Is it possible to pay off debt TOO quickly?

Paying off credit card debtCould one flourish of a pen pay off your credit card balance and subsequently cause a good credit score to be flushed down the toilet?

The answer is no.

Let's dispel the myth that you have to carry a credit card balance in order to have a good credit score. Many consumers hold a small balance of credit card debt, which could easily be paid off with their next paycheque, because they erroneously think that if they pay it off all at once, their credit score will drastically drop.

Let's remember first what a credit score is. A credit score is the record of your payments history, and, if it's good, a positive reflection that makes you look good to a lender. A positive credit score assures lenders that you will pay off that debt under the terms of the agreement you signed with the creditor -- and that makes lenders willing to offer better terms.

If you have to pay interest on a balance month after month, that money will accumulate, and you will have to pay off all of that interest eventually. Why would you want to do that when the money could be used for so many other things?

If you are able to pay off a loan, you should go ahead and do it. It would be far better to have the money that you would have used to pay the interest for something else instead. You could deposit that in the travel fund jar, or maybe bank it and make a lump sum prepayment on your mortgage.

In fact, erasing a debt from your record will most likely improve your credit rating, not suddenly sink it. And if it does sink, most likely there are other factors at work. For example, suddenly applying for several loans or credit cards at once, or forgetting to make a payment.

Remember, the main purpose of a good credit score is to qualify for debt, such as a mortgage or car loan, under the best possible terms. The less debt you carry, the better credit risk you are.

By paying off your debt, you should have a good feeling, and not worry about any minor impacts it may have on your credit score. Celebrate and rest easy with the knowledge that you have one less debt obligation to worry about should a change in the direction of your life call for a brand new credit card loan.

Written by Melanie Dixon.
Published August 10, 2009

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