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Question: If I pay off $20,000 of $25,000 in debts reported as a write-off as well as collections all in one year, how much would a credit score of 550 be raised by the end of that year, assuming all accounts get paid in full? – Matthew G. in Lowell, AR
Terry Cordell, co-founder of Ovation Credit Services, responds…
That’s an ambitious and admirable goal that will pay off when it comes to your financial health. How soon it will pay off and exactly how much it will impact your credit score, however, is less certain.
When talking about credit scores, we’re typically referring to your FICO score. This three-digit number is generated by the Fair Isaac Corporation and ranges from 300 to 850. The higher, the better. Anything below 580 is considered “very poor,” so, with a score of 550, you’re firmly in that camp. You’re right to want to bump that number up as quickly as possible. To get into the “good” range, you need to increase it to a minimum of 670, which is a pretty significant jump.
First, the bad news…
There’s no quick-fix way to boost your credit score. You mentioned you have debt that has been written off and is in collections. Because your payment history has the biggest impact on your credit score, this type of debt can have a major impact on your credit score. Also referred to as a “charge-off,” it means the company you owed money to wrote off the possibility of you ever paying them back and balanced their books accordingly.
What it doesn’t mean: That you’re off the hook for paying that money back.
In many cases, the original lender will sell that debt to collections agencies, so it’s likely you’ve been contacted by one. Also, just because a debt has been “written off” by a lender, it has not been written off of your credit report. In fact, according to FICO, debt in collections remains on your credit report for seven years, though its impact lessens over time.
Just how much paying off your debt will change your score depends on several factors that are specific to you, such as your credit history. If your credit history is limited, then changes have a more significant impact than if you have a long credit history. The “degree” of change, based on your past credit behavior, is also a factor. So, giving you an exact number that you can expect your credit score to jump to after paying off this debt isn’t possible.
Is your credit rating holding you back? Find out how to fix it.
Your credit score is constantly evolving and paying down debt is one of the most important things you can do to improve it. Each time a creditor requests your credit score, a new one is calculated. Lenders typically make reports to credit agencies on a monthly basis. As long as you make positive changes, you can increase your score. Even little improvements over time can add up.
While your payment history has the most significant impact on your credit score (35%), the amount of debt/your credit utilization ratio also makes a big impact (30%). So, if you reduce the overall amount of debt you have and also pay off your balances in full, that can seriously move the needle — not to mention the money you’ll save on interest.
Even more good news down the road…
Under the new FICO 9 rules, once a collection item is paid off, it will no longer be included in your score. However, most financial lenders aren’t using FICO 9 yet, so you likely won’t see the impact immediately.
Note, however, that you can’t just pay off the debt and be done with it. What you do after that is just as, if not more, important. Make sure you don’t put yourself in a position where you use all your financial resources to pay off this debt and leave yourself so strapped that you have to resort to taking on additional debt to make ends meet. Avoid opening new credit cards and pay your bills on time, every time.
In addition, beware of credit repair scams that promise to boost your credit score quickly. Many will request money upfront, and some will even tell you to lie or try to dispute accurate information on your credit report. If you need help managing your debt, contact a consumer credit counseling agency.
The bottom line…
Unfortunately, there’s no quick fix to send your credit score skyrocketing, and I can’t tell you exactly how much paying off this chunk will raise your credit score. What I can tell you, though, is the best thing you can do to improve and then maintain a strong credit score is to reduce and pay off your balances as quickly as possible and then pay all of your bills on time moving forward. It may take some patience and persistence to see the payoff, but with time and healthy financial habits, you’ll see your credit score continue to climb.
Terry Cordell, Esq. is Senior Vice President, Credit Integrity, of Ovation Credit Services, a LendingTree company (www.ovationcredit.com). As an attorney, Mr. Cordell brings tremendous insight into consumer credit laws and their application as they relate to credit repair and credit improvement. Under Mr. Cordell’s leadership, Ovation Credit Services has assisted tens of thousands of consumers with credit education, identifying and resolving credit reporting discrepancies, and overall credit profile optimization. Mr. Cordell was awarded a Juris Doctor, cum laude, from the University of Miami School of Law, Coral Gables, Florida, and is a member in good standing of the Florida Bar. He received a Bachelor of Business Administration Degree from the University of North Florida, and a Masters in Business Administration in Finance, Decision Sciences and Corporate Strategy from the Kellogg Graduate School of Management at Northwestern University, Evanston, Illinois.
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