How to Manage Your Debt

Tired young mother working from home

Through April 20, 2022, Experian, TransUnion and Equifax will offer all U.S. consumers free weekly credit reports through AnnualCreditReport.com to help you protect your financial health during the sudden and unprecedented hardship caused by COVID-19.

While it's always good advice to avoid carrying more debt than you can handle, eliminating debt from your life entirely may not be possible—or even necessary. Some debt, such as a mortgage or a manageable student loan, can help you reach goals that are important to you. Plus, paying down debt on time helps you build and maintain an excellent credit score. That, in turn, can help you borrow money at lower interest rates in the future, get credit cards that earn rewards and more.

But there are right and wrong ways to make use of debt. Use these strategic tips to ensure that any debt you take on will work to your benefit instead of weighing you down.

Get a Handle on Your Debt

Properly managing debt has two main components: paying all bills on time and keeping your balances low. To do both, you must first understand exactly how much debt you have. That can help you determine if you can afford to take on further debt, if you have the means to pay extra toward your current balances, and if it's time to make a change through a process like debt consolidation.

Here's how to get a handle on how many debt accounts you have and how much you owe:

  1. Check your credit reports. Look at each of your credit reports from all three consumer credit bureaus (Experian, TransUnion and Equifax) at least once per year. Viewing your credit report regularly is a good habit to get into, and it's free to access your report once per week from each credit bureau via AnnualCreditReport.com through April 20, 2022. You can also view your Experian credit report and FICO® Score for free directly through Experian.
  2. Keep track of your debt accounts. When evaluating your credit report, pay special attention to the "Accounts" section. That's where you'll find all credit cards and loans in your name, plus their account status (such as "current" or "past due"), credit limit or original balance, and term. Create your own record of your debts so they're easy to keep track of, whether that's in a spreadsheet or written down in a notebook. For each account, note the lender, current balance, interest rate and monthly payment due date, plus the original balance and final payoff date if it's a loan. Having this information in one central place can help you feel less overwhelmed by debt, and can help you more easily identify any action you need to take.
  3. Make sure you recognize all the accounts listed on your credit report. If you didn't open one or more of the accounts you see, it's possible a fraudster did so in your name. Contact the lender right away to figure out whether you've been a victim of identity theft. You can spot these issues more quickly when you monitor your credit regularly, perhaps with a service like Experian's free credit monitoring tool, which provides an updated Experian credit report every 30 days.

Pay Bills on Time and Pay More Than the Minimum

The most important element of your FICO® Score is your payment history. The more often you make on-time payments toward your accounts, the better it is for your scores.

As you manage your debt, it's crucial you pay every bill on time, as even a single late or missed payment can have a significant effect on your credit. Setting up automatic payments from your bank account makes sure you pay at least the minimum required payment each month—just be sure to keep enough money in the account to cover it. Your credit score will benefit even further if you pay more than the minimum on your credit cards (more on that below).

Making payments for more than your monthly minimum will help prevent you from carrying balances that will result in interest charges. Getting into the habit of paying down credit card balances as much as possible will help prevent charges from building up to the point that your debt is out of control.

Limit Your Outstanding Balances

The second most important factor in your FICO® Score is the amount of debt you owe, which also includes the amount of credit used in comparison to your credit cards' limits (your credit utilization). For the most benefit to your credit scores, it's best to keep balances as low as possible. That's because your credit scores can be negatively affected more significantly as your utilization approaches and climbs above 30%. In other words, if your limit on a credit card is $1,000, think of $300 as your actual limit for charges each month. For the best credit scores, keep your utilization in single digits.

Make it a goal to pay off your credit card balance in full by your billing date to keep your credit utilization as low as possible.

Use Credit Cards Strategically

There are times when using a credit card is a smart way to finance a purchase, particularly if you use a credit card that allows you to collect rewards. Cash back or travel credit cards, for example, may give you a statement credit or travel miles for every dollar you spend. Choose a card that provides rewards on your biggest spending categories, like groceries, gas, dining out or entertainment.

Carrying a balance and paying interest on the card will eradicate those benefits, however. Only consider opting for a rewards card if you're confident you can pay off your balance each month.

Carefully Consider Taking on New Debt

With any type of debt, there's the risk that you won't be able to make a payment on the account and wind up with a late payment or, at worst, a defaulted account. This can result in damage to your credit score, which can make it harder to borrow in the future. If you're not sure that you'll be able to make debt payments as agreed, hit pause before applying for a new credit account.

Consider, for example, using your credit card only for occasional purchases you have to finance, like a new computer that you don't have the savings to cover. Or, use your rewards credit card for specific purchases you'll get cash back or points for, then pay off the whole balance each month.

When looking into an installment loan, use a calculator—one for car payments or mortgages, for example—to understand exactly how much the monthly payment could burden your budget.

Avoid Common Credit Mistakes

These habits can make debt more of a strain, and can prevent your credit score from benefiting from the debt you've decided to take on.

  • Making only the minimum credit card payment: While paying the minimum balance every month will prevent a missed or late payment, it can be a recipe for a ballooning credit card balance. Make the minimum payment only during months when your budget truly has no room to stretch; otherwise, always consider the full outstanding balance the ideal amount to pay off each month.
  • Closing credit cards you rarely use: If a credit card comes with a high annual fee that you can no longer afford, closing the account could be a good idea. In nearly all other cases, your credit score will be stronger if you have a long credit history and a higher overall credit limit (assuming you use only a small proportion of it). Consider keeping your oldest cards open and making occasional charges to keep them active and prevent credit limit reductions or account closure.
  • Assuming paying off an installment loan will improve credit: You likely won't see an immediate improvement in your credit score when you pay off a mortgage, car loan, student loan or personal loan—even if the loan is paid in full earlier than required. The loan will be "closed" on your credit report, and all of that loan's positive payment history will no longer figure as significantly into your credit score. It may give you peace of mind to pay off a loan early, but the credit score impact shouldn't be the top reason you do so.

Managing your debt so you get the most benefit from your loans and credit cards involves being aware of exactly how much debt you have and keeping balances low—particularly with credit cards—so you don't find yourself taking on more debt than you can comfortably afford. Simply knowing how much you owe and paying as much as you can toward your debt can help you reach your financial goals sooner rather than later. If you're worried your debt has already gotten out of hand, consider enlisting the assistance of a certified credit counselor, who can offer advice and more to help you bring your debt back under control.

The purpose of this question submission tool is to provide general education on credit reporting. The Ask Experian team cannot respond to each question individually. However, if your question is of interest to a wide audience of consumers, the Experian team may include it in a future post and may also share responses in its social media outreach. If you have a question, others likely have the same question, too. By sharing your questions and our answers, we can help others as well.

Personal credit report disputes cannot be submitted through Ask Experian. To dispute information in your personal credit report, simply follow the instructions provided with it. Your personal credit report includes appropriate contact information including a website address, toll-free telephone number and mailing address.

To submit a dispute online visit Experian's Dispute Center. If you have a current copy of your personal credit report, simply enter the report number where indicated, and follow the instructions provided. If you do not have a current personal report, Experian will provide a free copy when you submit the information requested. Additionally, you may obtain a free copy of your report once a week through April 2022 at AnnualCreditReport.