Does Paying Off Credit Card Debt Improve Credit Score?

Here’s The Truth!

Credit card debt negatively impacts one’s credit score. Using 30 percent or more of the available credit limit will lower a credit score. And it will descend further if the user will continue to charge expenses on the card without paying the outstanding balance. Does paying off credit card debt improve credit score? Of course, it can! As long as one pays more than the minimum payment due on time and stop using the credit card, the credit score will improve.

Whether the debt incurred in the credit card is being repaid after a month or in months or years, paying off regularly is smart. The user doesn’t only remove the stressor to his mental and financial health, he’s also boosting his credit score. Those who know the importance of a good credit score to their credit history will be able to make an adjustment on how they spend money and pay what they owe in the fastest way they can. But it’s a different story when the debtors have no idea what is a credit score and why they must maintain a good score.

According to a survey carried out by the Consumer Federation of America, a surprising number of Americans don’t know much about credit scores with more than 25% of the respondents having no idea how to increase or maintain their credit scores.

Paying off credit card debt is one of the several ways one can improve his score. Credit cards along with other outstanding debts are considered No. 2 most important factor when lenders determine an individual’s FICO score. The FICO score is the most popular credit score that lenders used when assessing the credit eligibility of someone applying for a credit card or loan.

What Comprises a FICO Score and How Does It Work?

A FICO score has 5 categories: payment history (35%), amounts owed (30%), new credit (10%), length of credit history (15%), and types of credit in use (10%). To discuss briefly:

Payment History – Payment history has the biggest contribution in calculating a FICO score. This is why paying on-time is important and must be done consistently to improve a credit score.

Amounts Owed – In this category, the total amount of debt and usage of the available credit is being assessed.

New Credit – One must not open new credit while paying off an outstanding debt because it denotes a greater
risk for creditors.

Length of Credit History – FICO analyzes how long is the person’s oldest account and newest account have been opened
already and gets the average age of all accounts combined.

Types of Credit – This considers the types of credit a person has. Does he have a student loan, a mortgage, medical bills, retail accounts, credit card bills, etc?

When one is aiming for a good FICO score, these five categories should be improved and worked on. If there’s an outstanding debt, it’s time to pay more if possible to see improvement on the credit score sooner.

How Much Will Credit Score Increase After Paying Off Credit Cards?

A clear indicator that an individual’s credit score will likely improve is when the credit limit is closer to achieve.

  • Paying the balance in full will significantly drop credit utilization. One will possibly see improvement on his score when the complete settlement of debt is declared to the three credit bureaus: Experian, Equifax, and TransUnion. These are the biggest credit bureaus that gather and sell consumers’ credit file to interested companies.
  • Paying off one credit card but with balances on other cards might raise one’s score. It is a good strategy to employ because credit utilization is computed per card and as a whole.
  • Slowly and systematically paying a debt off will increase the credit score. But unlike full balance payment, the difference cannot be seen remarkably.

Paying outstanding debt in full is the best option. Yet, not everyone can release a huge amount in one go. Many people would rather pay a debt slowly for months or years as their income permits, or prioritize payment of one account by paying more on it and just pay the minimum to others.

What Debt to Pay Down First to Boost Credit Score?

When someone has a gigantic debt to pay off, deciding which type of credit to pay first can be overwhelming. Yet if the aim is to increase credit score, one must focus on the payment history and amounts owed as these two make up a total of 65 percent of the credit score. By always paying on time the mortgage, credit card, or any other loans, the payment history will look better and may raise the credit score. But when it comes to which debt to pay first, the amounts owed category has the biggest influence on a debtor’s decision.

1. Credit Card Debt

Having several credit card debts and using more than half of the credit limit can greatly affect one’s credit score in a bad way. It also means spending more on the debt as credit cards usually have higher interest rates than other lenders. To permanently remove this debt, there must be a plan on how it will be repaid quickly and how to tweak one’s budget to stay free of credit card debt when the outstanding debt has been paid off.

2. Other Debt

When the plan on paying the credit card debt has been created and being implemented, it’s time to focus next on the other debts. Although paying non-credit card debts will not do much to someone’s credit score like credit cards can, it would still benefit a debtor to pay all other debts. The faster the debts are paid down, the little interest he’ll have to pay.

There are many aspects to consider when determining one’s credit score. As each person’s credit report is unique, no fixed amount of points will be added to his score after performing any action that concerns everyone.

How to Increase Credit Score?

It is important to a debtor to keep to basic good credit practices which include:

  • Consistently paying bills monthly.
  • Not maxing out the credit card limits.
  • Checking regularly to ensure that they are free of errors.
  • Avoid opening new accounts when the debt is not yet paid off.
  • Applying only for credit that one needs.

Paying fully the amount owed on the credit cards on time will surely boost an individual’s credit score. But if this is not possible, at least pay on time the minimum payment. As the balance is continuously reduced through consistent payments, the credit utilization ratio of the debtor improves. Once the credit card balances have been reduced, one can see a better credit profile.

Final Thoughts

To see a significant increase in one’s credit score, he must focus first on paying off his credit card debt before anything else. Credit card debt impacts the score more than other debts.

Therefore if the aim is to pay outstanding debt and improve credit score, prioritize payment of credit cards. While the credit card debt repayment plan is up and running, the next step is to create a plan for paying the remaining debts. By cutting down all debts at the same time and making adjustment in spending and saving money, one can get out of debt quickly and stay off debt for the rest of his life.