Your credit score is a three-digit number from Fair Isaac Corp. or one of the three major credit bureaus. It has a major impact on how easily you can borrow money and get insurance policies. You do not directly control your score, as it is calculated with data from your TransUnion, Experian and Equifax credit reports, but you can do things, like paying off debt, that have a lot of weight in the scoring formula.
Effects
Your debt load affects your credit score, and revolving accounts like credit cards have the biggest influence, according to the MyFICO scoring website. Focus your balance reduction efforts on your credit cards by paying extra money on them, and pay any installment loans like mortgages, car payments and personal loans as agreed. The declining revolving account balances raise your score. The Motley Fool website recommends putting the most money onto your highest interest credit cards for the best debt-lowering impact.
Weight
Debt load is the second most important factor in credit scoring formulas, outweighed only by payment history. MyFICO explains that the money you owe and the specific types of accounts that have balances make up 30 percent of your credit score. This area also includes the original balance on installment loans compared to how much you have paid and the proportion of your available credit that you have used on revolving accounts.
Other Strategies
Combine other credit score -aising strategies with debt reduction for the best effect. MSN Money writer Liz Weston recommends monitoring your credit reports by getting free copies from annualcreditreport.com every year. Dispute mistakes that hurt your credit score, like prompt payments that show up as late. The credit bureaus accept complaints through their websites. Set up automatic payment for as many bills as possible to avoid delinquencies, which take a big toll on your score. Use credit regularly, but pay off as much as possible every month to keep from building your debt loan back up once it reaches a manageable level.
Warning
Leave credit cards open after you pay them off or you risk hurting your credit score. Old accounts give you a long-term credit use history, which helps your score. The unused credit also offsets other debts you owe because scoring formulas weigh your owed amounts against available credit lines. The Board of Governors of the Federal Reserve System explains that banks cannot legally charge a fee for account inactivity, but they can close the credit card. Avoid closure by buying things with the card every few months and paying the full balance immediately.
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