For those who are in debt, Yes, paying off your debt is the simplest and surest way to improve your credit. But, believe it or not, this is only 15 percent of what goes into your credit score. To have the best effect on your score, you need to improve as many areas as possible.
Step 1: Pay Off Your Lowest Balance First
If you owe a small balance on a credit card, or only have a few hundred dollars to go on a medical debt, then finish it off and close it out. This will have a positive effect on three areas of your credit score: amount of debt, total lines of credit, and debt to income ratio. This will also help you build momentum in your debt elimination plan, and free up more money in your budget.
Step 2: Improve Your Debt-to-Income Ratio
The higher your income in relation to your debt, the better your credit score. Either find a way to bring in more income, or sell something to pay off your debt. Ideally, do both.
Step 3: Eliminate High Interest Debt
Develop a plan to pay off your highest interest debt as soon as possible. Debt consolidation is a great way to improve your score by doing precisely this.
Step 4: Avoid Opening a New Line of Credit
Unless it is absolutely necessary, don’t take out any new loans or credit cards. The more credit accounts you have open, the more lenders view you as a risk. On the other hand, paying off a debt will close a line of credit and improve your score.
Step 5: Check Your Progress Often
Monitoring your progress will help you work towards a goal, and make better decisions. There are a lot of free or low-cost services online that enable you to check all three-credit scores at any time. Keep in mind that you are entitled by the government to a free credit report from each service once a year. Reviewing your credit report will also give you the opportunity to make sure there are no mistakes on your report which can cause significant damage to your score. You'll also be able to ensure that the debts you pay off are removed in a timely manner.
Step 1 vs Step 3
Does paying off lowest balance first contradict with paying off highest interest balance?
It is about logic vs emotion.
- Paying off highest interest balance is logic.
- Paying off lowest balance is emotion (few better and have less account to manage).
Any one know more about credit scoring in Malaysia to share with readers?