Improve Your Credit, Know the Math

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Sanyika Calloway Boyce may walk with confidence now, but years ago she admits she fell into a trap many Americans know well - out of control debt.

You know, those bills you'll take care of later, right?

Sanyika said the challenge with "later" was that it kept getting later and later, "to the point where I almost had to consider filing for bankruptcy."

Finally she entered into a different transaction, exchanging denial for responsibility, after realizing that she was almost $15,000 in debt.

Sanyika said she began, "making those payment arrangements, having candid conversations with the credit card companies, and moving beyond that place of fear and not opening my bills and not dealing with the situation as it was."

Most of us understand that debt is scary and costly; it keeps us awake at night. But for Sanyika, the beginning of freedom was education, and understanding how the credit game works and why it even matters.

Beginning of Freedom

It starts with something called your FICO score which can impact everything from how much you pay for a loan - the lower your score the higher your interest rate - to how fast you can get our of debt - the higher your interest rate, the higher your monthly bills. It can even impact whether or not you get your next job.

"We care because it is your reputation on how you are repaying your debt," Towne Bank Mortgage Vice President Kim Pate said. "We care because if you are going to be hired by an employer, they're going to check your credit."

That's why Pate tries to make it easy by encouraging clients to think of this as a math problem that can save you thousands of dollars.

This equation starts with something simple, paying your bills on time. Payment history accounts for 35 percent of this score.

"We want to make sure that you have the ability and the responsibility to repay the debt that you've taken on," Pate said. "So we're going to make sure that you're paying your car on time, your revolving debt on time, and your student loans on time."

Revolving Debt

Pate believes that the next part of the puzzle hurts people the most. It's the amount you owe on revolving debt, like credit cards, which adds up to 30 percent of your score.

"When you're looking at someone who pays their bills on time, but the credit score isn't as high as you believe it should be, it's typically because they have one card that they use each and every month," she added. "It has a high credit limit of $10,000 and it could have an $8,000 balance on it. Well, you're at 80 percent of that high credit limit and you really should be at 30 percent."

Go above that 30 percent limit and your score will go down. It's a sign that you may start maxing out your cards, so here's a new strategy for tackling your debt. This is different; something you've probably never heard before.

"Don't just start paying off the little credit cards that maybe have a high credit limit, because that's really not going to do it for you," Pate said. "You really need to pay down revolving debt to 30 percent or less, and then start paying them off."

Got that? Bring all of your balances down, then tackle them one-by-one. If not, your score will stay low and your interest rates will stay high, costing you money.

Credit Mix

Next, another lesson Sanyika learned; these bureaus also look at your credit mix which is 10 percent of your score, because not all credit is the same.

"Having a car loan is different than having a credit card," Sanyika said. "So when your credit score is considered and ultimately calculated. All of those things come into play. So it's important to understand the type of credit you have and having a good manageable mix."

For example, that car payment is considered installment debt, because there is an end in sight, as opposed to credit cards. These are known as revolving debt because, if you're not careful, they may never go away.

"They want to get rid of the revolving debt first. Forget about the fixed debt, which will eventually go away," Pate adds. "But the revolving debt is what you want to tackle first."

Rounding out your score is "pursuit of new credit," which adds up to 10 percent of your score. In other words, think twice before opening new department store accounts, no matter what kind of discount these stores are offering.

Credit History

Finally, your length of credit history accounts for 15 percent of your FICO score. It is an indication of how long you have had that creditor and how well you have paid them.

Sanyika learned to play this credit game well. She paid off that $15,000 in debt and formed a company to help the younger generation do the same; getting educated about the responsible use of credit.

"Time is the biggest factor," Pate said. "Your credit did not get to that place overnight."

"A lot of times we get overwhelmed and we think this is impossible, so I'm not even going to try," Sanyika adds. "So step back. Look at how much you owe: $5000, $10,000, $15,000, and start to decide where do I have to make some adjustments in other areas of spending, so that I can start paying down on this debt?

It's a math game, and learning the rules will save you money.

*Originally aired June 1, 2009

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