Why Paying Off Debt is Smart for Your Credit Score – The 7 Reasons Why

If you’re reading this article, you’re probably worried about your credit score. You may even know that a low credit score is a bad news. But why? And how can you take the most innovative action right now to improve your credit rating?

Let’s look at the answer to those questions in detail today, starting with the nine reasons why paying off debt is brilliant for your credit score.

Bad Debt

Bad debt is when you have an obligation you can’t afford. While this might sound like a good thing in the short term (because you don’t have to pay for it!), it can seriously damage your credit score over time.

For example, if your credit score is around 635 and you have a bad debt of $3,000 in your report, this will lower your score by about 25 points. This means that, in the long run, borrowing will cost you much more interest and fees. So why is bad debt so bad?

Bad debt is responsible for around 40% of all harm to your credit score caused by one account alone. It can also cause an increase of about 15 points in your FICO score (given that you have a history of debt).

No Loans or Credit Cards

Another critical piece of the puzzle is that you don’t have any loans or credit cards. This is what’s called a “Void” in your report. On the other hand, if you have a loan or a credit card, this can appear on your credit report.

This, in turn, will reduce your credit score by about 132 points. Why is a void so important? Because, like bad debt, it can cause a loss of almost 100 points off your score. That’s because it shows that you have no established credit history!

New Debt Is Good for Your Score

Now, here’s a secret that many people don’t know. New debt is outstanding for your credit score. Why? Because it shows that you are willing to obligate yourself to repay a loan. And this is what credit scores are based on.

So, not only will you have a new loan on your credit report, but it will also help to boost your score by a small amount.

Paying Off Debt Shows Financial Strength

The following reason why paying off debt is brilliant is that it shows financial strength. You will be disadvantaged when applying for credit if you have a large debt.

This is because lenders will often want to see that you have a solid income before they agree to loan you money.

Building Credit is Key for Improving Score

Now let’s talk about how to improve your credit score. There are two key ways to do this. First, build a good credit history. And second, keep your credit utilization low. When you have a long history of credit, it shows lenders that you are a reliable borrower. This, in turn, helps to boost your credit score.

FICO Ratings Explained

Now let’s get into the nitty-gritty of how to improve your credit score. First, your credit report will be analyzed by FICO scores ranging from 300 to 850. These scores have several versions, but we’ll now focus on the FICO scores. 

Your FICO score is essential in getting approved for a new credit line. Unfortunately, it’s a common misconception that the only thing that affects your credit score is the amount you borrow. Instead, your credit score is based on how you use it.

How to Achieve a Good Credit Score?

Building a solid credit past is the most crucial thing you can do to raise your credit score. This means: 

– Getting a secured credit card

– Paying it off as soon as possible

– Keeping your balance low (no more than 30% of your credit limit)

– Maintaining excellent credit utilization.

These things will have a far-reaching impact on your credit score. In addition, they will help strengthen your credit report, which lenders will see as a positive factor.

Final Tips

The positive news is you can always get better. There’s no reason why your credit score couldn’t be above 700. It just takes a little bit of work and commitment. Keep in mind that it will take time to see results, and it will require consistent effort. 

But it’s worth it. Because once you have a good credit score, it will save you a lot of interest and fees. And most importantly, it will give you the confidence that you deserve.