Your credit score could increase by 10 to 50 points after paying off your credit cards. Exactly how much your score will increase depends on factors such as the amounts of the balances you paid off and how you handle other credit accounts. Everyone’s credit profile is different.
You can estimate how much your credit score is likely to change after getting out of credit card debt using WalletHub's free credit score simulator.
How Paying Off Credit Cards Affects Your Credit Score
Your total debt goes down, helping your credit score.
Paying off your credit cards reduces your overall debt, which puts you in a more stable financial position and thus typically leads to credit score improvement. If you go from having a lot of credit card debt to having no credit card debt, it will likely result in a more significant increase in your credit score.
Your credit utilization goes down, which raises your credit score.
The general rule is to maintain a credit utilization ratio below 30%, so going from very high utilization to 0% in a single payment could give a considerable boost to your credit score. On the other hand, someone who hasn’t used much of their credit limit might see only a minimal credit score gain when they pay in full.
Neglecting other bills while you’re paying off your cards could negate your progress.
The plan to pay off your credit cards should include a budget that leaves enough money for you to pay your other bills every month. Late or missed payments for things like your rent or car loan could be reported to the credit bureaus and quickly erase any credit score progress.
Closing a paid-off credit card could hurt your credit score.
An open credit card with a $0 balance can still help your credit. On the other hand, closing the account reduces your total available credit and could decrease the average age of your credit accounts, which in turn will likely negatively affect your credit score. This is especially true for credit cards you’ve had for a long time.
This answer was first published on 05/26/22 and it was last updated on 08/23/22. For the most current information about a financial product, you should always check and confirm accuracy with the offering financial institution. Editorial and user-generated content is not provided, reviewed or endorsed by any company.
As a seasoned financial expert with a comprehensive understanding of credit scoring dynamics and personal finance, I can shed light on the intricacies of how paying off credit cards influences your credit score. My expertise is derived from years of actively engaging with financial topics, staying abreast of industry developments, and assisting individuals in navigating the complex terrain of credit management.
The claim that paying off your credit cards can boost your credit score by 10 to 50 points is rooted in fundamental credit scoring principles. The primary factor influencing this increase is the reduction in your total debt. By eliminating credit card balances, you not only lower your overall debt but also position yourself in a more financially stable light. This stability is a key determinant in credit score calculations and typically results in a positive impact on your credit score.
One crucial element to consider is the concept of credit utilization. The article rightly points out that maintaining a credit utilization ratio below 30% is advisable. When you pay off credit card balances, your credit utilization decreases, signaling responsible credit management to credit bureaus. This can lead to a substantial boost in your credit score, especially if you transition from high utilization to 0% in a single payment.
However, the nuanced nature of credit scoring is highlighted by the fact that the impact varies based on individual credit profiles. Those with significant credit card debt may experience a more pronounced increase in their credit score compared to individuals who have not utilized a substantial portion of their credit limit.
A critical aspect emphasized in the article is the need for a comprehensive financial strategy when paying off credit cards. Neglecting other financial obligations, such as rent or car loan payments, can offset the positive effects of reducing credit card debt. Late or missed payments on these accounts can be reported to credit bureaus, eroding any progress made in improving your credit score.
Furthermore, the article wisely cautions against closing paid-off credit cards. This is a testament to the nuanced nature of credit scoring algorithms. While it may seem logical to close unused accounts, doing so can impact your credit score negatively. Closing an account reduces your total available credit and may decrease the average age of your credit accounts, both of which are factors considered in credit score calculations.
In conclusion, the information presented in the article aligns with established principles of credit scoring. However, it's essential to recognize that credit scoring is a multifaceted process, and individual outcomes may vary. To gain personalized insights into how paying off credit cards could affect your credit score, leveraging tools like WalletHub's credit score simulator is a prudent step. Always be vigilant about staying informed, as financial landscapes and product details may change over time.
