Does Paying Off Debt Improve Your Credit Profile?
- UpdatedDec 18, 2024
- Bad credit and debt problems often go hand-in-hand.
- If you are suffering a financial hardship, focus on paying off debt.
- Your credit score will improve once you start making timely payments and reduce your debt.
Debt problems and bad credit is a double whammy
Many people who have debt problems often suffer from a bad credit profile as well. It’s a double whammy and definitely something that needs to be taken care of. So, how do you approach the issue? One obvious way to address your credit profile is to pay your bills on time, and when possible, in full. If you have extra cash, use it to pay down any outstanding debt.
But not all debts have equal influence on your profile. Depending on your individual circumstances, a high priority may be to pay down debts that will be recognized by several credit profiling factors. Getting rid of credit card debt may give you faster results than paying down other debts, because it is generally a riskier type of unsecured debt. Once you pay off a card, you may see a positive impact on your overall profile.
Focus on paying off your debt before improving your credit
Your credit profile should be important to you, because it has the power to determine a wide range of things in your life. If your credit profile is not as strong as you want it to be and you are looking to make it stronger, it may seem intuitive to pay off all of your debts. However, this strategy may backfire. You should always analyze each debt and predict how making changes to it will affect your overall credit profile.
If you choose to settle your debts for less than you owe (a.k.a. use debt resolution), talk to a certified debt specialist to get more information about how this process works. The benefit of debt resolution is that it is often a cheaper and quicker option for resolving debt. It may be especially helpful for people with high debt loads ($10,000+) and are struggling to keep up with their payments.
There are multiple ways to deal with debt and credit. If you are unsure which method is best for you, give our team a call at 800-910-0065 and we’ll guide you through your options!
Debt relief by the numbers
We looked at a sample of data from Freedom Debt Relief of people seeking debt relief during November 2024. This data reveals the diversity of individuals seeking help and provides insights into some of their key characteristics.
Credit utilization and debt relief
How are people using their credit before seeking help? Credit utilization measures how much of a credit line is being used. For example, if you have a credit line of $10,000 and your balance is $3,000, that is a credit utilization of 30%. High credit utilization often signals financial stress. We have looked at people who are seeking debt relief and their credit utilization. (Low credit utilization is 30% or less, medium is between 31% and 50%, high is between 51% and 75%, very high is between 76% to 100%, and over-utilized over 100%). In November 2024, people seeking debt relief had an average of 79% credit utilization.
Here are some interesting numbers:
| Credit utilization bucket | Percent of debt relief seekers |
|---|---|
| Over utilized | 30% |
| Very high | 32% |
| High | 19% |
| Medium | 10% |
| Low | 9% |
The statistics refer to people who had a credit card balance greater than $0.
You don't have to have high credit utilization to look for a debt relief solution. There are a number of solutions for people, whether they have maxed out their credit cards or still have a significant part available.
Collection accounts balances – average debt by selected states.
Collection debt is one example of consumers struggling to pay their bills. According to 2023, data from the Urban Institute, 26% of people had a debt in collection.
In November 2024, 30% of debt relief seekers had a collection balance. The average amount of open collection account debt was $3,203.
Here is a quick look at the top five states by average collection debt balance.
| State | % with collection balance | Avg. collection balance |
|---|---|---|
| District of Columbia | 23 | $4,899 |
| Montana | 24 | $4,481 |
| Kansas | 32 | $4,468 |
| Nevada | 32 | $4,328 |
| Idaho | 27 | $4,305 |
The statistics are based on all debt relief seekers with a collection account balance over $0.
If you’re facing similar challenges, remember you’re not alone. Seeking help is a good first step to managing your debt.
Tackle Financial Challenges
Don’t let debt overwhelm you. Learn more about debt relief options. They can help you tackle your financial challenges. This is true whether you have high credit card balances or many tradelines. Start your path to recovery with the first step.
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