Debt Payoff Doesn't Repair Credit Histories
Eliminating your debt balances certainly is a step in the right direction. But make no mistake – paying off your debts will not completely repair your credit. Only time and good behavior can do that.
What Lenders Can See
If you are planning on needing lender approval in the near future and have been working to cut out your debt balances, it will work in your favor with lenders. However, paying off your debt balances is not the only aspect of your credit report lenders want to see.
When you are seeking new lines of credit or other financing, a lender looking at your credit report will be able to note that you have effectively cut out your owed balances. For many lenders, that fact will put some points in your favor. But lenders need more information about you and your potential risk for defaulting on loan repayments.
One factor of your credit report they will look at to gauge risk is your payment history. Even if you have zeroed out the account balance, your credit report will still show the number of times you were late paying on the account. Late payments are logged in increments of 30 days so if you were late 90 days or 120 days, the credit report will reflect this information to the lender for several years to come.
Why Late Payments Matter
When you are 30 days late or more making your payments, lenders consider that to be risky behavior. Either you do not have the financial means to repay your debt in a timely manner or you do not take your financial obligations seriously enough. These can be red flags for lenders who are worried about risky behavior regardless of your reasons for being late.
In addition to the lasting representation of your late payments on your credit report, your payment history will also be a factor in the calculation of your credit score. Multiple late payments could significantly impact your credit score, dropping it substantially if you have lengthy payment delays.
Repairing the Damage
There is little you can do to change your late payment history besides making an effort to stay on track. You can not erase late payment histories from your credit report unless the information being report is inaccurate and you have the proof to back it up. You can start repairing the credit damage by consistently making payments on time each month for all of your financial obligations. A period of six months or longer of on time payments will help to improve your credit score.
Setting up automated payments is one effective way to ensure your debt payments are timely. Most banks allow you to set up automated payments at no cost and as long as you have the funds in your account, your payments should be completed without a problem each month without any additional effort on your part. If you are hesitant to establish automated payments, at least use a calendar and mark down payment due dates for each financial obligation you have several days in advance to help you keep track and stay on top of your debt repayments while also improving your credit at the same time.
Questions and Answers
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