It is always good to pay down your debt. It makes your credit report and score better, but the effect may not happen as quickly as you like. Debt problems, like late payments and unpaid bills, will stay on your report for seven years — even if you take care of them. The longer back in your history they are though, the less impact they have on your credit score.
Bankruptcy is the most serious flag on a credit report and should only be used as a last resort. Bankruptcies stay on your report for ten years and have a hugely negative influence. A bankruptcy does not wipe the slate clean.
When you have these red flags on your credit report, it will affect your ability to get credit down the road. Still, as time goes by, if you do improve your budgeting and money management skills, these will have less of an impact. The key is to make a serious change and only have positive reports going forward.
If you do use a credit counselor to help you with your debt problems that will often appear on your report as well. It is critical that as you clean up your credit report that you also work with lenders on how they report your progress. If you are closing an account, then make sure they note that the account was closed by the customer’s request. If you pay off an account, make sure they note that the account was paid in full.
If you have had unusual circumstances that caused problems with your ability to maintain your debt (like an illness or job loss), you can submit an explanation that will be included with your report. This can be worthwhile as people review these reports and they like to understand your situation. It also shows your interest and awareness of your credit and debt problems.