Keeping a clean credit report is very important because lenders will consult your report, and the credit score based on it, before granting you credit. Paying your bills on time contributes towards a high credit score, and that makes every aspect of your financial life easier. Paying off debt is an important part of that equation.
Paying Credit Cards
Paying down credit card balances is an excellent way to boost your credit score. The lower your outstanding balances compared to the total amount of credit available to you, the better your score. Your available credit-to-debt ratio accounts for 30 percent of your FICO score. In general, try to keep your outstanding balances below 30 percent of your available credit. A maxed-out card can drop your credit score by between 10 and 45 points depending on how good your original credit was. The best ratio is zero --- use your cards, but pay them off every month.
Paying Other Unsecured Debt
If you have medical bills or other types of debt, it is also important to pay these, and the most crucial aspect is timing. Your history of paying debt on time counts for 35 percent of your credit score. Do everything you can to meet any payment schedule that's been set up, so that your creditor does not report you as paying 30, 60 or even 90 days late. Late payment has a marked negative effect on your credit. If you have excellent credit with a score of 780, a 30-day late payment can drop your score, temporarily at least, by 100 points. If you cannot meet a payment schedule, call and negotiate with your creditor rather than have a default reported to the credit bureaus. Many creditors will be willing to work with you if you are in earnest about paying off your debt.
Paying a Debt in Collection
If things have gone so far that your debt has been handed over to a collection agency, proceed with caution. At this point, the damage has already been done to your credit score. Any debt in collection will remain on your report for seven years, whether or not you pay it off. Do not be tempted to settle the debt for less than the value with the original creditor. This can actually ding your score further by between 45 and 125 points, depending on your overall score. Your best option may be to contact the collection agency and offer to pay the debt in full, if the agency will then have the record of it removed from your credit report. Not all agencies will do this, but some will.
Secured Loans
If you have a mortgage, car loan or other secured debt, the most important aspect of managing this type of debt is paying on time. Mortgage companies won't hesitate to report late payment to the credit bureaus, and a note of late payment on a mortgage is very bad for your score. If you want to accelerate your payments to pay a loan off early, this can also help.
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