Time and Debt Repayment Still the Best Strategy for Increasing a Credit Score
Some of you might be rejoicing a bit because of news that the chief credit scoring outfit, FICO, is changing its rules about how it scores debtors. The main change is that the new system will draw a distinction between medical debt and regular debt. The other big change is the new system will disregard medical collection accounts if they are paid or settled.
While the new system does seem to inject more fairness into the system, it could take a while for you to see a difference in your score. It will take a while for lenders to adopt the new scoring model.
All those details aside, the news about this scoring change does not even bring up the best reason for you to get rid of all your debts. It’s not so you can have a higher FICO score. That is good news if you are planning to buy a home or vehicle soon. But that still misses the main reason you would want to embark on a quest to get rid of debts.
The main reason you would work hard to get rid of your debts is because living debt free is so much better than being saddled with bills. You don’t need a higher FICO score to feel the benefits of debt-free living. And if you score goes down temporarily, that shouldn’t discourage you from your efforts.
Remember, the main purpose in developing the FICO score was to help businesses decide whether you are a good credit risk. If you are in the middle of employing a strategy to pay off your debts or are considering one, then you have obviously already been deemed worthy as a borrower. Once you are debt free there will be worthwhile strategies you can use to improve your credit profile, but while you are reducing your debt load that should be your top priority, not proving that you’re a good risk.
Another reason the change in FICO scoring is only moderately good news is because having a better score has no relation to the debts you already have. So, for example, your debt being medical bills doesn’t mean you don’t still owe them. You do. An increased FICO score doesn’t change that. So your monthly expenses remain the same.
The real good news comes when those debts are paid off or you have reduced your debt to the point it has little impact on your credit report. That’s the moment you can begin to consider smart strategies for taking advantage of your higher score. Maybe you will be able to negotiate better insurance rates, or interest rates on the credit card accounts you keep. And once you save enough money to make a nice down payment on a home, your higher score will allow you borrow for less.
Until you’re free of your debts, though, your score is little more than a rating system.
Published Aug 13, 2014.