Does Paying off Debt Increase Your Credit Score Significantly?
September 4, 2013
Improving your credit score can be achieved in many different ways from lowering balances on credit cards to adding a new installment loan. It’s a bit of a balancing act and many consumers have bought into the myth of not paying off their debt because it will hurt their credit score.
Paying off debt can significantly help your credit score, depending on the type of debt you pay off and the rest of your credit report. If you pay off all your mortgage related debt, for example, it will positively impact your score, but not as much as if you paid off your credit cards. Revolving accounts make a larger impact than installment loans.
The reason credit cards have a larger impact on your score is due to the exposure or risk the lender takes when issuing you a credit card. This unsecured debt is a high-risk type of debt and factors in at a larger percentage than debt attached to property. Credit card companies have nothing to repossess in order to get their money back, which makes the credit a higher risk.
It’s possible to pay off a low amount of credit card debt and see more of an increase in your credit score than paying off a half-million dollar mortgage loan.
It also depends on where your credit score is currently. If you pay off a ton of debt and you already had a score above 760, you probably won’t see much of an improvement. However, if your score was below 600, you’re more likely to see significant increases to your overall score.
Whenever you plan to pay off debt, keep in mind that if you use the credit card you paid off, your credit report will still show a balance. It may also take a little time for the credit report to show a zero balance when you pay off an installment loan, such as a car, student loan or mortgage. Most lenders take up to a month to report the account paid in full.