Deep in debt? Focus on repayment, not credit scores

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Question for the expert

Dear Opening Credits,
I am a full-time student and full-time worker living on my own. I am only 24, but I have about $13,000 in credit card debt. I make the minimum payments -- and more, if possible -- but I don't really make enough money to pay a lot. I have recently gotten my credit score checked, and it is 870. So my questions are:  Why do I keep getting denied a consolidated credit card? And with my credit score being what it is, does that give me a better chance of maybe getting a loan to pay off my debt? -- Anonymous

Answer for the expert

Dear Anonymous,
That 870 number you're quoting is rather mysterious. You see, the range of a FICO score -- by far the credit score lenders use most in lending decisions -- is between 300 and 850, with higher numbers indicating less risk to a lender. My guess is that you are not looking at FICO, but instead a different credit assessing model. There are plenty of others, such as VantageScore (which tops out at 990) and others that banks themselves develop.  

I believe your actual FICO score is lower than you think. This is not to say you haven't been a good credit customer in some ways. It appears you've been making larger-than-required payments steadily. This is fabulous because you've satisfied the most heavily weighted section of the FICO score -- payment history. That slice makes up 35 percent of the credit scoring pie. The next most important factor, though, is outstanding debt. That's 30 percent of the equation. If you're maxed out, your score will decline. So unless you have very high limits, your balance is, well, out of balance. 

While it's smart to keep excellent scores, I'd like you just to concentrate on repaying the debt right now. By reducing that obligation, your score -- no matter which mathematical model is used -- is bound to increase. Also, stop applying for consolidation loans or lines of credit. Such inquiries comprise only 10 percent of a FICO score, but an abundance of them will have a negative effect.

So that more of your payment goes to the principal rather than finance charges, you'll want to have the lowest interest rate possible. Appeal to your current credit card companies and request they lower your rates. Since you've demonstrated responsibility, they may give you a break with just a phone call.

Another option: Check out a credit counseling agency. These nonprofit organizations will help you develop a budget to free up the maximum amount of cash that you can apply to the debt. They'll also discuss their debt management plan (DMP). With these arrangements, you pay them once a month and they distribute the funds to your creditors. The advantage is their prenegotiated interest rate reductions.  Some creditors even waive all finance charges while you're on the plan. DMPs are set up for a payoff time frame of three to five years, but you are encouraged to pay it off faster, if you can.

There is much confusion about how DMPs affect credit reports and credit scores. To clear it up, know that a notation of participation may show up on a report, but a DMP has no impact whatsoever on a score. It's simply not a factor. That said, someone who views your report and notices that you're using a service may formulate an opinion -- which can be negative or positive.

Does this mean credit counseling is your best bet? No! You can create your own DMP. Here's how:

  • Figure out what you can pay each month and never send less than that amount.
  • Prioritize accounts by APR. Send more to the one with the highest rate, then work your way down.
  • Send extra cash whenever possible.
  • Don't charge another penny during your plan.

Use a credit card debt payoff calculator to see how much you can pay and how long it will take to become debt free. Some sample numbers: If you paid $643 each month and your average APR is 17 percent, it would take two years.

Finally, consider how you got so over your head in the first place. It's all well and good to pay the debt down, but chances are it will creep up again if you don't solve underlying spending issues.

See related: The five elements of a FICO score, What you must know about credit reports and credit scores, Video: How to pick the right credit counseling agency, Your first budget in a few simple steps 

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Updated: 01-21-2018