In the financial world, having a good credit score is gold. Not only does it help you get approved for lucrative rewards credit cards, it also makes it easier to find a job, rent an apartment, take out a mortgage and even purchase a cell phone plan.
If your credit score is “fair” and you’re working to boost it to “good” or “excellent,” paying off credit card debt is a great place to start.
Most credit scores are calculated using the FICO method, which considers five factors to create scores ranging from 300 to 850: payment history, amounts owed, credit history, new credit and kinds of credit. A fair credit score is typically from 630 to 689, and anything above 690 is considered good or excellent.
Your score vs. debt
The amount you owe on a credit card is the second-most important factor in the FICO calculation — and it accounts for 30% of your total score. If you have a lot of credit card debt or revolving credit, it will hurt your score in this section and contribute to an overall lower score. Paying off your credit card debt will have a positive impact on the “amounts owed” section of your FICO score, and eventually raise your score from fair to good.
But before you start paying off your debt, check your credit accounts to see how much you owe on each and how much interest you’re paying on the balances. Pay off the credit cards with the highest interest rates first to avoid accruing even more debt. While credit card issuers require you to pay a minimum amount each month, there is no cap on how much you can pay on your balance. Whenever possible, pay more than the minimum on your accounts to shrink your debt even faster.
Make payments a priority
On top of improving your credit score, paying off credit card debt will release a huge weight from your shoulders. But once your credit card debt is gone, the last thing you want to do is rack up more. Going forward, make an effort to pay credit card bills on time. Many issuers offer email and text payment reminders that alert you when a bill’s due date is close. You might want to also consider automating your credit card payments, so the money is transferred from your bank account each month without you doing a thing.
Paying off old credit card debt is one way to raise your credit score from fair to good. Be sure to pay off the cards with the highest interest rates first, and pay more than the monthly minimum whenever possible to lower your debt faster and to avoid paying more in interest.
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