Debt is a huge drain on your financial life. Payments on credit cards, student loans, a car loan or a mortgage suck cash out of your wallet that you’d probably rather save or invest. Besides that, heavy debt can also drag down your credit score. A lower credit score may mean higher interest rates on what you borrow, which makes it even more difficult to make a dent in what you owe.
Make a debt payoff plan
Make a plan for paying down your debt, especially if you’re clueless about what you owe or what interest rates you pay. When you’ve got several different types of debt, just figuring out where to begin can be the biggest challenge. Fortunately, one of the perks of being a Credit Sesame member is access to tools that can guide you.
How the Credit Sesame dashboard works
When you sign up for a free Credit Sesame account, you get a personalized credit dashboard. This dashboard shows you key details about your financial picture, including:
- Your credit score
- Your total debt owed
- Your total monthly payment amount
- Your debt-to-income ratio (based on self-reported income)
- Your individual credit grades for payment history, credit usage, credit age, account mix and credit inquiries
You can dig a little deeper if you’re a numbers nerd. For example, you can break down what percentage of your monthly payments goes to each type of debt. If you filled out your profile to include your income, you can see at a glance how much money you have left once your debt payments are deducted.
Your profile also lists the minimum payment for each debt along with the balances. Charts show how your balances have trended up or down over time and how you compare to other consumers on five different aspects of credit scoring: payment history, credit usage, credit age, account mix and credit inquiries.
All the information in your dashboard is based on your TransUnion credit report. When you sign up for a free Credit Sesame account, you’ll provide your Social Security number. This is used to access your credit history and create your dashboard but don’t worry, it’s not a hard inquiry and won’t hurt your score.
At the top of your dashboard is a “Recommendations” tab. Here you’ll find guidance on things you can do to potentially improve your financial situation. My recommendations, for example, are all for rewards credit cards that are designed for people with excellent credit.
Putting the dashboard to work
Now that you’ve seen what’s on your dashboard, what should you do with that information? You can use it to improve your finances in two ways.
1. Start with your debt
Assume that you’re an average Credit Sesame member. You have $4,305 in credit card debt, with a total credit limit of $12,977. That puts your credit utilization ratio at 33%, which is well above the 10% or less ratio that’s recommended if you want to break into the elite credit score club.
In addition to credit card debt, you have $38,064 in student loans, $20,126 on a car loan and a mortgage with an outstanding balance of $201,734. Your income matches the national median household income, which was $55,775 in 2015, according to the U.S. Census Bureau’s most recent data.
According to your Credit Sesame dashboard, your monthly payments break down like this:
- Credit cards – $86
- Student loans – $403
- Car loan – $363
- Mortgage – $987
Total monthly payments – $1,839
Based on a median income of $55,775, your monthly take-home pay is around $4,648. Once you subtract your debt payments, you have $2,809 to cover the rest of your expenses and accelerate your debt payoff.
Let’s say that you need $1,800 of that to cover utilities, insurance, transportation and the occasional non-essential item. That gives you $1,000 to commit to your debt payoff. But which debt should you start with? That’s where Credit Sesame can help.
Decide which credit card to pay off first
Click My Finances at the top of your dashboard, and then the different tabs that show your various debts. For each debt listed, you can plug in the Annual Percentage Rate (APR). An easy way to decide which debt to tackle first is to choose the one that has the highest APR, which is most likely going to be a credit card. If your credit card debt is in line with the $4,305 average mentioned earlier, you could wipe out that debt in four to five months by paying the minimum plus the extra $1,000 left over in your budget.
Once the credit card is gone, move on to the next debt on the list. If your car loan has a higher APR, you may choose that one next. On the other hand, if your student loan and your car loan have roughly the same rate, you may base your decision on which one you’d like to see gone the fastest, or which debt is smaller and can be paid off faster.
Mortgage debt is generally best to leave for last, since rates are usually lower than for other kinds of debt. If you don’t have a low APR on your mortgage, however, check your Recommendations tab to see if Credit Sesame can point you to money-saving refinance offers. A lower rate on your home loan can speed up debt payoff and save you money.
2. Look at how your credit measures up
Now, let’s look at your credit grades, which break down in order of how significantly they impact your credit score. We’ll use another example here:
- Payment history – C
- Credit usage – C
- Credit age – A
- Account mix – A
- Credit inquiries – B
If your grades look like this, you’re lagging in the two most important areas where your credit is concerned: payment history and credit utilization.
Improving your payment history grade begins with establishing a consistent payment history. Late payments and collections drag your score down in a major way. Pay on time, every time, starting now. Mark the due dates on a calendar or set up automatic payments.
You can lower credit utilization in three ways. The first is to pay down your debt balances. The second is to ask your creditors for a credit limit increase.
The third option is to apply for a new credit card, based on what Credit Sesame recommends. When you open a new credit account, your available credit goes up. Your utilization is your revolving debt balances divided by your total available credit, so more credit means a better percentage. Just don’t charge up the new card as you chip away at your existing balances.
A word of caution. Each time you apply for credit and the lender pulls your credit report the inquiry shows up on your credit report. Inquiries carry less weight than payment history or credit utilization in shaping your score but too many inquiries all at once can be damaging. If you’re going to open a new account, study the Credit Sesame recommendations first. That can help you find a card that you’re most likely to be approved for so you can avoid racking up multiple inquiries that bear no fruit.
Leave room in your plan for adjustments
While Credit Sesame can get you headed in the right direction where your credit and debt are concerned, it’s important to remember that your plan may need to change over time. If your income goes up, for example, or you have to take out a personal loan or charge up your credit card to cover an emergency expense, those events can throw a wrench in your timeline. Adapt and tweak your plan accordingly to get back on track if you’re temporarily thrown off-course.