Debt can have a deeply negative effect on your life. Your debt situation may be hindering you from taking advantage of buying a house, going on vacation or simply having peace of mind. Carrying a heavy debt load is especially damaging to your credit report. However, if you are able to reduce your debt to a low level, your credit score will go up. And if you pay all of your debt off, then your score will only go higher.
Impact
Having a high level of debt means a lower credit score. Your FICO score ranges from 300 to 850, with anything above 700 considered ideal, while under 600 raises red flags for lenders. Your level of debt accounts for a significant portion of your credit score --- 30 percent. If you eliminate your debts, that becomes 30 percent of good reporting in your credit score, and it will increase rapidly.
How Fast
The speed at which your credit score rises depends on how long you take to pay off your debts. Once you make a payment, your score should increase within 30 days, or the equivalent of one billing cycle, as the information is added to your credit report. If you are making a series of payments to lower your debt over time, check your report halfway through or at the end of your payments to see how your score has been impacted. You are allowed a free credit report from each of the three credit bureaus (TransUnion, Experian and Equifax) through annualcreditreport.com.
Acceptable Level Of Debt
You do not necessarily need to eliminate all of your debt in order to have positive information in your credit report. For example, credit card debt is acceptable to lenders, so long as it isn't excessive --- no more than 30 percent of your total credit limit. For example, if your credit limit is $10,000 and you owe $9,500 --- 95 percent of your limit --- you will be negatively affected. However, if you keep your outstanding balance to $3,000 or less, that is acceptable. Of course, having no debt is most ideal, though not necessarily realistic for some people.
Other Ways to Improve Credit Score
Paying off your debts isn't a cure-all for your credit score. There are other components that make up your score, such as your bill payment history, which makes up 35 percent of your score. If you are not paying your bills on time, ensure that you do. The length of your credit history is worth 15 percent. Also, request a copy of your credit report through annualcrditreport.com to ensure all information is accurate. If there are errors, report them. Visit the Federal Trade Commission's website for details. Doing so will improve your credit score and make you more attractive to lenders.
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