If your credit score could use improvement, your first thought may be paying off some of the debts that appear on your credit report. Although it often happens that paying the debts on your report results in a higher score, it's not always the case. Understanding which debts are good for your score, and which are dragging it down, will help you to use your money wisely.
Credit Scores
A credit score is a ranking of a consumer's credit, based on the information in his credit report. Each of the three credit bureaus --- Experian, Equifax and TransUnion --- has its own formula for rating consumers. The commonly used FICO score relies on an additional, different scoring system. However, all these systems rate how low or high a consumer scores as a credit risk, and take into account debts such as credit cards, personal loans, car payments and mortgage loans.
Current Accounts
Current debts are not necessarily bad for your credit score, unless your debt-to-credit ratio is too high. If that's the case, pay down some of your current accounts. However, you may want to hold off on paying certain accounts completely, because the older an account is, the more it positively affects your score.
Delinquent Accounts
Delinquent accounts can do serious damage to your credit score. If an account is not yet in collections, pay enough on the account to get it current, and then continue paying it on time until it's paid off. The longer you pay your bills on time, the more your credit score will rise. If an account is already in collections, paying it off will not remove it from your credit report. However, you may be able to negotiate with the collection agency to remove the account from your report in exchange for full payment. In that case, payment of the debt will significantly increase your credit score.
Closing Accounts
If you have balances on many credit cards, you may be tempted to consolidate your balances onto just a few cards, or pay off most cards and then close them. However, moving balances around and closing credit cards will not raise your score. In particular, you don't want to close credit cards or other accounts you've had for a long time, since old credit is good credit.
Considerations
Credit scores can be very slow to improve. They usually require a steady, dedicated approach to paying bills on time and paying down large debts. You may see the fastest improvement through the pay-for-deletion method of negotiating with collection agencies, where the agency deletes delinquent accounts from your credit report in exchange for full payment.
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