Does Debt Free Mean My Credit is Good?

It is certainly an accomplishment when you can eliminate your outstanding debts but don’t make the mistake in thinking that your credit has been repaired too. Debt payoff and credit repair are two completely different concepts and it is important to distinguish between both of them if you wish to rebound with your overall finances.

How Debt Payoff Impacts Credit

When you carry debt that is considered ‘bad’, meaning it provides no value to your overall financial status, your credit will only benefit if you have paid on time each month and provided your creditors with adequate payment amounts. If you continually meet your financial obligations, your credit history and credit score will benefit greatly.

If you have a lot of debt that you have not kept up in making monthly payments and have often made late payments or missed monthly payments altogether, your debt will then work against you. Bad credit activity being reported back to the credit agencies will be reflected in your credit score and report. The way you make (or don’t make) payments has a significant impact on your immediate credit score as well as your long-term credit history. Payment information from your creditors will stay on your credit report for 7 years. If your debt has put you into bankruptcy, the black marks will last for up to a total of 10 years. This means that your potential creditors or lenders over the next 7-10 years will see how often you failed to meet your financial obligations. They will be hesitant to lend or extend credit to you until your credit improves.

Making Debt Payoffs Work in Your Favor

Eliminating your debts is certainly a good step in the right direction. However, it is important you are doing it in a manner that will benefit your credit score. The best way to ensure you are paying off debts effectively is to order copies of your consumer credit reports. You have the right to get a free copy of each annually and any time up to 60 days after being denied credit. Use the information on those reports to verify accuracy of debts still outstanding.

Contact your creditor and arrange pay off but ask about their protocol for reporting the account information to the credit reporting agencies. This information is important for you to know because it will give you a timeline for when you can expect to see results. You’ll need to know this after eliminating debts so you can follow up and make sure the correct information has been reported. You’ll do this by re-ordering your credit reports in 3-4 months after paying the debt since it can take awhile for the information to be processed.

If you discover after rechecking your credit report that your creditor did not report the right information, you need to contact the creditor and report the dispute to the credit reporting agency with proof of pay off. The credit reporting agency will then launch an investigation and record the appropriate results. Your credit score is largely dependent upon the accuracy of information contained on your credit report.

Remember too that it is possible to get too excited about paying off debts which can result in further damage to your credit. If you use all of your financial resources to become debt free, you may risk not having enough money to meet your other financial obligations on a monthly basis. You will then gain new black marks on your credit history which can drop your score.

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