If You Want to Improve Your FICO Scores…Paying Off Credit Debt
Reigns Supreme
Guest article by John Ulzheimer of SmartCredit.com
When it comes to boosting your FICO
credit scores there are a variety of strategies that will yield
varying amounts of improvement. Many people believe that
getting negative information removed from your credit reports is
the number one way to increase your scores. This is correct
but only if the consumer is successful at getting most, if not all,
of the negative information removed. Getting one of your
twelve collections removed isn't going to do anything for your
scores.
A much more actionable (and realistic)
way to increase your scores is to pay off debt. Not only is
this a proven way to earn better scores but also it's practically
immediate. Paying down debt can result in a better score in less
than 30 days, which is lightening fast in the slow moving
credit-reporting environment.
But before you crack open your checkbook
you'll want to consider WHICH debt you're going to eliminate.
Why? Because when it comes to improving your credit scores
not all "debt elimination" is created equal. In fact, paying
some huge debts will yield little to no score improvement while
paying smaller debts can result in meaningful score boost.
Using a scoring tool built by FICO, I
recently simulated the following "pay off" scenarios and measured
their impact to a FICO score of 630, which is clearly one that
you'd like to improve. Nothing other than the following
actions changed on the credit report.
1) Paying off a $250,000 mortgage
2) Paying off a $35,000 auto loan
3) Paying off a $5,000 credit card
The results are as follows…
Paying off a mortgage loan of
$250,000 improved FICO 630 to FICO 635
I've been telling people for many years
that installment debt, even in large amounts, doesn't have much of
an impact to your scores. This is the quantification of that
advice. And while this is just a simulation, in 2010 I sold a
house and eliminated a $249,000 mortgage and my FICO scores went up
four points.
Paying off an auto loan of
$35,000 improved FICO 630 to FICO 635
An auto loan is an installment loan (like
a mortgage) and the effect of paying it off is equally unimpressive
from a scoring perspective. Don't get me wrong; it's nice not
having a monthly car payment. And, it'll save you big bucks
not paying interest on a $35,000 loan any longer.
Paying off a credit card balance
of $5,000 improved FICO 630 to FICO 665
Eliminating the credit card debt resulted
in the largest improvement to the credit score, and really it
wasn't even a close race. Credit card debt is scientifically
proven to be a riskier type of credit for lenders to extend, which
means even smaller amounts like what was used in the simulation can
have a significant impact to your FICO scores. It also means
if you can pay it off your scores will improve a lot, and very
quickly. And even if you can't pay off your credit cards
100%, your scores will still improve by paying it down as much as
possible.
Now, where's my checkbook?
John Ulzheimer is
the President of Consumer Education at SmartCredit.com, the credit
blogger for Mint.com, and a
Contributor for the National
Foundation for Credit Counseling. He is an expert on credit
reporting, credit scoring and identity theft. Formerly of FICO,
Equifax and Credit.com, John is the only recognized credit expert
who actually comes from the credit industry. Follow him on Twitter here.
