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Advice on How to Pay Bills to Boost Credit Scores - The Bills.com Blog
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Advice on How to Pay Bills to Boost Credit Scores
Question: My wife and I are expecting to receive around $23,000 from her father's estate soon. We have too many bills. We have a mortgage, a 10,000 home equity loan, 2 auto loans, 8,000 in credit card debt, and about 40,000 in consolidated student loans. My question is: What would be the best use of that 23,000 to reduce our monthly obligations and boost our creditscores?
Answer: First, let me tell you that paying of the credit card debt is going to help your score go up significantly. Apart from that, I would list all the loans on a sheet of paper with their applicable interest rates, that way you will get a good idea of how much of your money is going where. It is always advisable to pay off the loan with the highest APR first. Having a mortgage payment actually helps you in maintaining a good score, but if your home equity line is at a higher rate I would suggest that you pay that off as well.
As you are inquiring about credit scores let me give you some information on how it is calculated. It is important to understand how your credit score is calculated. Your credit rating is calculated based on several variables, including:
1) Payment history, which counts for approximately 35% of your score, is the most heavily weighted factor used in calculating your credit score. Consistently paying your bills on time has a positive influence on your score, while late or missed payments will hurt you in this area. If you have delinquent payments, the older the delinquency the less the negative impact on your score will be. Collection accounts and bankruptcy filings are
also taken into consideration when analyzing your payment history.
2) Total debt and total available credit, which counts for about 30%. This section looks at how much debt you have compared to the total available credit on your accounts. If all of your accounts are maxed out, you will be considered a poor credit risk, because it appears that you are struggling to pay off the debt you have already incurred. If your account balances are relatively low compared to your available credit, this part of the risk analysis should help your overall credit score. The score calculation also looks at these two factors independently. Having too much available credit, whether you have used it or not, could hurt your credit score, as statistical studies have shown that people with excessive amounts of available credit are a higher credit risk. Unfortunately, the bureaus do not define exactly what they consider excessive, so best tip is to use credit conservatively and to keep your debt to credit limit ratio low.
3) Length of positive credit history, which counts for about 15%. The longer you maintain accounts in good standing, the better your score will be. This shows that you are able to make a long-term commitment to a creditor
and are consistently responsible about making your payments.
4) Mix of types of credit, which counts for approximately 10%. Having several different types of credit, such a credit cards, consumer loans, and secured debt, will have a positive influence on your credit score. Having too much of one type of credit can have a negative impact.
5) The number of new credit applications you have recently completed, which accounts for about 10% of your score. Applying for too much new credit in a short time period makes indicates that you could be credit risk, as you may be desperately trying to keep your head above water. The models make an exception for people who are shopping around for a loan, so if you are simply applying to see who can give you the best rate on a new loan, you need not worry too much about damaging your credit score.
If you would like to learn more about credit reports, credit scoring, and what it means to you, I encourage you to explore the wealth of material offered by Bills.com at http://www.bills.com/credit.
I hope this information helps you Find. Learn. Save.
Best,
Bill
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