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Paying off credit card debt is smart, whether you zero out your balance every month or are finally done paying down debt after months or years. And as you might expect, it will affect your credit score.
Whether you are chipping away at a balance or eliminating it with one big payment, your score will likely go up.
Here’s how various credit card payoff scenarios are likely to play out.
Should I carry a balance or pay in full?
Carrying a balance does not help your credit score. There is a persistent myth that paying off your entire balance is a mistake when you are trying to build credit. That’s not true.
It’s best for your wallet and for your score to pay balances in full and on time. Second-best? Pay at least the minimum payment, on time.
If you carry a balance, try to keep it below 30% of your credit limit — and much less is better. That’s because credit utilization — or how much of your credit limit you’re using — is an important factor in calculating your credit score. VantageScore calls this ratio “highly influential,” and FICO says it accounts for about 30% of your score. (You can check to see how much of your credit limits you are using by viewing your free credit score from NerdWallet.)
On the flip side, not using a card at all can lead to the card being canceled for inactivity.
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How much will paying off my credit card benefit my score?
The closer you were to your credit limit(s), the more a paid-off card is likely to lift your score, all other things being equal.
Paying off the full balance: If your credit utilization drops significantly because you repaid your credit card debt, you’ll likely see improvement once the lower balance is reported to the three major credit bureaus.
Paying it off slowly and methodically: Most credit scoring models will also reflect your progress incrementally. You won’t see a huge increase when you finally get that balance to zero.
Paying off one card, but having balances on the others: Your credit utilization is calculated both per-card and overall. While it’s best to pay off all cards every month, you’re headed in the right direction if you eliminate one balance.
As you pay down your credit card balances, your credit utilization ratio improves.
Most major card issuers also allow you to set up alerts to let you know when you are nearing a limit you choose.
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Maintaining the gains
Once you whittle down your credit card balances and see an improved credit profile, you likely want to maintain that progress.
If you are able to manage it, keep paid-off credit cards open and use them occasionally. Closing a card can hurt your score by reducing the average age of your credit accounts and by driving up your utilization.
You can keep utilization low in a couple of ways: A higher score might make you eligible for a higher credit limit. Having a higher limit while keeping your charges about the same will give you lower credit utilization.
But applying for a higher limit sometimes counts as a hard inquiry, which can cause a small, temporary dip in your score, so be strategic.
You can also make multiple payments throughout the month, so your utilization is low no matter when in the billing cycle your card issuer reports to the credit bureaus. If your balance happens to be high when the issuer reports, it can damage your score, even if you pay off cards every month.
Paying attention to basic good credit habits is essential.
Pay your bills on time as much as possible. Payment history is the other major factor in scores, along with utilization. And the higher your score, the more a late payment can damage it.
Keep the 30% guidance in mind. Don’t use more than 30% of your available credit on any card at any time during the month.
Apply only for credit you actually need, and make sure to go after the best credit card for your individual score and financial needs.
Check your free credit reports at least once per year for accuracy. If you spot an error, dispute it with the credit bureau reporting it.
Consistently paying off your credit card on time every month is one step toward improving your credit scores. However, credit scores are calculated at different times, so if your score is calculated on a day you have a high balance, this could affect your score even if you pay off the balance in full the next day.
VantageScore® 3.0 and 4.0, the most recent versions of scoring software from the national credit bureaus' joint score-development venture, ignore all paid collections and all medical collections, whether paid or unpaid. As a result, those accounts will not affect your VantageScore.
How long after paying off debt will my credit scores change? The three nationwide CRAs generally receive new information from your creditors and lenders every 30 to 45 days. If you've recently paid off a debt, it may take more than a month to see any changes in your credit scores.
If you're 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.
Settling a debt will generally help your credit a little, although not as much as paying your bills in full. However, if you intentionally stop making payments on an account that's current or only slightly past due, that could significantly hurt your credit scores in the meantime.
Making on-time payments to creditors, keeping your credit utilization low, having a long credit history, maintaining a good mix of credit types, and occasionally applying for new credit lines are the factors that can get you into the 800 credit score club.
The best opportunity here is to start putting it into savings. This can be an emergency savings account or retirement savings. This is especially important if you haven't been able to save for these things up until now.
Paying off something like your car loan can actually cause your credit score to fall because it means having one less credit account in your name. Having a mix of credit makes up 10% of your FICO credit score because it's important to show that you can manage different types of debt.
One of the best things you can do to improve your credit score is to pay your debts on time and in full whenever possible. Payment history makes up a significant chunk of your credit score, so it's important to avoid late payments.
As someone with a 650 credit score, you are firmly in the “fair” territory of credit. You can usually qualify for financial products like a mortgage or car loan, but you will likely pay higher interest rates than someone with a better credit score. The "good" credit range starts at 690.
The minimum credit score needed for most mortgages is typically around 620. However, government-backed mortgages like Federal Housing Administration (FHA) loans typically have lower credit requirements than conventional fixed-rate loans and adjustable-rate mortgages (ARMs).
You'll avoid paying interest if you pay your credit card balance off in full each month by the due date. Establish a better credit score: Using your credit card and repaying your balance will help you establish a good payment history.
It might reduce the types, or 'mix,' of credit you have
But now you have one less account, and if all your remaining open accounts are credit cards, that hurts your credit mix. You may see a score dip — even though you did exactly what you agreed to do by paying off the loan.
So, if you make payments to your credit card company before your due date, you'll have a lower balance due (and higher available credit) at the close of your billing cycle. That means less credit card debt gets reported to the credit bureau (or bureaus), which could help your credit score.
It is theoretically possible to get a 700 credit score with a collection account on your credit report. However, it is not common with traditional scoring models. A derogatory mark like a collection account on your credit report can make it incredibly difficult to obtain a good credit score like 700 or over.
Collections accounts generally stick to your credit reports for seven years from the point the account first went delinquent, even if the account has been paid in full.
Debt settlement typically has a negative impact on your credit score. The exact impact depends on factors like the current condition of your credit, the reporting practices of your creditors, the size of the debts being settled, and whether your other debts are in good standing.
Introduction: My name is Rueben Jacobs, I am a cooperative, beautiful, kind, comfortable, glamorous, open, magnificent person who loves writing and wants to share my knowledge and understanding with you.
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