How Does Paying Off A Credit Card Affect Your Credit Score?
by JennaOne of our readers, Sergio, sent us this question:
Hello,
I have a credit card with a limit of $3,000.00, my balance as of today is $2,100.00, I also have a line of credit of $9,000.00. As of yesterday my balance in my line of credit was $6,935.70, what I did today was pay the $6,935.70 out of my own pocket (without getting another loan) and zeroed out the line of credit without closing it. The balance is now $0.00. Give or take, how will it affect my credit in terms of points and how long do you think it will take for my credit score to raise. My credit score is about 650 (not the greatest) and am working on getting it better.
Thanks for the advice and help,
Sergio
Thanks for your question Sergio!
Congratulations! Paying off that card was a huge accomplishment – and it put you under 20% of your total available credit.
The credit bureaus (and FICO) do not publish the exact formulas that they use to compute your score. Because of that, I can’t tell you exactly how much it will raise your score, but I can tell you that it will definitely raise it. The amount you owe makes up 30% of your credit score.
You will be able to check your new improved score the month following the payoff. If you keep the balance low on that card, pay on time, and continue paying down the card with the $2,100 balance, you will see your score continue to go up, and up, and up.
You are right to keep the paid off account open – don’t close that one whatever you do or you will see your score drop instead.
You should probably pick up a cheap credit monitoring service for a little while. Right now, I think that True Credit is letting you monitor all three of your reports and scores for about $30 a month. Once you see your scores hit over 700 try applying for a new credit card. Don’t charge on that one either. Just put it back for emergencies. Better yet, if you can get a rewards card, you could use it just for gas and utilities, and then pay it off at the end of every month.
The important thing to understand is that you are making all the right moves, taking all the right steps, to repair your credit. As long as you keep on doing what you are doing you could well see your score in the high 700s within the next couple of years. Probably even sooner than that if you open a third card.
Be aware that when you do open that third card your score will temporarily drop a few points (because of the inquiry.) As long as you keep your balance under about 20% of your total available credit your score will go right back up even faster than before.
Also, when you monitor your reports, look at them carefully. If your score is at 650 now it’s probably safe to assume you may have had some late payments, or gone over the limit a couple of times. See if there is anything on your existing reports you can challenge. Any negative information that you can remove will raise your score that much quicker.
One warning: Don’t challenge too many things at once or you will get your score frozen until the disputes are resolved. It does not hurt your score if that happens, but you will not be able to get a loan or a new credit card as long as it is going on.
Thanks for your question!
Have a question for us Leave a comment below!
August 4th, 2008 at 15:51
My question sort of relates to the one above. My husband has a score of 560 and it low because there are 2 accounts that were slow pays and paid off and closed almost 5 years ago. The problem is we are trying to get a mortgage and with his score it may be difficult. I have tried everything to repair the credit and nothing seems to work. Since these bad cards, he has paid off 1 vehicle and has 2 car loans on his credit, which are paid for on time every month for 3 years now. He has a few open credit cards which we pay every month. The thing with those current cards is that we owe too much, not above the limit, but maybe only $500 under it.
My first question is: Since I have the money to pay off the cards we have now, do we do that and will it really impact his score?
I just want to know if it really helps. I feel if I pay off all of his debt, we won’t have any money left in savings to buy our house. It is about $10K in credit cards.
Thanks.
August 7th, 2008 at 21:37
Thanks for your question Jennifer, We’ll answer it soon!
August 25th, 2008 at 22:42
I was wondering how asking my credit card company to increased in my credit limit will affect my score. I would like to take advantage of a 0% promotion. thanks – km
November 17th, 2008 at 22:37
I have a question- My credit score is 662. I have 5 Credit cards (revolving) and some installment accounts mainly student loans with 1 auto loan payment. I am trying to apply for another private student loan and was recently denied (even with a cosigner). My credit to debt ratio is rather high 96%, but I do not have any negative accounts, no late payments, and no defaults. If I was to pay off one or two of my credit cards, how long would it take for my credit score to increase?
December 18th, 2008 at 01:08
my credit score was a 718, but stating due to no recent credit pymt history, loan or mortgage is has dropped to a 673! I thought my score was low at 718, so I inquired at the bank. They suggested I open up a MC 0% interest x 6 months, charge and make payment. I did that in October. No affect on score, now I get the notification from transunion a 45 point drop in my FICO score! With the economy the way it is and being unemployed I am not going to apply for a loan. What the heck is someone supposed to do!!!
April 2nd, 2009 at 16:40
Credit card lobby must be eliminated.