Is My Credit Score Go Up After Paying a Credit Card

Credit ScoreThe best way to obtain a high credit score is to use your cards as needed, then pay the balance in full every month. This shows potential lenders you’re taking advantage of your credit resources and are capable of paying your obligations as agreed. If you carry a balance for a few months and pay it off in one lump sum, your credit score might drop at first. You can try various strategies to mitigate this effect.

Utilization Rate Improvement

Paying off your credit card benefits your credit score in several ways. One involves your utilization rate. Credit issuers like to see you’re using credit responsibly, so having several accounts open is a positive. However, they also like to see that you’re not maxing out your cards and living beyond your means. A utilization rate of 30 to 50 percent or less is ideal. Paying your balances improves your utilization rate, and keeping your credit card debt below that threshold will boost your score.

Multiple Factors Affected

Credit scores are based on a number of factors, so paying off one card doesn’t guarantee your score will rise. Approximately 35 percent of your score is based on your payment history, and 30 percent is the amount owed. Both of these are boosted by making payments. The length of your credit history makes up 15 percent, and new credit and type of credit used account for 10 percent each. When credit scorers consider your amount owed, they consider the number of accounts with a balance, as this can indicate a higher risk of over extension. As a result, it may help your score more to pay one credit card balance off than to pay multiple cards down by an equal amount.

Short-term Effect Uncertain

Experience notes that paying off your debts in sudden, large spurts introduces some instability into your credit history that can temporarily hurt your score. That often changes soon afterward, but it’s best to pay off cards a few months before you’ll need to make another significant purchase. In addition, because there’s a lag between when you make the payment and when it’s reported to the bureaus, the effect isn’t immediate. As a result, you’ll want to pay off a credit card debt several months in advance of applying for a major commitment like a mortgage loan.

No Guarantees

Despite the positives that come from paying off your card, it doesn’t guarantee that your score will rise. Some cardholders will reduce your credit line once it’s paid off, particularly if you’ve had problems with the account in the past. This negates the expected utilization rate benefits. If your balance was small anyway, or your total amount of debt was large, the benefits likely won’t be significant. If you have a total of $55,000 in available credit lines and a total of $40,000 in credit card debt, paying off the balance on a $5,000 card still would leave your credit utilization ratio at 70 percent — $35,000 in balances for $50,000 in available credit — well above the desired 30 to 50 percent threshold.

Calculate your credit score

Your credit score is one of the most important measures of your creditworthiness. For your FICO® score, it’s based on metrics developed by Fair Isaac Corporation. The higher your score is, the less risky you are to lenders. Fortunately, by understanding what impacts your credit score, you can take steps to improve it.
The five pieces of your credit score

Your credit score is based on the following five factors:

-Your payment history accounts for 35% of your score. This shows whether you make payments on time, how often you miss payments, how many days past the due date you pay your bills, and how recently payments have been missed. The higher your proportion of on-time payments, the higher your score will be. Every time you miss a payment, you risk losing points.

-How much you owe on loans and credit cards makes up 30% of your score. This is based on the entire amount you owe, the number and types of accounts you have, and the proportion of money owed compared to how much credit you have available. High balances and maxed-out credit cards will lower your credit score, but smaller balances can raise it – if you pay on time. New loans with little payment history may drop your score temporarily, but loans that are closer to being paid off can increase it because they show a successful payment history.

-The length of your credit history accounts for 15% of your score. The longer your history of making timely payments, the higher your score will be. It may seem wise to avoid applying for credit and carrying debt, but it can actually hurt your score if lenders have no credit history to review.

-The types of accounts you have make up 10% of your score. Having a mix of accounts, including installment loans, home loans, and retail and credit cards may improve your score.

-Recent credit activity makes up the final 10%. If you’ve opened a lot of accounts recently or applied to open accounts, it suggests potential financial trouble and can lower your score. However, if you’ve had the same loans or credit cards for a long time and pay them promptly – even after payment troubles – your score will go up over time.

Ultimately, the best way to improve your credit score is to use loans and credit cards responsibly and make prompt payments. The more your credit history shows that you can responsibly handle credit, the more willing lenders will be to offer you credit at a competitive rate.

Ways to improve your credit score

If you need to boost your credit score, it won’t be easy. A credit score isn’t like a race car, where you can rev the engine and almost instantly feel the result. Credit scores are more like your driving record: They take into account years of past behavior, not just your present actions.
In addition to making the right moves, you also have to be consistent. A few easy steps can move your score in the right direction.

1. Watch those credit card balances

One major factor in your credit score is how much revolving credit you have versus how much you’re actually using. The smaller that percentage is, the better it is for your credit rating.

The optimum: 30% or lower.

To boost your score, “pay down your balances, and keep those balances low,” says Pamela Banks, senior policy counsel for Consumers Union.

What you might not know: Even if you pay balances in full every month, you still could have a higher utilization ratio than you’d expect. That’s because some issuers use the balance on your statement as the one reported to the bureau. Even if you’re paying balances in full every month, your credit score will still weigh your monthly balances.

One strategy: See if the credit card issuer will accept multiple payments throughout the month.

2. Eliminate credit card balances

“A good way to improve your credit score is to eliminate nuisance balances,” says John Ulzheimer, a nationally recognized credit expert formerly of FICO and Equifax. Those are the small balances you have on a number of credit cards.

The reason this strategy can boost your score: One of the items your score considers is just how many of your cards have balances.

So, charging $50 on one card and $30 on another, instead of using the same card (preferably one with a good interest rate), can hurt your credit score, he says.

The solution to improve your credit score is to gather up all those credit cards on which you have small balances and pay them off, Ulzheimer says. Then select one or two go-to cards that you can use for everything.

“That way, you’re not polluting your credit report with a lot of balances,” he says.

3. Leave old debt on your report

Some people erroneously believe that old debt on their credit report is bad, says Ulzheimer. The minute they get their home or car paid off, they’re on the phone trying to get it removed from their credit report, he says.

Negative items are bad for your credit score, and most of them will disappear from your report after 7 years. However, “arguing to get old accounts off your credit report just because they’re paid is a bad idea,” he says.

Good debt — debt that you’ve handled well and paid as agreed — is good for your credit. The longer your history of good debt is, the better it is for your score.

One of the ways to improve your credit score: Leave old debt and good accounts on as long as possible, says Ulzheimer. This is also a good reason not to close old accounts where you’ve had a solid repayment record.

Trying to get rid of old good debt “is like making straight A’s in high school and trying to expunge the record 20 years later,” Ulzheimer says. “You never want that stuff to come off your history.”

4. Use your calendar

If you’re shopping for a home, car or student loan, it pays to do your rate shopping within a short time period.

Every time you apply for credit, it can cause a small dip in your credit score that lasts a year. That’s because if someone is making multiple applications for credit, it usually means he or she wants to use more credit.

However, with 3 kinds of loans — mortgage, auto and more recently, student loans — scoring formulas allow for the fact that you’ll make multiple applications but take out only one loan.

The FICO score, a credit score commonly used by lenders, ignores any such inquiries made in the 30 days prior to scoring. If it finds some that are older than 30 days, it will count those made within a typical shopping period as just one inquiry.

The length of that shopping period depends on the credit score used.

If lenders are using the newest forms of scoring software, then you have 45 days, says Ulzheimer. With older forms, you need to keep it to 14 days.

Older forms of the software won’t count multiple student loan inquiries as one, no matter how close together you make applications, he says.

“The takeaway is don’t dillydally,” Ulzheimer says.

5. Pay bills on time

Trying to get rid of old good debt ‘is like making straight A’s in high school and trying to expunge the record 20 years later.’

If you’re planning a major purchase (like a home or a car), you might be scrambling to assemble one big chunk of cash.

While you’re juggling bills, you don’t want to start paying bills late. Even if you’re sitting on a pile of savings, a drop in your score could scuttle that dream deal.

One of the biggest ingredients in a good credit score is simply month after month of plain-vanilla, on-time payments.

“Credit scores are determined by what’s in your credit report,” says Linda Sherry, director of national priorities for Consumer Action. If you’re bad about paying your bills — or paying them on time — it damages your credit and hurts your credit score, she says.

That can even extend to items that aren’t normally associated with credit reporting, such as library books, she says. That’s because even if the original “creditor,” such as the library, doesn’t report to the bureaus, they may eventually call in a collections agency for an unpaid bill. That agency could very well list the item on your credit report.

Saving money for a major purchase is smart. Just don’t slight the regular bills — or pay them late — to do it.

6. Don’t hint at risk

Sometimes one of the best ways to improve your credit score is to not do something that could sink it.

Two of the biggies are missing payments and suddenly paying less (or charging more) than you normally do, says Dave Jones, retired president of the Association of Independent Consumer Credit Counseling Agencies.

Other changes that could scare your card issuer (but not necessarily hurt your credit score): taking cash advances or even using your cards at businesses that could indicate current or future money stress, such as a pawnshop or a divorce attorney, he says.

“You just don’t want to do anything that would indicate risk,” says Jones.

7. Don’t obsess

You should be laser-focused on your credit score when you know you’ll soon need credit. In the interim, pay your bills and use credit responsibly. Your score will reflect these smart spending behaviors.

Are you getting ready to make a big purchase, such as a home or car? At least a few months in advance, spring for a copy of your credit scores, Consumer Action’s Sherry says.

While the score that you pay for may not be the exact same one your lender uses, it will grade you on many of the same criteria and give you a good indication of how well you’re managing your credit, she says. It will provide you with specific ways to improve your credit score — in the form of several codes or factors that kept your score from being higher.

If you are denied credit (or don’t qualify for the lender’s best rate), the lender has to show you the credit score it used, thanks to the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Another smart move is to regularly keep up with your credit reports, says Sherry.

You’re entitled to 1 of each of your 3 credit bureau reports (Equifax, Experian and TransUnion) for free every 12 months through.

It’s smart to stagger them, Sherry says. Send for 1 every 4 months, and you can monitor your credit for free.

Credit score drops after paying debt?

Getting a perfect credit score is not that easy. There are hundreds of variables that go into calculating a credit score, so don’t feel frustrated that yours isn’t perfect. But let’s investigate why your credit score may have gone down. First off, paying off your mortgage or car loan doesn’t necessarily help your credit score any more than paying those obligations on time, says Jeffrey Scott, spokesman for FICO, the developer of the most widely used credit score.

“One of the most important factors in the FICO score is payment history,” he says. “Are you making payments on time, every time? That’s what really matters. There is no bonus for paying off loans early.”

But there’s no penalty for paying off your loans, so that doesn’t explain why your score went down. It only helps to explain why it didn’t go up.

The second biggest contributor to a FICO credit score, accounting for 30 percent, is amounts owed. Within this category is something called your utilization rate, or the percentage of available credit that you use on your credit cards. This rate is calculated for each credit card and for all of them combined. The lower your utilization rate for each card and combined, the better for your credit score.

In fact, a study by FICO found that consumers with the highest credit scores (above 785) used, on average, only 7 percent of their available credit on credit cards. That means they charge only $350 on a credit card with a $5,000 credit limit. Or, just $1,400 on several credit cards with combined limits of $20,000.

Loan officers that I’ve spoken to can’t say enough about keeping a low utilization rate, which they say separates those with great credit scores from those with only good credit scores.

Here’s something to remember: Paying off your entire balance every month is not reflected in your utilization rate or, ultimately, your credit score. The balance that is used to calculate your utilization rate is based on your last statement balance. So, you could charge $900 on a credit card with a $1,000 limit and pay it off the same month, but the FICO credit score will still consider a utilization rate of 90 percent.

That means you should check how much you’re charging each month and how that affects your utilization rate. If that rate is above 30 percent of your credit limit, consider these two options to lower your utilization rate and boost your credit score: First, obviously, charge less each month. Or, second, ask your issuer to consider increasing your credit limit.

You also could open another credit card to increase your total available credit and spread your charging among several cards, but your credit will initially take a hit when applying for the credit card. That ding will lessen over time and disappear altogether after two years.

If you think your utilization rate is OK, then pull your free credit report for clues as to what is going on with your credit score. Equifax credit reports, for example, offer factors that could hurt your credit. Experian credit reports have a section that summarizes potentially negative information based on the company’s experience with lenders, says Rod Griffin, director of public education at Experian. These could include late payments, public records or collection accounts, he says. To get specific risk factors that hurt your credit score, you would have to buy one.

Paying off your debt early won’t help your credit scores

While paying the loan off early may save her some interest fees, it is better for her credit history to leave it open until she has been approved for other credit accounts. Open and active accounts are scored more highly than closed accounts because they demonstrate that you are managing credit well now and not just in the past.

However, it can still be a positive start to her credit history, even if closed. The important thing is that all payments were made on time. She also should review her contract carefully to ensure there is no early repayment penalty. Such a penalty will not affect her credit history, but could result in additional expense.

With an established credit history, she may be able to qualify for a credit card. If so, she should give serious consideration to getting one. A credit card will help her build a strong credit history and credit scores more quickly.

Unlike an installment loan that sets a specific payment amount each month, a credit card allows the holder to decide how much they want to charge and how much they want to pay each month.

Because the holder makes these decisions, credit card use provides much greater insight into how the individual will manage other accounts. As a result, credit cards play an important role in establishing strong credit scores.