Q: I have severe debt. I’m 25 and want to find a way out before I reach age 30. Is it best for me to just start paying my bills on time or pay off my old debt and pay my bills on time? Which one will have a more positive effect on my credit?
Roshunda, Rochester, NY
A: The best way, going forward, to improve your credit history, and thus the scores used to determine your credit worthiness, is to pay your bills on time.
Under the FICO model, the credit score formula most popularly used by lenders, 35% of your score is based on paying your bills on time. Paying your debts on time, as agreed, has the greatest effect on improving your score. Although paying off old debt will help, it won’t give you the same boost as how you currently handle your debts. Delinquent payments, even if only a few days late, can have a major negative impact on your FICO score.
Here’s something else to consider. If you do slip up and pay a bill late, the longer you pay your bills on time after being late, the more your FICO score should increase. Negative information stays on your credit report, and therefore impacts your score, for seven years. However, older late payments count for less. So over time, older late payments won’t bring down your score forever.
Now, you certainly should make an effort to pay off old debts. Reducing your debt also has a positive impact on your credit score. While the older debts have less impact on your scores, they still have an impact. Further, a lender, especially one thinking about giving you a home loan, will want you to clear up those old debts.
If you want to know more about how to improve your credit score, go to MyFICO.com and click on the link for “Education” and then go to “Improving your score.”
I commend you for wanting to get your financial life in order. Change your financial habits now, and you’ll find such peace in the future.