Credit scores can plummet quickly when a person defaults on bills, according Fair Isaac Corp., creator of FICO credit scores. It takes a longer time to repair damaged credit. One of the best ways is simply by paying off debts, especially if the payments are all made on time.
Definition
A credit score is a three-digit number calculated by FICO or one of the credit bureaus and sold to lenders to help them make decisions on credit applications. Leslie McFadden of the Bankrate.com financial website explains that a score is supposed to indicate a consumer's chances of becoming delinquent on bills within two years. FICO scores range from 300 to 850, with higher scores indicating more creditworthiness.
Factors
Debt levels and account balances are part of a person's credit score. FICO puts the most weight on whether consumers pay their bills on time, followed by debt load, credit history length, the number of recently opened accounts and the different types of credit used, such as loans and revolving account. Balances make up 30 percent of the score.
Time Frame
A credit score rises a little bit with each on-time payment that brings down an account balance. Bankrate.com says that prompt payments and lowering balances are the two quickest ways to bring up a score, although the process takes several months. The credit score does not rise significantly when an account reaches a zero balance.
Misconceptions
Financial columnist Liz Pulliam Weston warns that paying off old debts can hurt a person's credit score under certain circumstances. Some people contact lenders or collection agencies to pay old bills for a quick credit rating boost. Their score actually goes down if they negotiate a pay-off amount less than the original bill. Agencies sometimes agree to remove a negative item from a consumer's credit reports or to change it to a positive status in return for payment, which boosts the score. All such agreements should be put into writing before the account is paid, Weston states.
Considerations
Debt pay-offs will not raise a credit score if they are not being correctly reported on a person's Experian, Equifax and TransUnion credit files. The Federal Trade Commission notes that consumers can order free credit reports once a year from each of the three major credit bureaus by going through annualcreditreport.com. Consumers have the right to dispute any mistakes they find in their report, and the Fair Credit Reporting Act requires the bureaus to either correct or remove wrong information.
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