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The short answer is that yes, paying off your credit card in full should improve your credit score. This increase usually results from lowering your credit utilization rate. Also, paying off your credit card balance in full at the end of the month prevents you from incurring interest charges.
Be careful not to cancel your credit card after you pay it off, because that could hurt your credit significantly.
Read on to understand how it works.
Will Paying Off My Credit Card in Full Improve My Credit Score?
Maintaining and improving your credit score requires that you use credit. An example of this would be using your credit card for purchases.
A general rule of thumb is to only use your credit card for purchases that you can afford to pay each month. Doing so prevents you from accruing interest charges. This process demonstrates that you are borrowing responsibly.
If you pay only a fraction of the balance owed, any remaining amount carries to the next billing cycle. Credit card issuers add interest charges to the unpaid amount, which accrues daily.
Your payment history has the single largest influence on your credit score (35%). Another important factor is your credit utilization rate (30%).
Your credit utilization rate pertains to revolving credit accounts; most notably, credit cards. A calculation expressed as a percentage; utilization rates show how much of your available limit is being used. Consider this formula:
Credit Utilization Rate (CUR) = Total Current Debt / Your Total Available Credit
Let’s consider a practical example. Assume you have Credit Card A with a $1,000 balance and a $2,000 credit limit. You also have Credit Card B with a $0 balance and a $2,000 credit limit. Of a maximum limit of $4,000, you are currently “utilizing” $1,000 or 25%.
CUR is one reason why “maxed out” credit cards have a negative connotation. Equifax, one of the three major credit bureaus, encourages consumers to maintain a CUR under 30%. Using exorbitant amounts of your available credit creates a perception of financial instability.
How Many Points Will My Credit Go Up if I Pay Off All My Credit Cards?
Those with several credit card accounts who pay off all their balances should get a credit score boost.
How many points exactly? There are many variables that can be considered for different people’s credit scores. But it is likely in the range of 10 to 100 points. If you have large balances, the increase would be on the higher end.
FICO and VantageScore are the two major credit scoring models in the industry today. FICO’s Score Estimator is an online credit score estimating tool.
This tool allows for changing variables and seeing the impact on your score.
With all other variables remaining the same, we compared a consumer with two to four credit cards. Here, one individual had a zero balance and zero credit utilization rate on their credit cards. This individual’s estimated credit score ranged from 715 to 765.
The other individual had card balances of $5,000 to $9,999 and a utilization rate of 50 to 69%. This individual’s estimated credit score ranged from 650 to 700.
How paying off all credit cards will impact your credit score also varies based on your larger credit history.
The following table outlines these factors that influence your credit score.
Credit Score Factors
|FICO Score 8|
|Amounts Owed / Credit Utilization Rate||30%|
|Length of Credit History||15%|
|New Credit Accounts||10%|
|Credit Mix (types of accounts)||10%|
|Credit Utilization Rate||20%|
|Age of Credit Accounts / Credit Mix||20%|
|New Credit Accounts||11%|
Sources: FICO and VantageScore
How Long After Paying Off Credit Cards Does a Credit Score Improve?
After paying off your credit cards, a few things must occur before your score updates.
After paying the balance, your credit card lender will process the payment. Keep in mind that the lenders generally report all account activity at the end of the billing cycle. Thus, the credit reporting bureau will not receive the update immediately.
Based on the point in the billing cycle that the payment occurred, several weeks might elapse. Next, the credit reporting bureau must update your credit history.
Finally, the credit scoring models must recalculate your score based on the update.
Experian estimates that the scoring update will take “one to two months.” Equifax explains that it will take “more than a month” before the credit score update occurs.
Should You Cancel a Credit Card After Paying It Off?
After paying off a credit card you might feel tempted to close or cancel the account. Bear in mind that doing so could harm your credit score with the FICO and VantageScore models. First, credit cards are revolving credit accounts, which affect credit utilization rates.
When canceling a credit card, your available credit limit decreases. Here, conversely, your credit utilization rate will likely increase.
Consider this example:
You have two credit card accounts. Card A with a $200 balance and $1,000 limit and Card B with a $0 balance and $1000 limit. Your current utilization rate ($200 / $2000) is 10%. After canceling Card B, your rate ($200 / $1000) rises to 20%.
Next, you might harm your length of credit history or average age across all accounts.
With FICO scores, closed accounts still factor into calculations for 7 or 10 years. Yet, VantageScore excludes some closed accounts when calculating the average age of accounts.
Closing a credit card might also adversely affect your credit mix.
This would apply if the closed account was your only credit card (revolving) type of account. TransUnion explains that your credit mix reflects only the types of accounts that you have open.
Should I Pay Off My Credit Card in Full or Leave a Small Balance?
Consumer advocates usually encourage paying off credit card balances each month. This stems from the concept of buying only what you can afford to pay back.
The other reason for paying off your credit card balance each month is interest. Credit card issuers charge interest on any unpaid balances.
Many credit card accounts impose charges with annual percentage rates (APR) exceeding 20%. Here, the interest often compounds daily, meaning immediately added to the principal balance.
Yet, many consumers will use their credit cards intentionally for larger purchases. This allows for repaying in manageable monthly payments.
Carrying credit card balances may also hurt your credit score. How? Balances on credit card accounts increase your credit utilization rate (CUR). Although, this impact is likely minimal unless your rate exceeds 30%.
Some uncertainty exists about the effect of a 0% CUR on credit scores.
Even those who pay off the balance each month usually have some credit utilization rate. Here, some discrepancy likely exists between the account billing and credit reporting cycles.
Put differently, the only way to always have 0% CUR would be if you pay the full balance off well before the due date each month.
Experian states that maintaining a 0% CUR is not needed to achieve an excellent credit score. Further, a low rate under 10% is “ideal.”
A CNBC source recommended “using but not abusing” credit cards. Some scoring models may slightly penalize those with a consistently zero balance.
A 0% CUR is preferable to a high CUR. Yet, a CUR slightly below 10% might result in a better credit score.
Why Did My Credit Score Go Down When I Paid Off My Credit Card?
In some cases, paying off a loan, credit card, or other accounts might trigger a slight drop in your credit score. Both scoring models consider many factors when calculating credit scores.
For example, your credit mix, new credit accounts, and credit utilization rate are also factors.
Don’t hesitate to pay your full credit card balance. However, avoid canceling unused credit card accounts.
Minor differences, like a slight variation in your credit utilization rate, may change your credit score by a few points. Yet those who achieve excellent credit scores focus on the basics.
Most importantly, develop a history of making timely payments on all accounts. Use credit cards responsibly. Avoid excessive spending on things you cannot afford and keep balances low.
Anthony Amodeo is a regular finance writer in both business-to-business and business-to-consumer industries. Particular areas of focus include personal finance, small business, real estate, and more. He is a graduate of Kent State University. His credit scores are top tier.