Improve Credit Scores Pay Off Debt

With so many people languishing in credit card debt it’s no wonder that folks are looking at how to improve credit scores. But since most people don’t know exactly what makes up a credit score, knowing how to improve a credit score is even harder. If you’ve been having trouble finding a home loan, a car loan or getting a credit card you may have a lower credit score than you think. There are a few simple things you can do to raise your credit scores, and we’ll explore them all in a series of five articles on how to improve your credit scores.

Before we begin trying to improve credit scores you’re going to need to know what your current score is. The score is a three digit number that ranges from 300 all the way up to 850, and although the credit reporting agencies keep the calculation of those numbers a tight industry secret, there are still some things that have been proven to work to raise your credit score. You can get a free credit report every year from annualcreditreport.com.

A Credit Score Reflects Two Types of Credit

Now let’s talk about credit types: there are two types of credit. Even though both result in debt, in reality they are quite different as far as the bank is concerned.

The first type is installment loans. Installment loans are loans on things like houses, cars and even student loans. In other words, they are collateralized loans. When you default on installment loans the bank can liquidate the securing property in order to recoup their losses.

This can lead to huge problems where you might have to face the International Debt Collectors org that will issue notices for you to vacate your house if the loan is not cleared soon so it is best to avoid any such scenario and mange your credit score in the best possible way where the collateral loan can be something that is verified in advance by the authorities.

Revolving Loans

The other kind of loan is a revolving credit account such as personal loans and credit cards. Revolving loans are unsecured debt, meaning if you default, the bank that gave you the loan has no real property to recover and sell.

Strategy to Pay Off Debt And Improve Credit Scores Fast

Because revolving credit is considered much riskier to banks, paying down your credit card and personal loan debts should be the very first thing you do when you begin trying to improve your credit scores. You can get the same effect from paying off all of your debts, but the biggest improvement in your credit scores will come from paying off your revolving debts before you begin paying off the installment debts.

Banks like to see a wide gap between your credit maximum and the amount of credit that you’re using. For instance if you have a credit card with a $5000 limit you can improve your credit scores by never running more than $1500 on that limit. Of course, the best way to go about doing this is to pay off your credit bill every month and try to keep the card as close to a zero balance as possible.

Which Debt to Pay Off First for Fast Results

You have probably heard people say that you should pay off the credit card with the highest interest rate first, but that won’t help your credit score quite as much or nearly as fast as paying down the car that is the closest to its limit first. If your primary goal is to improve your credit score while you get out of debt, paying down the card that is the closest to its credit limit should be your first priority.