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Amy Nickson On 31st Aug,17
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What happens to your credit score when you pay off all the debt

Some people assume that paying off their debt will solve all their money problems. They think that after paying off debt, their credit health will improve overnight. But, unfortunately it is not the fact.

Paying off all your debts help your credit score to flourish, but it may not always happen in every case.

At first, you have to understand the factors that can improve credit score.

As per the FICO, the credit score is based on the length of credit, new credit, how much debt you owe, the payment history of your debts, and types of credit you use.

  • Payment history — approximately 35%
  • Amounts owed — approximately 30%
  • Length of credit history — approximately 15%
  • New credit — approximately 10%
  • Types of credit in use — approximately 10%

4 Points to remember regarding boosting your credit score after paying off debt

1. Late payments are no-no: Making debt payment on time can boost your credit score

If you make payments on time, it will surely affect your score positively.

The age of your credit accounts, new credit and what kinds of credit you have also affect your credit a bit.

No other factors carry as much as a good effect on your credit than making payments on time.

2. The second most important factor is your credit utilization.

It is important because having a low credit utilization is better than having no credit utilization.

If you have no credit utilization, your credit score may drop even after paying off the debt.

3. Debt shuffling doesn't help to improve credit score

Paying off debt actually helps to boost your credit score when you repay your debts from your income or savings. Taking out a new loan to make payments on debts doesn't help to improve your credit rating. You are actually shuffling your debt to cut the interest.

If you want to improve your credit score, you have to owe less money overall.

4. Add positive points in your credit rating

Credit score improves with time. Any negative things like defaults, late payments matter less once they get older. If you want to see a good boost on your credit score, you have to add some positive points in your credit report.

If your credit report is full of the same old pile of negative points, it will never help you achieve a good score. Even when the negative points go completely from your credit report after a certain time, your credit score is just a proof as our identity. It has nothing positive to say about you. Thus, you need to be committed with your old credit cards. Instead of applying for new credit cards, use your old credit card and repay it in full every month. Thus, the length of credit history will get enriched and your credit score will improve with time.

How many points will your credit score increase if you pay off all your debt?

Remember, you should maintain a healthy balance of debt-to-income ratio for a good credit score.

If you pay off all the negative debts (accounts sent to collection), your credit score may get a boost.

However, the amount your credit score will go up depends on where your current credit score is.

If your current credit score is 680 or above, then you will certainly not find any changes.

But a very low credit score can get a good boost if you pay off all collection debts.

Should you panic about your dropping credit score after paying off debts?

If your credit score gets a negligible hit after paying off the debts, then no need to worry about it. Like what? If your credit score drops from say, 800 to 780 points, it will not bother you when it comes to getting the best terms on credit.

But if you already have an average score and it has dropped drastically, then you should work hard to regain the credit health.

How can you secure a good credit score?

If you don't want your credit score to drop, then you should follow some tips.

Here you go:

1. Use a small amount of revolving credit regularly

Thus, you will be able to avoid the interest payments by paying the balance in full each month.

Your credit score will show that you are maintaining a lower credit utilization ratio.

According to, "Having more than two to four credit cards with maxed limits is going to hurt your credit."

2. Make sure you make all your monthly payments on time (medical bills, credit card bills, and utility bills)

Remember, utility bills and unpaid medical bills can affect your credit score negatively if they are sent to the collection agency.

3. Review your credit reports carefully

If the data in your credit reports are wrong, your score may drop significantly. So, get your free credit reports and check thoroughly. If you find mistakes, dispute them.

Note: You are eligible to get a free credit report from the three credit bureaus, usually once a year.

4. Don't apply for new credit

Applying for new credit lowers the average age of your credit accounts. Also, there will be a "hard inquiry", which can drop your credit score temporarily.

5. Pay attention to the loan terms

Be careful while evaluating your current loan terms. If you have some higher interest rate debts, try to pay them off sooner.

6. Pay off all the accounts that are sent to collection

Collection accounts remain on your credit report for 7 years. Thus, paying off accounts sent to collections can increase your credit score with time.

Lastly, you should understand that credit health will not improve all of a sudden. You have to keep patience and continue good financial habits to rebuild a good credit score.

Last Updated on: Thu, 31 Aug 2017

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