What is a Credit Score?
Credit scores range from 400 – 850 and are dependent upon the debtor’s amount of debt, the history of debt payment, and any collections and or judgments against the individual. It includes any current debt on which payments are being made and any previous debts already paid off. Items generally remain on a credit report for a ten-year period. When debts are paid regularly, and when no current or past debts show missed or late payments, a credit score will be excellent.
Impact of Debt Reduction on Credit Scores
When each “trade line” on a credit report is shown, the amount of the original debt, the amount of monthly payment, and the history of that payment is reported. In the case of credit card debt, the credit card limit is shown, along with the amount currently owed, and the history of the monthly payments. Reports are updated every month to show the previous month’s payment history.
Three things can affect a credit report negatively – late payments on debt, too many credit card and revolving debt trade lines, and a consistent history of owing more than half of the credit limit on credit card debt.
If an individual has had previous late payments, nothing can be done about the history. The only “fix” for this problem is to maintain a perfect payment history for a year.
If there is too much credit card and revolving debt, then eliminating some of those trade lines will automatically result in good raises in credit score. Consider consolidating too many accounts into one with a lower payment.
The third and most easily accomplished step is to reduce credit card debt to less than one-half of the total credit limit on each card. This can be accomplished one at a time, by making minimum payments on all but one. On the last one, dump as much money into that debt as possible until the balance is less than one-half the limit. Move onto the next one and reduce it to less than one-half of the limit, and so on, until all of the credit card debt is reduced to less than one-half of the credit limit. With each reduction, a credit score can be increased by as much as 40 points.