Debt is one of the main factors in determining your credit score. Paying down debt will reduce your debt-to-credit ratio, lower the total amount you owe, and improve your credit score. However, debt is only part of what goes into calculating the score. The best way to raise your credit score is through a combination of tactics.
Credit Score Calculations
The formulas used to calculate credit scores are kept secret. However, we do know what sort of information goes into the calculation and approximately how it is weighed. Thirty-five percent of your credit score is based on your repayment history from the last seven years. Recent missed payments matter more than ones from several years ago. Another 30 percent is your total debt. Ideally, you should not owe more than 30 percent of your available credit line. The length of your credit history makes up 15 percent of your credit score and new credit applications count for another 10 percent. The last 10 percent reflects the diversity of your borrowing habits.
Paying Down Debt
Paying down your debt will improve your credit score. It will lower your debt-to-credit ratio, as long as you don't cancel all your credits cards as soon as you've paid them off. Keep the oldest ones active, to improve the length of your credit history. You don't have to run a balance on them or pay interest, but do use the cards once in a while.
Other Factors
Paying down debt will do nothing to erase negative information from your credit report. If you've missed payments in the past, your credit report will reflect this for seven years. It doesn't matter if you've paid off the debt in full. Negative information carries more weight than positive information when it comes to calculating credit scores. The only way to rebuild your credit history after missing payments is to continue to make regular payments on time for 18 to 24 months.
Finding Out Your Credit Score
You can get a free copy of your credit reports from annualcreditreport.com. This is the only website authorized to issue free credit reports on behalf of the main credit bureaus -- Experian, Equifax and TransUnion. However, the free reports do not include credit scores. You can get an idea of the state of your credit history from the reports, but if you want to know the exact scores, you will have to request them from the bureaus via their websites. The bureaus charge a fee for this. If you are applying for a mortgage, you can ask the for the score.
Time Frame
You can ruin your credit score in less than a month. It will take much longer to repair it. Lenders report information to credit bureaus every 30 to 90 days. Your score will not improve faster than that. Unless you've paid down a very large amount of debt, it will not have a massive affect on your credit score. The exact number of points depends on your personal financial circumstances. However, if you need to improve the score by 100 points or more, be prepared to wait for at least a year.
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