How Does Paying Off Debt Affects Your Credit Score?
How Does Paying Off Debt Affects Your Credit Score?
Using a credit card for all your daily life shopping is more of a trend now. Recent research says that about 80% of the Americans are almost all the time in debt and paying it off is more of a trick rather than simply making a transaction. The way we pay off the debt has a lot to do with our card’s overall score. The real issue arises when the amount we spend crosses what balance we have in the account. In such cases, all the commercial debt solutions we know of might get a little trickier to apply. However, once the debt is all over, a new issue arises which leaves most of the holders confused. Once you have paid off all or some of the debt that is on you, your overall credit score is bound to be affected. Based on how much amount was due and how did you pay, the credit score is affected in various ways. If you have also passed through that confusing stage ever and what to know the details of how debt payments and credit scores is related, you have landed at the right place. Here are a few things to know in order to better understand this labyrinth for the future.
How is credit score calculated
In order for you to better understand the working of credit score, it is necessary to know first how it is usually calculated. Once you understand the working of it, it gets really easy to be sharp in order to save and increase this score. According to Debitize, FICO score is one of the most easily understandable ways of how credit score calculations work. There are five distinct categories with a different weight in the score’s calculation. Your payment history makes 35% of your total score while the debt you owe makes 30% of your score. How long is your history with the card adds to 15% of your score and new additions to the credit makes 10% of it? Lastly, your credit mix, i.e. the mixture of debts of various kinds you owe them makes 10% of your score too.
Once these all are clear, you can make rough judgments about how and why your score increased and decreased after paying off the debt. However, no one is a pro at mathematics, and we understand that. Therefore, we have got the secrets spilled for you here below.
While there may be various other possibilities and complexities, paying off debt either affects your score towards the increase of decreases it. Here is how:
Debt pay off that increases your credit score
Your payment history and amounts owed should be your first focus while paying the debt while working to increase your credit score. These two combined make up 65% of the credit score and therefore must be worked on nicely. To keep your score high, you must make your payments in time.
To keep the score instead of amounts owed high, you should know well which debts to pay first and which later. Your first paying priority must be the credit card debt itself. Using a high part of credit limit can affect your score adversely because of the higher interest rates of these cards. According to the professionals, this kind of debt is not a “good debt” and hence must be gotten rid of sooner. Try to avoid this debt as much as you can and even if you are under such debt, pay it at your first ease.
Other than this specific debt, you must smartly manage your other debts too so as to keep your score balanced. Even when you won’t find much focus on urging you to pay other debts too, paying them on time and avoiding them is a good way to keep your score up. The quicker you pay off these debts, the lesser the interest you will be facing, and the more will be your score.
Debt pay off that decreases your credit score
Your utilization rate or what can be stated as something which defines your amount owed is a big factor to consider while paying off. The lower is your utilization rate means the good will be your score. While paying the debts, the utilization factor is usually not considered which ultimately decreases the credit score.
Your utilization rate is calculated based on the last statement’s balance and paying on time has not much to do with it. According to Bankrate, even charging $900 on a card with a $1,000 limit and paying it the same month, will still make your utilization rate 90%.
This habit of paying off without considering the utilization rate can get your score decreased so on must be careful about it.
To conclude, it can be said that a better understanding of your credit score and the way it is calculated is necessary to keep the score high. It is important to understand the factors which affect the score and pay the debts accordingly. Focus more on paying such debts that can increase your credit score.
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