Your credit score is what lenders and banks use to assess your ability to pay back whatever money you borrow:
As such, understanding and managing your credit score has always been important.
Yet in an age of data breaches, online fraud, and identity theft, it’s more common for incorrect blemishes to suddenly appear on your credit history — often without you realizing it. It also doesn’t help that consumer debt is on the rise nationwide. Below are just a few surprising statistics:
Add all this together, and it becomes clear why National Credit Education Month matters. We have a lot of debt, and it’s becoming harder and harder to manage.
This is especially true for consumers (who are the primary target of this annual awareness month). However, credit education is also important for businesses, since payment fraud, identity theft, and debt can affect merchants.
The first step involves understanding how credit scores work. They’re usually based on numerous factors including:
The FICO scoring model ranges from 300 to 850, with the average score hovering around 711.3
Under the Fair and Accurate Credit Transactions Act, you’re allowed one free report per agency every year.4 You can also use any number of monitoring services, like Credit Karma or Credit Sesame.
Once you have your credit report, look for any mistakes, including:
If you spot anything out of the ordinary, it’s important to correct it ASAP by contacting:
It’s a time-consuming process; however, the longer you let these errors slide, the harder it will be to repair your credit score.
Finally, you’ll need an action plan for paying down the remaining actual debt. Even if your credit report looks clean, the ultimate goal is to improve your score as much as possible. Doing so will help you qualify for lower interest rates in the future.
Below are some tips to help you get started.
Two of the most popular strategies to help reduce or eliminate debt include the Snowball Method and the Avalanche Method.
With the Snowball approach, you make the minimum payment on all of your outstanding debt (so as to avoid late fees or interest hikes). Any money left over should be devoted to the smallest loan obligation.
Once that first balance is paid, you can turn your attention to the next smallest debt.
This strategy can help keep you motivated, since you’re able to see your progress very clearly. The downside of the Snowball method is that you end up paying more in interest than you would with the next strategy.
With this approach, you still pay the minimum amount on all of your balances. If there’s any money left over, use it to pay down whichever account has the highest interest rate.
This strategy minimizes the total amount of interest paid as you work to reduce your debt. It’s a bit harder to see your progress and stay motivated, but the Avalanche approach can ultimately save you more money in the long run.
Ideally, you should revisit these strategies periodically throughout the year, but with our increasingly busy lives, that’s not always possible.
Set aside time this March to get your credit history in shape.
If you’re a small business owner and would like to learn more about how to run your operations easier with our smart point-of-sale (POS) systems, schedule a free consultation with our merchant services team today.
This information is provided for informational purposes only and should not be construed as legal, financial, or tax advice. Readers should contact their attorneys, financial advisors, or tax professionals to obtain advice with respect to any particular matter.
1 “2020 American Household Credit Card Debt Study,” Nerdwallet, 12 January 2021
2 “Average Car Payment | Loan Statistics 2021,” Lendingtree, 5 February 2021
3 “The average credit score by age, state, and year,” Business Insider, 16 December 2020
4 “Fair and Accurate Credit Transactions Act,” Ballotpedia
Sign up and learn more about Clover.