if your credit is bad is it more helpful to send the monthly payments as opposed to paying it off quickly?

Question

Is it better to send regular monthly payments to the credit card companies or to just pay off the debt in one lump sum? Which will help me get my credit rating back up faster?

Answer 1

Your FICO credit score ranges from 300(worst) to 850(best), and is comprised of the following categories:
30% - debt-to-credit limit ratio (how much debt you owe IN COMPARISON to your credit limit; strive for 35% or less)
35% - payment history (late/missed payments bring down your score in this category)
15% - length of credit history (how long you've had your accounts, how many open accounts you have)
10% - types of credit (strive for a well-rounded variety consisting of a credit card, store card, auto loan, mortgage, and personal loan)
10% - inquiries/credit applications within the past year (although inquiries from the past 2yrs stay on your actual credit report)

For an immediate "quick fix" to your FICO score, paying it off in one lump sum is the way to go. You will save money in interest(this only helps out your wallet, but doesn't help your credit score). It will help your FICO score because your debt-to-credit limit ratio will be lower. Paying off debts can increase your score as much as 50points!

HOWEVER, in the long run it will be better to pay off your credit cards in timely installments over a course of 6-12 months. Just calculate how much you will pay per month to have it paid off in 6-12 months. Pay more than the minimum, but less than full amount, so that it will take 6-12 months to pay off. Yes, you will be spending more money on interest in the long run, but you will also be reestablishing on-time payments over a long period of time. This shows creditors that you can make financial commitments. Your score will not rebound as quickly at first, but eventually(6-12mos. later) your debt-to-income ratio will be 0 so then your "debt-to-credit limit ratio category" will be good...plus you will have extra points in the "payment history" category. If you pay off your debt right away, you will show less payment history.

Also keep in mind that if you pay off huge debts all at once after not paying or paying late for a while, you will be viewed by creditors as someone with a "windfall situation." The creditors will assume that the only reason you were able to pay your debts so suddenly, was because you received a huge gift(lottery proceeds, inheritance, etc) or because someone else(a parent, spouse, etc) took over managing/paying your accounts for you. They will suspect that this "windfall" was a one-time deal that probably will not happen again. They will not assume that you have learned to become more responsible with your debts, since they will not have any prolonged payment history to believe it.

If you are concerned about the interest, you can always call your creditors and negotiate lower rates. They are more willing to cut your rates if you are paying smaller amounts, than if you pay off your bills in full. You do NOT need to go through stupid debt consolidators to do this! If you are really that concerned about paying interest, then pay off your credit cards in one lump payment, then rack them up to a slightly smaller amount with your living expenses, pay them off before the due date, rack up more expenses, etc. This will show that you are using the card. Your credit cards only report the balances to your credit report once a month(at most), so it'll still show a gradually declining balance over time.

However, if you are in a scam/rip-off debt consolidation program, DO pay them off asap! This is because a lot of debt consolidation places charge huge monthly "maintenance" fees, so the longer you're with them, the longer you pay fees IN ADDITION to your credit card bills. These fees sometimes cost more money than the so-called "interest" that you are saving. A lot of debt consolidation programs also close out your accounts, therefore it'd be wise to pay them off asap, since it never looks good to see closed-off accounts that still carry a balance(it only looks good to see a consistent revolving balance on OPEN accounts). At that point you'll have to pretty much start from scratch and open new accounts anyway, so you might as well pay them off so that you can start over as soon as possible.

Answer 2

It's amazing how many people don't have a clue as to how the credit system works! Paying off your balance all at once will avoid any interest charges, but does nothing to help you re-establish your credit. You are proving to your creditor that you can manage money and prove you are a good risk with further loans. Paying your monthly payments on time proves you can be responsible and if you want to avoid paying interest as possible, pay more than the minimum due each month. For example, if your credit limit is $500.00 and your monthly payment is $25, you will need 20 months to pay it all back, but you will establish credit! However, most credit reporting agencies, Trans Union, Experian and Equifax report on your credit worthiness every 6 months. Paying $75 every month instead of $25 will pay off your debt faster, in 7 months and you will have established a history of paying on time and paying more than the minimum due! Note that I simplified this and did NOT include interest charges, but you should get the idea. Keep in mind that interest for a cardholder with questionable credit will be a lot higher than usual, from 18% to as much as 29% at an annual percentage rate! This means that for every dollar you "borrow" you will pay back $1.18 to $1.29 so make your purchase worthwhile and something you really need! Creditors look at not only how you pay off your debt, but how you spent the money they lent you too. If your in school for instance, buy needed books and supplies on your credit card and pay it off as described and you will show you can spend money wisely and be trusted with debt when you make payments on time. In other words, you are a good risk! Good luck to you and I hope I helped you! Knightrider966.

Answer 3

Well, if you are paying the company direct (meaning, original creditor) you should tell them your situation and work out a feasible re payment schedule. Assuming it's with the original creditor, monthly or lump-sum won't make much of a difference, just as long as either payment is not being applied to already overdue payments.

If payments are overdue, and it's with original creditor, it would be better to make an agreement with them and to get back on the straight and narrow. This would be ideal over a lump sum because it will reflect on your report that you are back on good terms with them and that you handled a tough situation on your own. This will raise your score.

If, the original account has been charged-off and sent to collections agency your best way to raise your score is to make a lump-sum arrangement. Although it will remain on your report from 6 months after the original delinquency up until 7 years, you will get little score boost the sooner the bad account is settled/closed. Plus, it allows mental relief of getting it behind you.

So,

Original creditor: payments.
Collections Agency: lump-sum.

Good luck! Remember: if it's still with the original creditor you have the ball in your court. It is not as bad as their letters say. You have the money they want! Remember that!

Answer 4

You will have a notation that your credit payment is slow, but by paying the debt in monthly payments will show the creditors that you are responsible about your debts and assures the creditors they will be paid. That will help your credit rating go up. Paying off the debt after a bad rating doesn't show the creditors anything other than you can purchase things outright.

Answer 5

If you make payments on time for 6 months in a row your credit score should improve. Creditors want to know that you can consistently pay your bills on a monthly basis. You can certainly make higher payments that will help you get your bills paid faster, but if you can do it over a 6 month period, your credit score will be better. Closed accounts affect your credit score as well.

Answer 6

Its best to send in monthly payments + a little something extra for 9-12 months to establish proper & timely repayments & a willingness to knock off the outstanding by saving & paying back from your end.

This should help u get your scores corrected fast.

Answer 7

Its called "credit history". Banks want to see a long term credit history and the longer you pay the better history you will have. If you credit cards are over 50% then it will hurt you. But as far financialy it is better to pay off as a lump sum that way you dont pay all the intrest.

Answer 8

If it is debt, pay it off...
But if it is just your regular bill, you need to pay it monthly, and on time. That shows consistency. That is what you want on your bureau. Its more important to have good solid established credit than to have a good score with weak credit.

Answer 9

yes, strangly enough it does help your rating to pay payments... see your rating is a score that tells lenders 1 if your trustworthy and two how much they can make off you. so paying say 10-20% more than the min. is a good bet, but then you pay more interest. that way they see you are dependable, yet, make some interest off you.

Answer 10

pay off the entire bill if you can & don't cancel the card it could effect your FIACO score.

If you can't py off the entire bill try to pay more than the minmum due and never miss a payment.

hope this helps

Answer 11

For every reason you can think of, always pay debt off as fast as you can.
The more you prove that you don't need the money, the higher your credit score will get.