balance in its entirety is a great way to boost your credit score. And for the most part, it’s true. If you pay off, or even make a substantial reduction in your credit card debt, you’re likely to see your credit score rise. Show
Having said that, like most financial topics, it’s not quite as easy as that. The magnitude of a payoff-induced credit score increase can vary dramatically depending on your circumstances, and in some cases, paying off a credit card can even make your score go down. With that in mind, here’s a quick guide that illustrates how paying off a credit card could affect your credit score, and some of the variables that might apply to your particular case. How your FICO® Score worksBefore we dive into the finer points of how paying off a credit card could affect your credit score, it’s important to have a basic knowledge of how your credit score works. And, the FICO® Score is by far the most popular scoring model used by lenders, so let’s take a closer look. The FICO credit scoring formula is a closely guarded secret, but we do have some knowledge of how it works. Your score is made up of information from your credit report, which is broken down into five weighted categories:
Story continues How paying off a credit card affects your scoreHere’s the short answer: Paying off a credit card is generally a positive factor when it comes to your credit score. The reason is that the "amounts you owe" category is the second most important factor in your FICO® Score, and that lower balances relative to your credit limits can have a major positive impact. In other words, if you owe $2,000 on a credit card with a $2,500 limit, you’re using 80% of your available credit, which indicates to lenders that you might be over-extending yourself. On the other hand, if you pay it off and you’re using 0% of that credit line, it indicates responsible debt management as well as financial flexibility. Additionally, of the two major types of debt -- revolving (credit cards and credit lines) and installment (loans) -- revolving debt is the one that can really drag down your credit score if it’s overused. By paying off your credit card, you’re essentially taking a bad debt out of the FICO calculation. Other things to considerSo as a general rule, paying off a credit card balance should make your credit score go up. However, there’s no way to know exactly how much it will help, and in certain cases, paying off a credit card could even make your credit score go down. There are several other factors that come into play, which can determine just how much of an impact paying off a credit card can have:
Every situation is differentThe bottom line is that there is far too much information considered by the FICO credit scoring formula (as well as most other scoring models) to say something like, "…if you pay off your credit card, your score will increase by XX points." If you pay off a credit card that had a significant balance, and the paid-off amount represented a large portion of your outstanding credit card debt, you can generally expect a pretty significant boost to your score. Conversely, if you pay off a credit card but didn’t have much of a balance in the first place, or if you pay off a credit card and then close the account, you’re unlikely to see a massive rise in your score. And if your situation is somewhere in between, you’ll just have to go ahead and pay it off to find out for sure. The Motley Fool owns and recommends MasterCard and Visa, and recommends American Express. We’re firm believers in the Golden Rule. If we wouldn’t recommend an offer to a close family member, we wouldn’t recommend it on The Ascent either. Our number one goal is helping people find the best offers to improve their finances. That is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. How much does your credit score go up when you pay off a credit card?If you're already close to maxing out your credit cards, your credit score could jump 10 points or more when you pay off credit card balances completely. If you haven't used most of your available credit, you might only gain a few points when you pay off credit card debt.
How fast after paying off a credit account does your score go up?How long does it take for my credit score to update after paying off debt? It can often take as long as one to two months for debt payment information to be reflected on your credit score. This has to do with both the timing of credit card and loan billing cycles and the monthly reporting process followed by lenders.
What happens if I pay off my credit card in full?No interest charges on your balance: Most credit card issuers charge interest or APR if you carry your balance over to the next month, which means you're paying interest on top of the unpaid balance you owe. You'll avoid paying interest if you pay your credit card balance off in full each month by the due date.
How can I raise my credit score 100 points in 30 days?Lower your credit utilization rate. The fastest way to get a credit score boost is to lower the amount of revolving debt (which is generally credit cards) you're carrying. ... . Ask for late payment forgiveness. ... . Dispute inaccurate information on your credit reports. ... . Add utility and phone payments to your credit report.. |