Earn a Big Bonus? 5 Ways Not to Blow It

Earn a Big Bonus? 5 Ways Not to Blow It
GUIDE
Mike Randall
By: Mike Randall
Posted: May 13, 2014
BadCredit.org's popular "How-To" series is for those who seek to improve, rebuild or better understand their subprime credit rating.

Americans work harder than ever to provide for their families and work toward their piece of the American dream. Some of us are rewarded for our hard work in the form of bonuses. If you’re in a job that pays a bonus, congratulations! Now what should you do with that hard-earned cash?

Admittedly, most American workers who receive a bonus see it as an opportunity to splurge on some new gadget or other form of reward.

If you already have a credit score that’s above 800, you could probably stop reading right here. For the rest of us however, here’s how to use that bonus to improve your credit.

1. Treat your bonus as a windfall, not income

Create a budget plan

If you have a well-managed budget, you shouldn’t need your bonus to manage day-to-day expenses. If you do, there are deeper problems to address.

2. Use your bonus pay fend off a mountain of debt interest

Pay down your debt

If you currently have any debt, or owe a balance on a credit card, you may be paying anywhere from 12 to 20 percent or more in interest. By using your bonus to pay down debt, you eliminate that debt and the interest that goes with it. In effect, you are earning that rate of interest on your bonus cash. There is no other investment you could make that would pay as well.

3. Put the bonus cash in an emergency fund

build an emergency fund

If you already have an emergency fund, then congratulations – you’re ahead of many Americans. If not, consider using part of your bonus to start one, or to add to an existing one. Maintaining an emergency fund will help you avoid going deeply into debt if an unexpected expense comes up. And we all know that an increase in debt will kill our credit score.

4. Pay off debt – the right way

pay off credit cards

Believe it or not, there’s a right way and a wrong way to pay off your debt. Using your bonus cash to pay down credit cards is a great way to improve your credit, but do it correctly. Rather than paying off only the most debt or highest interest cards, chose those cards with a smaller balance and pay as many of them off as you can. The reason is that your FICO score depends not only on how many debts you have, but how much overall debt you have as well.

5. Keep paid-off cards open

Good Credit Score

Using your bonus to improve your credit involves paying down debts with high interest rates, but also paying off as many cards as you can. The final step is to keep those credit card accounts open and active, but to no longer use them to excess. The reason for not cancelling your zero-balance cards is that the rating agencies will use the credit you have available as a positive factor in determining your credit score. The more credit available and unused, the better your score.

It may be tough at first to give up the idea of spending your bonus on something exciting. However, I guarantee you will be better off down the road. You’ll also find your credit better off if you follow these guidelines. Using your bonus to pay down debt and improve your credit ensures that your bonus pays off again and again. Now what’s more exciting than that?

Photo credits: dailyfinance.com, accountonus.com, rentreporters.com, gettingoutofdebt.co.za, chicagobookclinic.org.