WSJ Your Money Briefing - Money Moves for the New Year: How to Pay Debt and Boost Your Credit Score

Episode Date: December 23, 2024

Are you ready to take control of your financial future in 2025? Our new four-part series, “Money Moves for the New Year” will answer your questions about achieving your money goals. In the first episode, we’ll hear from Aqua Richards, who aims to pay off $10,000 in credit card debt and boost her credit score by more than 100 points next year. Host J.R. Whalen is joined by WSJ personal finance reporter Imani Moise and financial planner Stephanie Genkin to discuss what you should know about creating a debt-repayment plan and the pitfalls to avoid.  Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

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For new U.S. customers with minimum financial commitment, offer ends $12.3124. See if your company qualifies at oracle.com slash wall street. Here's your money briefing for Monday, December 23rd. I'm JR Whalen for The Wall Street Journal. Here we are about a week away from turning the calendar to 2025. And you know what that means, setting those New Year's resolutions like getting ourselves in shape. For a lot of people, ringing in the New Year also includes a plan to get their finances

in shape. But solving personal finance challenges is no easy task. How do I improve it to the best of my ability within the next year? How easy or difficult the job market is? How long will my money last? Welcome to part one of our special series, Money Moves for the New Year.

Over the next week, we'll talk to WSJ reporters and financial professionals about the biggest personal finance questions you have for 2025, like boosting your credit score, leveling up your career, prepping for retirement, and saving up for a big expense. So how do you make a plan and stick to it? Today, we're kicking off our series

by talking about paying off debt and improving your credit score. I have close to ten thousand dollars in credit card debt. That's Aqua Richards. She's 25 years old and lives in Atlanta, Georgia and she has two major goals for next year. One of my biggest is to pay off all of my credit card debt. That debt is split between three cards. She traveled a bit this year, did some online shopping, and racked up debt from when she was out of work. To meet her 2025 financial goal

of paying off her credit cards, Aqua knows she needs to have a plan. Her biggest question, what's the best approach? What are the best strategies? Is debt consolidation a good idea? Is a credit card transfer. Great idea. To dive into this, I spoke with Stephanie Genkin.

She's a certified financial planner and founder of the investment advisory firm, My Financial Planner. Stephanie, it's one thing to say you're going to get yourself out of debt. It's another thing to actually do it. How should someone approach this process? First of all, anybody who's in debt, be kind to yourself if you have credit card debt and

try not to judge yourself or be shamed by it. This will help you actually tackle it. And the second thing I would say is the mindset is not to try to do it so fast because probably it didn't happen quickly, but to give yourself grace to actually get rid of it properly. What's the best strategy to do that? So there's two methods that people use. One is the snowball where you start with the smallest debt first, build that muscle up,

and then it's motivating to keep going. It's like practicing for a marathon. You run short races first and you build up. And that works for some people where they might have self-doubt and they need a quick win. The other way of doing it is looking at the highest interest rate first. That's going to save you the most amount of money, but it's also possible that across three cards that total $10,000, it's a long slog and

you could get discouraged along the way. Acqua wanted to know if debt consolidation was a good option. Can you explain what that entails? Debt consolidation is usually working with a company that is going to help put all your debt together, possibly lower the rate, do some negotiation. I don't really favor that as the first thing to go to. I like to encourage do-it-yourselfers first and gain that confidence with a little bit of organization to get it done. So one of the things that one should try before even just throwing up your hands and saying, I can't do this,

I'm going to refer to a debt consolidation. In this case, I'll use the example of take a clean piece of paper and write down each credit card, the total balance, the interest rate, and your monthly minimum payment. When I have my clients do that as part of a financial intake, the clarity just comes into focus. Many times people are not looking at this

because they're upset what they have, they're beating themselves up, and they don't wanna look. And then what you're gonna do is understanding that you're gonna find room in your budget, otherwise known as a spending plan, to see where you might be able to cut down some spending you don't need right now, to put it more towards the credit card debt.

Often when I'm trying to be efficient, I tell people make monthly minimum payments on two of the three cards and then give the biggest punch monthly to the one that you want to tackle first whether it's the lowest balance to get a quick win or the highest interest rate to save the most amount of money. Once that's paid off, then you can snowball it into the next.

Can transferring balances from one credit card to another help lead somebody out of debt? So there's pros and cons of this. The pro is that instead of having a 29% interest rate, which I just saw one of my clients recently had, everything you're paying back is principal. So it really saves time and saves money. But the con side is if you're the person that's going to keep charging things, then the clock is going to run out and that 0% goes to a much higher balance.

But for people who are like, I'm very focused, I make enough money to do this, I'm going to do it, I think that the 0% balance is really a great opportunity to get rid of this. Because think of it this way, when you have $10,000 of credit card debt, some people will see it as, oh, I just have to pay off $10,000. But actually, if it comes with a 19%, 25%, 30% interest rate, it will take you much longer. You don't realize how insidious the interest rate is. So somebody's paying off their debt and they've paid off one of their credit cards, but they don't plan to use that card going forward, should they keep the card open? Oh, absolutely.

What you don't want to do is close the card or leave it dormant. Because if you close the card, now you're shrinking your available credit, and when you are using credit, it's a bigger proportion. And we don't often think of that, because if you don't work in the credit industry, you don't know. So you do want to keep the card open after it's been paid off. But what you would do is you'd put a low-cost item that's

reoccurring, like my Netflix example, and auto-pay it so you never miss a payment. That automating the $10 and forgetting about it, so to speak, but knowing that it'll be covered is going to pump good information into your credit score, showing that you paid it off, you're a responsible user, the court is still open, and that's going to help the score as you're battling through the rest of the debt. One key to fulfilling your 2025 resolution to give your finances

a reset or achieve other financial milestones like purchasing a home or a car is having a strong credit score like Stephanie mentioned. We'll talk to her about boosting your number. Plus, WSJ Personal Finance reporter Amani Moise will join us after the break. AI is coming to your industry if it isn't already here, but AI needs lots of speed and computing power. So how do you compete without cost spiraling? Upgrade to Oracle Cloud Infrastructure, or OCI. OCI is the blazing fast and secure platform for your infrastructure, database, application development, and AI workloads. Right now, Oracle is offering to cut your current cloud bill in half if you move to OCI. For new U.S. customers with minimum financial commitment,

offer ends $12.3124. See if your company qualifies at oracle.com slash wall street. Paying off her credit card debt is just part of Aqua Richards' financial goals for 2025. She wants to buy her first home, ideally a three-bedroom in the North Atlanta area. But to do that, she has to focus on another goal, boosting her credit score. My score right now, I think, is at a 620, and so I want to improve it to a 750. But obviously, I don't know if that's achievable, but I just want to increase it as much as I can within the next year so that I can buy a house. And it's a common goal.

A 2023 survey from NerdWallet found that four in five Americans are trying to improve their credit score. Financial planner Stephanie Genkin is back with us and lays out what you can expect when trying to increase your score, starting with a situation like Aqua's. Stephanie a moment ago we heard from Aqua who would like to improve her score to 750. That'd be a roughly 130 point boost. How long could it take to build up a score by 100 points?

It depends on how far in the hole you are But one of the important things is to never be late with a payment So even if you're still only able to make minimum payments making them in time is the most important thing because Missing a payment or two by a month or two Really wax your credit score hard. So the more good information you're funneling into the account, the more readily your credit score is going to go up. Another easy way for people is let's say you have one credit card and you have a $10,000

limit on it. And without spending more money, because again, we want to pay this down, you could call and ask them to raise the credit limit. So let's say you went from 10,000 to a $15,000 credit limit and you're not using this and you're not even using your credit card anymore except for a little bit here or there, your credit utilization ratio goes down.

That's a big fancy word of how much credit you use compared to what you're allowed to use and that will pump better information into your credit score over time. If somebody misses a payment along the way or they slip up, what should they do? First of all call the credit card company quickly and explain the circumstance and of course pay it immediately. If you've slipped up and let's say you missed a payment and you realize it within a week, ask for mercy and pay it right away. And very often they haven't had a chance to report it on the credit report yet.

The other thing I would say is when you automate the payments or at least the minimum, then you never are going to miss a payment. If someone wants to plan out how to raise their score over the course of the year, how could they approach that? If since you got the credit card, you've had increase in salary, call them up, raise the limit and don't use the card much. Maybe you're gonna automate it on something small

like a gym membership or Netflix or something like that. And then what you wanna do is after you've seen how much money could you reduce your spending by or increase your earning by to be able to automate payment on one card that you're targeting. One mistake I see people make, both psychologically and numerically, is that they start paying a lot more across all cards. And they're never really getting anywhere. And so what I would say is pay the minimum on a low interest rate card and then put all your firepower,

however you do it, whether you took like a side hustle during the holidays, some dog walking, whatever, reduction of spending in your lunch or going out budget and start putting it more towards the debt and target one card so you're starting to see immediate results. That is going to improve your credit score and you're going to also have the stamina to keep running. So how does the system work? If somebody is making these changes, how long until they could see results in their score? It's not going to shoot up overnight, but I would safely say that in six months,

you're going to see an improvement. That's why I was suggesting that it's not about getting rid of debt fast. It's about doing it forever. So raising your credit score isn't a sprint. It's a marathon. To explore what could be holding you back from improving your score, I spoke to my colleague Amani Moise.

She's a personal finance reporter and has written a lot about the credit industry. About how long do you have to make payments and make a pattern of payments to have a positive impact on your credit score? So, you want at least a few years of credit history. That's another factor that goes into your score. And that's the next largest factor, is the length of your credit history. So that means that as you get older

and have a longer credit history, your score should theoretically improve as long as you keep your payment history pretty good. The other two factors that go into your score are your credit mix and new credit. And what your credit mix is Having a bunch of different kinds of loans So installment loans like a mortgage or a personal loan combined with revolving loans like a credit card

Can help you keep a higher score and then new credit That's just the way that the algorithm keeps track of how many Inquiries or how many new applications you're submitting? Because if a prospective lender sees that you have applied for maybe five credit cards within the past six months, that could be your red flag. What can someone do to monitor their credit score over the course of the year? It's gotten much easier to keep track of your score and your credit report in general.

For example, if you have a credit card, a lot of times in your banking app, that bank or lender will give you a copy of your score once a month. The other way to do it is to go to annualfreecreditreport.com, which is a free website run by the major credit bureaus, so Experian, Equifax, and TransUnion, where you can check your credit score for free and make sure that there's no errors on that report because that could be weighing down your score. And despite the way the website sounds, you could actually get your credit report

for free once a week. You don't have to do it once a year. And then if you were a part of a data breach within the last year, so a significant percentage of the population, you're probably eligible for free credit monitoring. So check the breach notice that you probably got in the mail

and there should be a website that tells you how to sign up for that. And remember what Stephanie Genkin told us earlier in the episode. Your credit score isn't going to shoot up overnight. But you do have the power to boost your number by creating a plan and making some changes along the way. That's it for part one of this special series from Your Money Briefing. Join us tomorrow when we'll hear about another 2025 resolution you might have on your list. I want to land a job that is at a company that I'm like passionate about and that helps me live like a full life outside of work too.

And we'll get answers from a career coach about strategies to land that dream job. This episode was produced by Ariana Osborne. I'm your host, J.R. Whalen. Sound design by Michael Laval. Our supervising producer is Melanie Roy. Aisha Al-Muslim is our development producer. Scott Salloway and Chris Zinsley are our deputy editors. And Falana Patterson is The Wall Street Journal's head of news audio. Thanks for listening. AI is coming to your industry if it isn't already here. But AI needs lots of speed and computing power. So how do you compete without cost spiraling?

Upgrade to Oracle Cloud Infrastructure, or OCI. OCI is the blazing fast and secure platform for your infrastructure, database, application development, and AI workloads. Right now, Oracle is offering to cut your current cloud bill in half if you move to OCI. For new US customers with minimum financial commitment, offer ends $12.3124. See if your company qualifies at oracle.com slash Wall Street.