Strategies to Build Credit and Reduce Debt 

By: Samuel Molina, AFC® 

Credit, the one financial product that allows consumers to live well beyond their means and achieve their dreams without having to wait until the income is earned. Is it any wonder why it is so often abused? American households now account for $1.21T in debt. Yet, while there is so much information available online on how to navigate credit and manage debt, it can be confusing, and many are left with questions that often go unanswered. Let’s try to simplify matters. Here are some immediately actionable strategies to build credit and reduce debt:  

Don’t Close Old Accounts:

Sometimes, this is unavoidable. When we pay off our home or vehicle, the account typically closes, but with credit cards, we have the option to keep the account open even after the balance is paid in full. The reason you shouldn’t close your credit card account is that your payment history, which accounts for 35% of your credit score, may disappear. Unless you have an annual fee or feel obligated to close your account, do your best to keep it open. Credit bureaus like to see actively managed credit.

Several clients and students have told me they paid credit repair companies hundreds, if not thousands of dollars to negotiate their debt. The great news is you can do this yourself. YES, YOU CAN! Call your credit card company and ask them to reduce your interest rate. In my experience working with clients, I’ve seen them lower rates by as much as 13–20%, resulting in big savings. For example, if you have a $1,000 balance at an 18% interest rate and negotiate it down to 13%, you could save $197 in interest (assuming you make only minimum payments) and position yourself to pay off the balance eight months sooner. Moreover, you’ll not only save on interest, you’ll pocket the money you would’ve paid someone else to do it for you. It’s a win-win.  

Before you make the negotiation call, make sure of a few things:  

• Double-check that you haven’t missed any payments 
• Ensure that your credit score is in a good place (above 600).  
• Once you’ve checked those two boxes, contact your credit card company and say the following: 

 

“I have made on-time payments for the last 6 or 12 months and I would like to have my interest rate reduced. What can you do for me?” Wait for them to respond and try to get them to go as low as possible.   

If they refuse, ask them why. Don’t be afraid to ask or be scared to try again in the future.  

Balance Transfers: 

Credit card companies may offer the opportunity to transfer a balance from a high interest account yet will charge you anywhere from 3 to 5% in a balance transfer fee. Before initiating a balance transfer, be mindful that you’ll need to pay the balance off before the promotional period ends—typically within 12, 15, or 18 months. Check the promotional period before moving forward. Transferring balances can be very effective, as it allows you to move your debt from a high-interest account to one with a much lower rate – often as low as 0% to 2.99%. That’s a major cost-saving benefit. 

Keep Your Credit Card Balances Below 30%: 

Credit utilization accounts for 30% of your credit score, but this does not include your mortgage or vehicle loan. If you use more than 30%, it begins to negatively affect your credit. Credit bureaus will deem you more of a risk, thus lowering your credit score. For example, if you have four credit cards and a total balance of $10,000 across all of them, do not use more than $3,000 (30%); otherwise, you may have your score reduced. 

I have found these strategies to be very effective. Whichever credit building and debt reducing decision you make, always run the numbers. Ask for help and seek out a financial professional. Remember, credit can be a powerful tool when managed wisely—it’s not about avoiding credit, but about learning to use it to your advantage. 

 

Samuel Molina is an Accredited Financial Counselor® and CEO and Founder of The Academy of Financial Education, a non-profit organization dedicated to narrowing the wealth gap for its community through activities, coaching, education, and instruction. Visit Samuel’s FindAnAFC profile to view his services and connect with him on LinkedIn.