I've received a lump sum disability payment and I have more credit card debt than I'd like to admit too. Is it better to completely PAY OFF all the credit card bills I can or should I make larger monthly payments and pay off in time? I have heard that it isn't good for your credit report to close out credit. HELP!
It is always better not carry any credit card debt, not only will it help in improving your credit score, but you will also save the interest that you pay on a monthly basis. I think the other part of the question has to do with closing these accounts once paid off. Paying your accounts in full is not the same as closing these accounts. Paying off these cards will help boost your credit score. Once paid off, you may have to decide in which credit cards you want to keep and which ones you want to close. Typically, any account that you have had for a long time, and also have transacted on it a lot, would have helped in establishing your payment history. You would want to leave these accounts open. On the other hand, even if you have had a card for a long time, but you never used it, closing it is not going to hurt you.
There are several factors that come into play when dealing with your credit score. Just so you better understand how your credit score is calculated, here is some more information. 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.