Will Paying Off All My Debt Help Raise My Credit Score?

Paying off all your debt may not necessarily raise your credit score, and in some cases it may lower it.

That’s because 30% of your credit score is based on credit utilization, and if you’re not using any of your credit, your credit score could actually go down.1

This is not to say that paying down a large balance won’t improve your score. It may in due time.2 But, in the meantime, letting your credit utilization ratio drop to zero may hurt.

What’s A Healthy Credit Utilization Ratio?

The credit utilization ratio measures how much of your available credit you are using. It is the second-largest factor in determining your credit score behind payment history (which makes up 35% of your score).3 You may lose points if you use a high percentage of your available credit. You also could lose points if you don’t use any of it.

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Do Credit Card Balances Actually Boost Credit Scores?

Spending even a small amount on your credit card each month may improve your credit score, as long as you are paying your bills on time. It shows that you regularly use your credit wisely and manage your payments well.4

What’s the Best Way to Improve My Score?

Pay your bills on time and keep your credit utilization in balance with your available credit. Some experts say it’s best to keep your credit utilization rate below 30%. Others say there’s no magic percentage. Common sense dictates a conservative balance.5

If you do pay off all your debt at once, congratulations. As long as you maintain some responsible credit activity moving forward, there’s no need to worry about your score.

Resources:

1. http://www.nerdwallet.com/blog/credit-cards/credit-score-pay-debt/#.Vp2VZDb-3t8

2. http://www.nerdwallet.com/blog/credit-cards/credit-score-improve-credit-card-paid-off/

3. http://www.creditcards.com/credit-card-news/credit-utilization-fico-1270.php

4. http://www.myfico.com/crediteducation/improveyourscore.aspx

5. http://www.creditcards.com/credit-card-news/credit-utilization-fico-1270.php

Legal Disclaimer: The articles and information provided herein are for informational purposes only and are not intended as a substitute for professional advice. 

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