09 Apr How Paying Off Debt Can Boost Your Credit Score

A good credit score means more freedom. You’ll face lower interest rates on credit cards and loans, saving you thousands over time, as lenders will perceive you as a lower risk and feel there’s less of a need to tack on higher interest rates as a sort of insurance policy.

You’ll also see higher credit limits, giving you access to more opportunities, such as affording a wedding, obtaining a personal loan for a holiday, or getting vehicle finance. Your vehicle finance will award you with lower monthly payments and fewer hoops to jump through. With good credit, you’re not trapped with unsavoury lenders, payday loans, or predatory deals.

In this post, we’ll discuss why paying off debt can increase your credit score and strategies you can use to pay off debt efficiently.

Why Paying Off Debt Increases Your Credit Score

Credit bureaus use algorithms – a set of instructions computers use to work out complex problems – to determine your credit score. The algorithm calculates your score by factoring in your payment history, credit utilisation ratio, length of your credit history, types of accounts you have open, and recent credit inquiries.

Here’s why paying off debt will improve how your score is calculated.

Lowers Your Credit Utilisation Ratio

Credit utilisation ratio is how much credit you use compared to what you have available. Experts recommend that you keep it below 30%. In other words, don’t use more than a third of your credit at any one time. For instance, if you have a credit card limit of R10,000, you shouldn’t use more than R3,000. Under 10% is even better.

It Shows You Can Handle Credit Responsibly

Paying off debt shows you can handle credit responsibly: you borrow money and pay it back. Over time, making repayments on time and in full can bolster your score.

Improves Your Payment History

Payment history makes up a good chunk of how your credit score is calculated – about 35%. Once you’re up-to-date on missed payments and making on-time payments regularly, your score should start to rise.

Reduces Risk in the Eyes of Lenders

Less debt illustrates that you’re a lower risk and thus builds trust with lenders and bureaus. Just like a low credit utilisation ratio, a lower overall debt load signals that you’re not overextended and will pay them back. You’ll have an easier time being approved for credit, lower interest rates, and higher credit limits.

Lets You Build Up a Positive Payment History

Once you’ve gotten rid of the backlog of missed payments, you can start focusing on what matters: using a small amount of credit and paying it back in full and on time each month. Plus, you’re likely to be approved for a new line of credit, such as a store card or loan, which will allow you to diversify your credit mix and further build your score.

Lowers the Stress You Face from Debt

Paying off your debt not only allows you to build positive credit but also allows you to obtain peace of mind. Not being worried about debt will help you perform better at work, sleep better, and be less anxious in general.

Let’s Boost Your Credit Score

Let Credit Boost help you raise your credit score. Whether you need help becoming debt-free or need financial guidance, we’re here to assist. Our experts have years of experience helping South Africans overcome over-indebtedness and build their credit scores. Become financially free – contact us today.