How to Pay Off Debt & Increase Your Credit Score

Your credit score is the number that lenders use to determine your credit risk. Paying off debt is an important factor in boosting your credit score. If you have a low credit score and a large amount of debt, expect to pay high interest rates and fees to get a loan--if you can even qualify for one at all. In general, any credit score over 700 is a good credit score, notes Experian, one of the three major credit bureaus. Pay down your debt to increase your credit score and qualify for the best interest rates on loans.

Instructions

Paying Off Debt

1

Pay more than the minimum required payment due on your credit cards and other loans. If your minimum payment is $15, pay $30. Try to double your minimum payment. Paying only the minimum required mostly pays interest on the account so you are not knocking down very much of the principal.

2

Transfer high-interest credit card balances to cards with a lower interest rate. Saving on interest charges will allow you to pay more towards principal.

3

Focus on paying off one card or loan at a time. Start with the card that has the highest interest rate. Pay as much as you can on that card while only paying the minimum on your others. Once that card is paid off, start paying as much as you can to the card with the next highest interest rate, and so on.

4

Use your savings or investments to pay off your debt. Unless you are earning an interest rate above what you are paying on your credit cards or loans, it will be worth it to use savings or investment money to pay off credit card debt. You will then be able to save the money you were once spending on paying down your debt.

5

If you own a home, take out a home equity loan to pay off your debt. The interest rates on home equity loans are usually significantly lower than those of credit cards or other revolving lines of credit. Just make sure that you don't rack up more charges on your credit card once you pay them off with the home equity loan.

6

Talk to your creditors to try to renegotiate your terms. Explain your situation to your creditors. If your creditors fear you may be close to filing bankruptcy, they will likely negotiate a lower interest rate.

Increasing Your Credit Score

7

Obtain a copy of your credit report (see Resources) and check your credit limits with the amounts included on your credit report. Lenders make mistakes sometimes. If they are reporting a lower limit than what you actually have, your credit score may be suffering. Contact your lender if your credit limit has been reported to credit bureaus incorrectly and and the lender will update it.

8

Use your old credit cards. Don't max them out, but use them periodically. The older your credit history is with a card, the better it is for your credit score. If you stop using your old credit cards, they will eventually stop reporting to the credit bureaus.

9

Dispute any unfair reporting on your credit report. If you see negative information that you think is unfair or inaccurate, contact the credit bureau to dispute it. Depending on how old and how much the charge is for, lenders and collection agencies will often not verify the charge and the credit bureau will then remove it from your credit report.

10

Pay your bills on time. Failure to pay your bills on time may result in the lender reporting negatively to the credit bureaus.

11

Be patient. Your credit score did not drop overnight so you cannot expect it to improve overnight either. If you are taking the proper steps to work towards improving your credit score, you may notice slight changes from month to month. In general, do not expect to see more than about a 30 point increase in a any three-month period of time.