If you carry large debts on your credit card, your credit score will suffer. Having a low credit score will make it difficult for you to open a new credit card, get a loan or find a home mortgage. Carrying a balance on your credit cards will also cost you more in interest fees. By paying down the balance on your credit cards, you can improve your credit score.
Effects
The Fair Isaac Corporation reports that your total debt accounts for 30 percent of your overall credit score. Your total debt includes any balances you carry on your credit cards and the interest those debts accumulate. Your debt ratio also includes amounts you own on personal loans, auto loans and mortgages. If you have any unpaid credit accounts in collections, those debts will count towards your total overall debt as well.
Benefits
Paying down your credit card debt will improve your credit score. How much improvement depends on your current credit score, amount of debt and other factors that affect your credit score such as your payment history. For example, if you have reached your available credit limit on more than one credit card and you pay down the balance on each, you will likely see more of an improvement than someone who paid down a small balance on one credit card. Paying down your credit card debt will also save you money on interest.
How to Pay Down Debt
Lenders consider your available credit limit when deciding whether to extend you a loan. Ideally, you should keep your total debt below 10 percent of your available credit limit. However, reducing your debt to 30 percent of your available credit limit will still help improve your credit score, according to MSN. Start by paying off the debt on any card you have maxed out. Next, pay down the debt on the credit card closest to the limit. Repeat this process until you pay down all of your credit cards.
Tips
Credit card companies charge off any debt you do not pay. Typically, the company will send your debt to a collection agency. The debt will then show on your report as a collection account. By paying off these collection accounts, you will lower your total overall debt. However, the collection account will stay on your report for seven years, according to the Fair Isaac Corporation.
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