When was the last time I did an advice post? I can’t even remember. Hopefully this means everyone is so smart and pretty they have no unanswered questions! But it might mean I’m losing track of even more things than usual, and you’re asking, and I’m forgetting to answer. Whoops. Let’s assume the former.

Anyway! Pretty Amy writes:

Hello pretty Mir,

I have a question (or two or twelve) for you regarding increasing my credit score. See, I’ve not always been good about paying stuff on time and then we had some financial issues and so the slippery slope goes. I’ve recently been laid off (permanently) and received a handsome severance package as well as qualifying for unemployment. The nitty gritty is that I’m hoping to use the severance to pay down/off a boat load of credit cards and get my finances manageable once and for all.

My goal is two-fold — lower my debt AND increase my crappy credit score. I’m planning on closing all but 2 (Visa and Discover) cards once they are paid off (we’re talking about 5 or so department store cards). Is the trick in bettering the score by paying them off in a lump sum or over a few months?

First, let me say that I’m sorry you were laid off, but I have great admiration for your commitment to tackling your debt issues with the windfall. That’s half the battle right there.

If you haven’t read it already, please go read this post all about the voodoo involved in calculating credit scores. In it, you’ll learn how there’s not a cut-and-dried relationship between Action A and Result B when it comes to FICO scores, but general trends.

For your particular situation, Amy, I’d say that you are going to be better off making payments (thereby extending your history of timely payments compared to your history of late/missed payments) than just paying everything off, in terms of your credit score. If we are looking at only what will be best for raising your score, that’s the way to go. Make regular payments.

However, there’s a problem with this approach. Although your score will improve, it will cost you more to continue to carry that debt and pay interest than it would cost to pay it off and stop paying interest. Unless you’re very wealthy, that’s not an acceptable trade-off for most people.

In the grand scheme of What Is Important in FICO scoring, here’s some common debt sources in descending order of importance: Mortgage, home equity loan, car loan, major credit cards, store credit cards. That is to say, missing a store credit card payment will damage your score but not nearly as badly as missing a mortgage payment. Knowing this is important, because it can help you to decide how to weigh continued debt against the savings of paying it off.

So. Do you have a mortgage? If so, you could pay off the rest of your debt and continue paying your mortgage on time and your score will continue to improve apace. If you don’t have a mortgage, do you have a car loan? If so, you could pay off the rest and your score won’t improve quite as quickly as if you had a mortgage, but it’ll still keep coming up.

If you don’t have a mortgage or a car loan, you need to seriously consider not paying off the rest of the debt in one fell swoop, because you need to continue to beef up your history as a good credit risk. Should you elect to go this route, you want to look into transferring balances to a 0% interest card or making some other accommodation to minimize the interest you’ll be paying. Perhaps you pay off half the cards and make payments on the other half; you have to sit down and look at everything and see what seems workable. And you don’t need to make payments forever, either. Even six to twelve months of model bill-paying behavior will greatly aid in your credit score recovery.

Once your debt is paid off, don’t close down those accounts. Keeping them open improves your debt ratio (actual debt to available credit), which in turn can improve an ailing credit score. Once your score has recovered—which, depending on the amount of damage, may take a couple of years—then go ahead and close your extraneous accounts.

Best of luck with it all, Amy! You’re on the right track for sure.