What to Do After You Pay Down Your Debt

You did it. It took discipline and patience. You had to give up a lot of little “extras.” It wasn’t always easy. But you stayed the course, and you’ve finally done it: Your high-interest credit card debt is gone. 

So, how do you keep debt from coming back? Should you adopt a strict “cash-only” policy? Should you cut up all of your credit cards? Should you close all of your accounts, effective immediately?

The short answer: No! 

We get it. Debt is stressful, and the impulse to stop using credit cards is completely understandable. But love ‘em or hate ‘em, credit cards are an integral part of modern life – and learning to use them responsibly can be a huge help when it comes to, say, buying a car or finding a place to live. In some cases, potential employers will even check your credit history to get a sense of how responsible you are.

In this blog, we’ll look at a few ways you can start learning to use credit again – especially if past debt problems have made you a little gun-shy.

Don’t close any credit cards.

It’s tempting, and it probably sounds counterintuitive, but closing a credit card will do more harm than good. Part of your credit score is based on your ratio of available credit. In general, the more (unused) credit you have available, the better. Closing a credit card makes your pool of available credit smaller – and that can drop your credit score a few points.

Consider a secured card.

If you’re looking for a way to help rebuild less-than-stellar credit, a secured card can be a helpful tool. A secured card is a lot like a regular credit card, with one exception: To get a secured card, you have to put down a cash deposit as collateral. The deposit can be anywhere from a few hundred dollars to a couple thousand – and it also functions as your credit limit. In other words, if your deposit is $2,000, the limit on your secured card is $2,000. Most secured cards allow you to transition to a regular, unsecured credit card once you’ve demonstrated responsible use. 

Set some ground rules for credit use.

Remember, the goal isn’t to stop using credit cards entirely – it’s to learn how to use them responsibly. And the best way to do that is to create some rules about how, when, and why to use credit cards. A few examples:

• Set rules around how many times you can use your card. For instance, you might decide that you can only use your credit card once or twice in a month.
• Establish a spending cap. If you want to keep your balance under control, you can set a strict spending limit. Capping your credit use at $50 or $100 is a good way to avoid racking up a high balance.
• Decide what kinds of purchases are acceptable. An impulse purchase at the mall is different than, say, a set of new tires. Rules about what you can (and can’t) do with your card will help you keep your balance in check.

Start small.

Feeling hesitant about using your credit card(s) again? There’s no rule that says you have to jump right in with a big-ticket purchase – in fact, it’s much, much better if you start with one or two smaller purchases a month. This keeps your credit card account active but reduces the risk of going overboard. Recurring – but small – payments work great for this (think: Netflix. Hulu. Your monthly gym membership). 

Pay your balance in full.

This is non-negotiable. You must pay your balance in full every month. Keeping a zero balance is a great way to show lenders that you’re responsible – and it will help boost your credit score, too. Most importantly, though: Paying your balance in full is a great way to keep debt from piling up over time.

Build an emergency fund.

What does an emergency have to do with credit cards? Well, here’s the thing: When you don’t have cash on hand to cover, say, an unexpected car repair or emergency dental work, it can be all-too-easy to just pull out the plastic. All it takes is one or two emergencies to land you in serious debt.

Now that you’ve paid off your debt, you can start building up an emergency fund to handle all of those surprises. Most experts recommend saving three to six months’ worth of living expenses. If that seems a bit lofty, try setting smaller, more attainable goals. Even having an extra $1,000 in the bank can help.

Create a realistic budget.

A budget is another great tool that can help you use credit wisely. Most folks don’t set out to rack up credit card debt. And in many cases, credit card debt isn’t the result of a few big-ticket purchases – it’s often caused by chronic overspending and lack of budgeting. 

Setting a budget can help ensure that you are living within your means and staying on top of your monthly expenses. Budgeting can also help you develop good financial habits, like saving and tracking your purchases. Just remember to make sure that your budget is realistic – and don’t be afraid to adjust it if it’s not working for you.

Keep an eye on your credit score.

If you’ve struggled with credit issues in the past, chances are good that you’re actively working to rebuild your credit score. Most banks and credit card issuers give you access to your credit score – so take advantage of it! As you continue to demonstrate responsible credit card use, you should see your score go up. 

Get your free credit report.

Everyone is entitled to a free annual credit report from the three major credit reporting bureaus. Unlike your credit score, which is just a number, your credit report offers a detailed look at your credit history, from missed payments to credit inquiries. 

Your credit report can also help you preserve your good name. By reviewing your credit report thoroughly, you can spot any errors that might affect your credit score (sure enough, lenders make mistakes, too!). Reviewing your credit report can also help you detect fraud or ID theft: If you see unfamiliar credit inquiries or accounts that you never opened, you can take action before it becomes a problem.

And of course, it’s important to remember that, when it comes to responsible credit card use, you don’t have to go it alone. The friendly folks at DebtGuru.com are happy to answer your questions and offer advice about rebuilding your credit.