How to Pay Off Debt Without Wrecking Your Credit

4 MIN. READ

 

Key takeaways:

• Getting out of debt while preserving your credit score is possible if you use the right strategies.
• You should keep old accounts open, closely monitor your credit utilization ratio, and select the right consolidation products.
• PFCU can help with personalized debt management recommendations.

Getting out of debt is a major milestone, and we know you want to achieve it ASAP. 

But did you know that mistakes like closing accounts too fast or choosing the wrong consolidation loan can backfire and hurt your credit?

Let’s review how to pay off debt and improve your financial situation while protecting your credit.
 

What’s the Link Between Debt and Credit?

The more debt you have, the worse your credit score is, right? It’s not entirely true. Credit bureaus want to see you actually using your available credit, as long as you’re responsible with it.

Here’s what being responsible with your credit means:
 

• Keeping your credit utilization ratio under 30% (meaning that the sum of all your balances shouldn’t be more than 30% of your total available credit).
• Making your payments on time every month.
• Not opening too many accounts too fast.
• Having long-standing accounts and a good mix of different types of credit products.

Paying debt off is great for your finances, but what boosts your score is showing that you can manage credit rather than being debt-free. Here’s how you can achieve both goals.
 

Don’t Close Your Old Accounts

Closing the accounts you’ve paid off reduces how much credit you have available, and could mean you’re getting rid of your oldest account (which can account for 15% of your credit score).

For instance, let’s say you have $8,000 in available credit between account B with a $3,000 credit limit and account A, with a $5,000 credit line. You pay off account B and still have a $2,000 balance in account A. Your utilization rate is currently at a comfortable 25%, but closing account B would reduce your available credit to $5,000, which would increase your utilization rate to 40%.
 

Don’t Max Out Newer Accounts

Paying off your oldest debt first can be a good strategy, but we sometimes see members max out newer accounts to achieve this goal. 

Instead of focusing on your oldest accounts, budget so you can make the minimum payments on everything and cover your essential needs. The money you have left can then go toward your oldest balance or the account with the highest interest rate.
 

Make On-Time Payments

A single missed payment could hurt your score, and it’s easy to avoid by scheduling recurring monthly payments.
 

Use the Snowball or Avalanche Method Carefully

Here’s what you need to know about these two popular methods for getting out of debt:
 

• The snowball method involves addressing your smallest balances first. It’s great for simplifying your finances.
• With the avalanche method, you’re paying off the debt with the highest interest before tackling other accounts. It means juggling multiple accounts, but you’re not letting interest accumulate.

The best option depends on your unique situation. The snowball method can be ideal if you don’t have high-interest debt, but the avalanche method will help you get out of debt faster if you’re spending a lot on interest.
 

Consider Balance Transfers or Consolidation Loans

The avalanche method might not be enough if you’re having a hard time keeping up as interest builds. If this sounds familiar, you should look into lowering your interest rate with a balance transfer or a consolidation loan:
 

• You can open a balance transfer credit card and get a low APR for an initial period. Use it to pay off high-interest debt and think about making larger payments now that you’re not spending so much on interest.
• A consolidation loan is a personal loan you can use to repay different accounts, so you only have one monthly payment to make. Your finances are easier to manage, and you may qualify for a lower interest rate.

Both methods mean adding some hard inquiries and new accounts to your credit report, but your score will quickly go back up as you chip away at your debt. If you decide to use one of these methods, ensure that you keep your old accounts open to maintain your available credit.
 

Manage Your Debt With PFCU

Getting out of debt without running your credit score is possible with these strategies. We also recommend adopting healthy financial habits to prevent falling back into old patterns, such as budgeting and closely monitoring your credit.

If you’re struggling with debt, it’s time to make a plan, and PFCU can help. Contact us online or visit one of our South Florida branches, and a representative will create a personalized debt management plan with you, including affordable balance transfer credit cards and consolidation loans from PFCU.
 

FAQs About How to Pay Off Debt 

Why should you keep old credit card accounts open?

Keep old accounts open to increase your available credit and reduce your utilization ratio. The age of your oldest account can also contribute up to 15% to your credit score.
 

Avalanche vs. snowball debt repayment method: What’s the difference?

The snowball method involves tackling the account with the lowest balance first, while an avalanche strategy prioritizes the account with the highest interest. Both can make sense depending on your unique situation.
 

What’s the best way to protect your credit score if you’re in debt?

Prioritize making your payments on time. Even if it takes you a while to get out of debt, you can still build a solid history of making your payments on time.