In the previous article we discussed building up a savings account as the important first step in building up your financial fortress. The second stage in our program of economic defense is to pay off your credit cards.
I know. This is not a fun or exciting piece of advice, and it is certainly not new or breaking news, but it is absolutely important. As I discussed in my article “The Magic Bullet, Get Rid Of That Debt Burden”, paying down your debts is a powerful way to strengthen your finances. Don’t feel bad or guilty about the debts you have built up. Those feelings are not productive and often cause people to shy away from facing the truth and beginning to deal with it. Just look at your debts. Face them, and start to deal with them. Paying down your debts, will free up extra money each month. As you work towards eliminating them, this extra money will continue to grow and grow. Eventually you can begin to set these funds aside into your savings. So the benefits of paying off your credit cards, will eventually compound the effectiveness of your savings efforts.
It is important not to be overwhelmed by whatever debts you have. Like with savings, just start working on them. If your credit balances are extremely large, then get the balances moved to low rate cards. This will make your payments work harder, and waste less money on interest payments. You didn’t get into debt over night; you won’t work your way out of debt over night. It will take a while, but you will eventually get there.
As you pay off your credit cards, do not close the accounts. At least, do not close your general Visa or Mastercard type cards. These are an important part of building and maintaining a high credit score. I do recommend closing gas cards and department store cards because they often have extremely high interest rates. Just maintain a couple of regular credit cards.
Once you have paid off all of your credit cards, you should use your remaining open accounts every month or two, and pay off those charges immediately. This will help you build up a good credit score (FICO score). A high credit score will allow you to take out home loans and car loans at very low interest rates, and it can be an important factor in getting a job.
So, by paying off your credit card debt, you have added to your financial fortress in many ways. You have eliminated the burden of those debts. You have improved your credit scores, and you have freed up a great deal of available credit. (This should not be used except in an emergency. However, it could be very helpful in allowing you and your family to get through a sudden economic hardship.)
Once your debts are gone, using credit responsibly will help build up another barrier in your financial fortress, by building up an excellent credit score. This is important in helping you to get loans at cheaper rates (thus keeping more of your money), and it could even help you to land a job in a difficult time.
So, as you can see controlling your credit is critical in building your financial fortress. We will continue discussing your future financial weapons in an upcoming article.