receive toward paying it off. If this is the route you plan to go, pay the minimum amount on all your other accounts and direct all the remaining funds to making large payments to this big debt.Following the steps above, is a great start to improving your credit score and fighting the debt addiction. If the road to credit and debt recovery seems much too overwhelming for you to travel alone, BMI Federal Credit Union is here to help. Our free Certified Financial Counselors are always standing by to answer the difficult questions about credit and debt management as well as to assist you in developing a strategy to improve your credit score.More From our Blog:What You Need to Know About The FAFSA