Theres Good Debt And Bad Debt
What makes debt good? Its debt you paid off as you agreed to do. The three big credit bureaus Equifax, Experian, and TransUnion base their scores on how well you handle your debt. If you have no debt at all, you can have problems. Last year, one Debt.com intern recounted her problems getting a credit card because she had no credit history. She was 19 and had always used cash.
Bad debt is much easier to spot: You run up huge credit card bills that you cant afford to pay off, and you end up getting harassed by debt collectors.
The lesson here: The longer you have a history of good debt, the better your credit score. This is a good reason not to close old accounts where youve had a solid repayment record.
Heres Why Credit Card Utilization Is Important To Your Credit Utilization
As weve been waying throughout this article, credit card utilization is important and plays a big role in where your credit scores fall .The general rule of thumb is that you want your credit utilization ratios between 10-30 percent.Why?In most cases, the higher your credit card utilization ratios, the lower your credit scores will be.If I have a $20,000 limit and Im using $15,000 of it, my credit utilization is at a high 75 percent.Due to this, its likely my credit scores are going to go down.If I can make a payment on this credit card and get my balance down to $5,000 , my credit scores are likely to take a good jump higher.See how that works?Your goal is to get your credit utilization down to 10-30 percent.
What Are The Other Ways To Improve Your Credit Score
Collection accounts will have less impact on your credit score as they age. Even if they still appear on your credit report, there are other ways to improve your credit score.
- Always check your credit report for inaccuracies. File a dispute right away once you see an error and provide the necessary documents to support your claim. This will let you fix your credit report before it causes damages to your financial situation.
- Avoid adding negative items to your credit score by paying off your debt on time. Making timely payments prevents debts from going into default, which means your lenders or credits dont need to tap collection agencies.
- Keep your as low as possible. Always remember that your credit utilization ratio will be factored in once your credit score is calculated.
- Apply for new credit only when you need it. Applying for new credit results in a hard inquiry, which could bring down your credit score.
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See The Full Financial Picture
Before you can pick a strategy for paying off your debt, you need to fully understand what you owe. Start by itemizing your debts, which will help you to focus on paying them down more efficiently. Also, note both the minimum payment for each debt and your monthly interest rate.
Dont try to guess and pull numbers out of the air. Look up your user agreement or call the customer service number to find out exactly what you owe and how much interest youre being charged. Youll need the exact numbers for each piece of information when considering your various debt repayment strategies.
How Can I Raise My Credit Score To 800
5 Habits To Get 800+ Credit ScorePay Your Bills on Time All of Them. Paying your bills on time can improve your credit score and get you closer to an 800+ credit score. Dont Hit Your Credit Limit. Only Spend What You Can Afford. Dont Apply for Every Credit Card. Have a Credit History. What an 800+ Credit Score Can Mean.
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How Long Does It Take For Your Credit Score To Go Up After Paying A Credit Card
Question: I had nearly $5,000 on four credit cards that I was carrying for years, but then I read what you had to say about getting rid of it . So I did that. Believe it or not, next month I should have everything paid off!
So thank you for that, but now I have a question: I need a new car and want to make sure my credit score takes into account how I paid off all my credit cards. I know that a higher credit score will mean a lower rate on a car loan. How long do I have to wait?
Regina in Michigan
How Long After Paying Off Credit Cards Does Credit Score Improve
Some ways of boosting your credit can take months, or even years. Revolving debt repayment can be much faster. Given that your credit utilization ratio is the main factor impacted when you pay down credit card debt, you should see the results of those payments as soon as your credit card balances update on your credit reports.
Your credit card issuer typically sends an updated report to the once a month when your statement period ends. A new credit score is calculated every time your credit is pulled, and the new score uses the latest balance information.
Payoff Any Past Due Balances You Owe
This is one of the fastest ways to improve your credit score, at least a little bit. Past due balances weigh heavily on your credit score. By paying them off, you can jumpstart your credit score quickly.
While paying off very small past-due balances may not have much of a positive effect, paying off a larger balance, or several smaller ones, can jump your score by 20 or 30 points.
If youre applying for a loan, that may be all the improvement that you need in your score.
Its sometimes possible to negotiate a lower settlement on past-due balances, particularly if the delinquency is pretty old .
The creditor may be anxious to settle the account, and be willing to accept substantially less than the original amount due.
If you do attempt to negotiate a lower payoff, be sure that you get the terms of the settlement in writing before sending any money.
You want to be sure that the creditor fully plans to accept the lower amount in full settlement of the account. Confirmation should be provided in writing, spelling out the exact details of the settlement.
If it is a fairly large settlement, you may want to enlist the help of an attorney who works specifically with credit problems.
An attorney will know how to make that happen.
Pay More Than The Minimum
Pay off your debt and save on interest by paying more than the minimum every month. The key is to make extra payments consistently so you can pay off your loan more quickly. Some lenders allow you to make an extra payment each month specifying that each extra payment goes toward the principal. Before you begin, check the terms of your loan to determine whether additional fees or prepayment penalties may apply.
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What Happens When You Pay A Charge
If you pay a charge-off, you may expect your credit score to go up right away since you’ve cleared up the past due balance. Unfortunately, its not that easy.
Paying a charge-off doesnt remove the account from your credit report. That’s because clearing up the past due balance doesnt erase the fact that your account was actually charged-off. Paying a charge-off also will not improve your credit score at least not immediately.
Over time, your credit score can improve after a charge-off if you continue paying all your other accounts on time and handle your debt responsibly. However, if youre late again or you have another account charged-off , your credit score may drop even lower and can take longer to recover.
The charge-off will eventually fall off your credit report whether you pay it or not. The and 180 days from the date of the first delinquency that led to your account being charged-off.
If a charge-off is still listed on your credit report after the credit reporting time limit, you can file a dispute with the credit bureaus to have it removed.
Pay Off Your Most Expensive Loan First
Your most expensive loan is the loan with the highest interest rate. By paying it off first, youre reducing the overall amount of interest you pay and decreasing your overall debt. Then, continue paying down debts with the next highest interest rates to save on your overall cost. This is sometimes referred to as the avalanche method of paying down debt.
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Make The Most Of A Thin Credit File
Having a thin credit file means you dont have enough credit history on your report to generate a credit score. An estimated 62 million Americans have this problem. Fortunately, there are ways you can fatten up a thin credit file and earn a good credit score.
One is Experian Boost. This relatively new program collects financial data that isn’t normally in your credit report, such as your banking history and utility payments, and includes that in calculating your Experian FICO credit score. Its free to use and designed for people with no or limited credit who have a positive history of paying their other bills on time.
UltraFICO is similar. This free program uses your banking history to help build a FICO score. Things that can help include having a savings cushion, maintaining a bank account over time, paying your bills through your bank account on time, and avoiding overdrafts.
A third option applies to renters. If you pay rent monthly, there are several services that allow you to get credit for those on-time payments. Rental Kharma and RentTrack, for example, will report your rent payments to the credit bureaus on your behalf, which in turn could help your score. Note that reporting rent payments may only affect your VantageScore credit scores, not your FICO score. Some rent reporting companies charge a fee for this service, so read the details to know what youre getting and possibly purchasing.
Consider The Snowball Method Of Paying Off Debt
This involves starting with your smallest balance first, paying that off and then rolling that same payment towards the next smallest balance as you work your way up to the largest balance. This method can help you build momentum as each balance is paid off. Understand the pros and cons of this debt pay down strategy by reviewing the Snowball versus Avalanche methods of paying down debt.
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Establishing A Credit Score
If you dont have any credit history, get started! A positive credit history helps out nearly every aspect of your financial future, whether its purchasing a car, renting or buying a home, or even applying for a job.
The easiest way to start is to apply for a line of credit. Credit cards for gas stations or department stores are generally easy to obtain and are good ways to build solid credit. Use them responsibly, being careful not to overcharge. The key is to pay your bill on time each month.
If you cant get approved for a traditional credit card, . These cards require a deposit, often equal to the credit limit you will be extended with the card. For example, a $500 deposit will get you a secured credit card with a $500 spending limit.
These cards act the same as unsecured cards in that you receive a monthly bill and payment is expected each month. Be sure that the spending on the secured card is reported to the credit reporting bureaus.
In most cases, as long as you pay each month, your deposit will be refunded when you are finished with the card. Your deposit cant be used to make the monthly payments.
Becoming an authorized user is another way to establish a credit score.
Being an authorized credit card user is the best position possible in the credit world: you get all the benefits and none of the responsibility. You spend, someone else pays, and everybodys credit improves.
That is the sole responsibility of the cardholder.
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How To Report And Fix Any Errors On Your File
If you do spot any mistakes, challenge them by reporting them to the credit reference agency.
They have 28 days to remove the information or tell you why they dont agree with you.
During that time, the mistake will be marked as disputed and lenders arent allowed to rely on it when assessing your credit rating.
Its also best to speak directly with the credit provider you believe is responsible for the incorrect entry.
Negative information in your name usually stays on your credit report for six years and cant be removed sooner if its accurate. However, if there were good reasons why you fell behind with payments that no longer apply, such as not being able to work during a period of illness, you can add a note to your credit report to explain this. This note is called a Notice of Correction and can be up to 200 words long
Read about notices of correction on the Experian website
Find out more about correcting personal information on your file on the Information Commissioners Office website
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Be An Authorized User
Being an means that you will have to ask someone to add you to their existing credit card account. But, you must choose someone close to you who has a high credit limit and satisfactory on-time payment history.
Their credit card account will appear on your . The high credit limit can help your credit utilization improve. Thats why becoming an authorized user is one of the most efficientstrategies to improve your credit score.
You dont have to use the card or even know the account number for this method to help improve your score. Plus, the impact is pretty quick! As soon as youre added, and the accounts reported to the three bureaus, it will appear on your credit report.
Settling Vs Paying In Full
Considering how FICO and VantageScores newest models view paid collection accounts, the goal if you have delinquent debts is to get your balances down to zero. Paying the debts in full is one option but settling those accounts is going to yield the same result with regard to your credit score and potentially save you a ton of money in the process.
When you settle a debt, youre effectively asking the creditor or collection agency to accept less than the full balance owed to consider the account repaid. Depending on who the creditor is and how long the account has been outstanding, it may be possible to settle for hundreds or even thousands of dollars less than what you owe.
Once the account has a zero balance, it wont drag down your score anymore. A word of caution about debt settlement, however. Canceled debts generally have to be reported on your taxes as income unless you qualify for an exception or exclusion. If youre settling large amounts of debt, that could come back to haunt you at tax time.
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Why Do Final Payments On Student Loans Affect Your Credit Score
When you pay off a loan and then close the related account, it can impact your FICO score in a couple of ways.
First, when you close a revolving account it can affect your credit utilization ratio or the amount of revolving debt you have relative to the available credit you have. If you close an unused $0 balance credit card, your utilization ratio will increase. And that could negatively impact your FICO score.
Next, the closure of an account could zap the repayment history associated with that account. A long history of on-time repayment helps build your creditbut if you close that account, there goes its history with it. That could also negatively impact your score.
Third, when you close your student loan accounts, which are considered installment loans, and have only revolving credit remaining or no other credit at all remainingyour credit mix will change. This could also negatively affect your FICO score. You could have federal student loans or private student loans, repaying your full loan balance will close your account with the servicer and impact your credit.
The more credit history you have, the less your FICO will be impacted by singular events like closing an account.
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Negotiate A Lower Interest Rate
A lower rate can help you pay off your balance faster, because more of your payment can be applied to your principal balance than interest. Lower balances can mean a lower credit utilization ratio . Learn more about how to negotiate a lower interest rate.
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Will Paying Off All Debt Increase Credit Score
Paying off all debt can increase your credit score when you leave your credit lines open. If you have debt in the form of installment loans, like student loans or auto loans, it can actually slightly harm your score when you pay them off.
If you are trying to improve your credit score, keeping lines of credit open after youve paid them off will help improve your score. Thats because it impacts your credit utilization. The more credit you have available to you and the smaller your balances are on that credit, the higher your score will be.