This is the latest update on my attempt to do the ReadyForZero New Year’s Challenge. If you want to read previous updates (and I know you do!) just click here: Intro, Week 1, Week 2, Week 3, Week 4, Week 5, Week 6.
In this week’s update we’ll do all kinds of fun stuff, including:
1) look at my credit card payment for this month
2) find out if my credit score has improved
3) see how my credit score would change in different scenarios
My Credit Card Payment
When I started my New Year’s Challenge, I had $3,200 in credit card debt. That amount was leftover from 2011, and I was determined to get it completely paid off in 2012. My first task was to decide how much I could pay each month. I solicited advice from readers of this blog, and, based on encouraging responses from friends and personal finance bloggers Ben Edwards and Carrie Smith, I decided that I would attempt to pay off $480 per month, which would make me debt free in about 7 months.
So far, it’s been two and a half months, and I feel like I’m making some serious progress. Since January, I’ve been following the tips in our Zero Debt Action Plan to help me save money and conquer my debt. And Last month I made my first $480 payment as planned, bringing my debt down to $2,716, which felt great!
So how much did I pay off this month?
Let’s go to my trusty ReadyForZero snapshot to find out:
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Okay… so the bad news is that I didn’t quite pay $480 this month. The good news is that I paid about $355 – which means I’m $355 closer to being debt free! As I said in last week’s update, you can’t let minor bumps in the road throw you off course. It would have been great if I paid $480 again this month, but no matter what, my debt was not going to disappear this month, and that means perseverance is the most important thing to keep in mind.
I’m actually really happy that I’ve had two months of significantly paying down the credit card. My new debt total is $2,361, and next month I should be able to bring the total balance down below $2,000, which would be fantastic.
My Credit Score Update
In Week 3 of my challenge, I got my free credit score from CreditKarma.com, and it was a whopping 742, which was exciting. More recently, I signed up for their new free credit monitoring service, which delivers alerts to your inbox when there’s a change to your credit report. It’s a very useful tool, and luckily so far I haven’t seen any alerts regarding erroneous or negative additions to my credit report.
However, I was curious to see whether my credit score had changed in the last month, so I logged onto CreditKarma to find out. Here’s what I found…
Okay, I have to admit I was a little disappointed that the score had not changed, because it would have been fun to see that score go up even higher. But I guess it’s not too surprising, because the only thing that has changed about my finances in the last month is that my credit card balance went down. Apparently that was a small enough change that it didn’t affect my credit score.
That made me wonder, though: what would it take to make my credit score go up? To find an answer to that question I relied on a great tool…
My Credit Score Scenarios
In our Zero Debt Action Plan, we describe various ways to improve your credit score. And thanks to CreditKarma’s Credit Simulator, it’s easy to predict the outcome of different actions you might take. The simulator is a really neat tool that allows you to test various scenarios and see how your credit score might change.
Scenario 1: Pay off my credit card balance
The most obvious thing I could do to help my credit score would be to keep paying down my balance, and in fact that is what I’m planning on doing. But we already saw how my credit score stayed the same since last month despite the fact that I paid off over $800 of my balance. So what would happen if I paid off $1,000 over the next couple months? According to the credit simulator said there would be no change. Darn! However, if I paid off my balance entirely (which I could do in the next 5 months), here’s the predicted outcome:
Wow! That is a pretty big change. According to CreditKarma, only 22% of Americans have a credit score above 750, so it would be great to climb all the way up to 778. But that’s not something I can do immediately, so let’s see if there are any other actions I could take (other than paying off my balance) that would boost my score…
Scenario 2: Increase my credit limit
One of the main components of your credit score is your rate of credit utilization, or in other words, the percentage of your overall credit you’re using. For example, if your credit card allows for you to spend up to $10,000 and you have a balance of $1,800, then your credit utilization is 18%. So what would happen if I convinced my credit card company to raise my credit limit by $5,000? The credit simulator says…
That’s not a very big difference! I suppose even a small increase like that might help if I were about to apply for a car loan or a mortgage. But since I’m not planning on doing either of those things anytime soon, it’s probably not worth it (especially since it’s possible for the credit card company to lower my credit limit rather than raise it, when I call to ask for a review of my credit limit).
Scenario 3: Get another credit card
There might be a better option, however. What if I got a new credit card? Theoretically, it should help my credit score because (A) it would increase my credit limit substantially and (B) it would add another account to my credit report – which is apparently something I need. The downside is that applying for a new card would put a hard inquiry on my credit report. Would that outweigh the benefits? Without the credit simulator, I’d have no idea. But using the simulator and I can find out. Here’s how my score would change if I went out and got another credit card with a $10,00 credit limit:
So you’re telling me I could add 16 points to my credit score simply by getting another credit card? I suppose the risk is that I would start charging more things and run up my balance. However, that has not been a problem for me in the past. I do have a balance on my single credit card right now, but I’ve never come close to reaching my credit limit. I’ll have to seriously consider this option and decide if it’s worth the effort to pursue this potential 16-point increase in my credit score.
In the meantime, I’m going to continue working to stay within my budget and next week I’m going to write an update on my attempts to generate some extra income – so be sure to check back next week and see how I did!
Are you interested in paying off your debt so you can have more money in your life? Give ReadyForZero a try: