Paying down existing balances trumps need for secured card

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 Dear Opening Credits,
I would like to buy or lease a car soon. I have two credit cards I am currently paying off. One has a balance of $1,818, and the other about $1,200. My current credit score is about 568. Should I pay off my current debts and then open a secured card to build my credit up? Would that make a huge difference in my score? I’m trying to avoid paying a very high car note. – Mimi


Dear Mimi,
You are absolutely right to try to increase your credit score as soon as possible. Scores as low as yours indicate a strong level of risk. A bank or leasing company will see those numbers after you apply and immediately make a negative presumption about your financial abilities.

To qualify for the very best loans and leasing deals, you will need a steady, well-paying job plus credit scores that are in the mid-700s and above. You can bring those scores up faster than you think!

You have about $3,000 in total liabilities. That’s not so bad, but if those balances are close to or at your charging limit, your credit rating is suffering because you’re maxed out. The FICO score in particular ranks credit utilization (the amount you owe compared to your credit limits) as a very important factor.

If you can kick about $527 to your combined accounts every month before the due date (assuming an interest rate of about 18 percent), you could be out of debt in six months. Or, if that’s too much for your budget to handle, you could pay $274 a month toward both accounts for 12 months. The timely payment pattern will also help, as scoring systems rank payment history as the weightiest factor. You don’t mention why your scores are so low right now, but I guarantee that if you satisfy your obligations swiftly while also establishing an on-time payment pattern, those numbers will escalate.

To get a quicker boost, apply a larger portion of your combined payment to the balance on the card with the lower credit limit. That way you can reduce your credit utilization ratio quickly. For example, if the $1,818 balance is on a card with a $2,500 credit limit and the $1,200 balance is on a card with a $3,000 limit, then apply a bigger payment to the card with the $1,818 balance.

A secured card is a terrific starting account, and I do recommend them to people who have trouble qualifying for regular, unsecured credit cards. However, since you already have two active card accounts, I don’t see a need for you to apply for a new card because that would result in a hard pull on your credit, which can knock your score further into the hole.

Follow this plan and you should see a vast improvement in your credit scores in half a year.

Finally, be sure that any new car payment will be within your means. If it’s not, you may find yourself leaning on credit cards again to pay for the things you need, and the debt will start to creep up. Then your credit scores will once again take a downward turn.

See related: The hard and fast rules of hard inquiriesNew to credit? Build score with car loan, secured card, How a car repossession affects your credit

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Updated: 02-21-2019