And Three Ways to Keep Your Score From Dropping
It can be nail-biting to wait for your credit score to update after paying off debt. Especially if that bump in your score is helping you get approved for a new car loan, mortgage, or revolving credit account. In some cases, it can take up to two months for your credit score to reflect the payoff.
How Long Does It Take for Your Credit Score to Update After Paying off Credit Cards?
Luckily, it doesn’t take most financial institutions longer than 30 days to send updates to the credit bureaus. But if you’re working with a smaller lender or credit union, they might only report to the credit bureaus once a quarter.
If that applies to you, here are some alternative options at your disposal:
- Rapid rescoring: This option is available to prospective homeowners. When applying for a home loan, you and your lender can request a recalculation of your score from the credit bureaus.
Rapid rescoring can take about 2-7 days and will include the recalculation of your score with updates from your paid-off credit card balance.
- Contact the credit bureaus: You can reach out to the credit bureaus directly to have them update your score with the new information if it hasn’t been updated in a reasonable timeframe. The turnaround for resolution is much slower at around 30 days.
You might find some helpful information on how to do this by reading How To Correct Credit Card Errors.
- Use alternative methods for building credit: Tools like Experian Boost or UltraFico can use utility bill payments, banking history, and even your monthly Netflix bill to add points to your score almost instantly.
While it doesn’t replace the boost you can get from the update after paying off credit card debt, it can give you a few extra points that you didn’t have before.
Factors That Influence Your Credit Score
Your FICO score considers several factors to come up with your credit score. Those factors can play a large role in how much your score increases after the debt payoff is processed. But the amount of the increase in your credit score depends on what’s already there.
And as you know, the higher your credit score jumps, the lower your interest rate will be on new credit accounts, and you’ll have better repayment terms on the balances borrowed.
It’s important to understand how each factor affects your individual credit report. According to FICO, these are the components in your credit history that are used in their credit scoring model:
- Payment history —35%
- Credit utilization ratio/ amounts owed —30%
- Length of credit history —15%
- Credit mix —10%
- New Credit —10%
The biggest factors are payment history and credit utilization, which make up a combined 65% of your score. So if you’re on the journey to earning a good credit score, that’s the first place to start.
Payment History
Your payment history is the largest component of your credit score making up 35% of how your score is calculated. Even one late payment can drop your score significantly. So let’s avoid doing that.
Paying off credit card debt is a great start to a credit rebuilding strategy especially if you’ve had problems keeping up with the monthly payments in the past. However, any late payments on your credit report can add extra time to your credit-building goals.
If there are late payments or debt collections accounts on your credit report, it’s likely affecting your score.
For example, someone with excellent credit who is making a payment 90 days late will have a bigger drop in their credit score than someone with bad credit making the same late payment. The moral of the story being, don’t ruin your hard work by not making timely payments.
The longer you wait to make a payment, the bigger an effect it has on your credit score and the longer it takes to repair. Any recent attempts at debt collection should be paid off to see a small improvement in your credit rating.
You could also contact your debt collectors or work with credit counseling to reach a debt settlement in a resolution for the account. It will still stay on your credit report for several years though.
The easiest way to keep your payment history in order is to have your monthly payments be deducted from your account on autopay. This takes out the extra step of having to remember billing cycle due dates and eliminates the pain of manually telling creditors to take your money.
Amounts Owed
The amounts that you owe on revolving credit accounts and installment loans in your credit profile make up your credit utilization ratio. Amounts you owe on each credit card, personal loan, student loan, or auto loan are compared to the credit limit or the total amount of the loan.
For example, if you have a credit limit of $10,000 and are currently holding a credit card balance of $3,000, your credit utilization would be about 30%.
This factor directly affects your debt payoff because that financial move drops your credit utilization rate. It simultaneously increases your available credit as well. If you have more than one credit card, you’ll have two credit utilization rates to pay attention to.
- Overall credit utilization—takes all of your revolving credit into the calculation.
- Individual credit utilization—focuses on each credit card’s utilization rate.
If you’ve paid off a high balance card and still have other cards with a high remaining balance, you likely only made a minor decrease in your overall credit utilization ratio. It’s important to pay attention to both of these since a rate over 30% for either could be draining your score.
FICO suggests a utilization rate of less than 30%, but people with the highest credit scores typically use 10% or less of their total available credit.
You can increase your available credit and improve your utilization ratio by requesting a credit limit increase through your credit card company. This may involve them checking your credit report to approve the increase.
Credit History Length
When making the move to pay off a credit account, many people resolve to close their credit card to avoid the temptation and stop themselves from undoing all their hard work. This could be a big mistake.
Your oldest credit card is likely the one with the highest interest rate, so it makes sense that you’d use the avalanche method and pay that one off first. It may have even started as a secured credit card if you were using it to make up one of your accounts to build credit.
But if it’s been your longest open credit account, closing it after payoff could cause your length of credit history to dive.
The older the accounts in your credit report, the better your credit rating will be.
Credit Mix
Even though your credit mix is one of the smaller pieces of your score, it still matters when you talk about paying off debt. Lenders prefer to see a mix of different credit types when doing a credit check. They usually fall into two categories:
- Revolving credit: Has no set repayment term but requires a minimum payment to remain current. Typically in the form of credit cards or lines of credit.
- Installment loans: Has a set repayment period and a fixed monthly payment. Includes car loans, mortgages, and student loans to name a few.
If you pay off an installment loan the account automatically closes because the loan term has ended. If that was your only installment loan, it has a temporary negative impact on your credit report when it closes.
The same thing happens if you close your credit card after paying it off especially if that was your only revolving credit account.
Many people have learned how to build their credit using credit cards but aren’t sure how to diversify their credit profile. Learning about how to build credit without a credit card could be beneficial if that applies to you.
New Credit
Having too much new credit can have a detrimental effect on your credit report as well. Not only does the hard inquiry drop your score by a few points, but it also adds accounts without a history to work with.
Many people pay off their credit card debt to raise their score in preparation for getting a new car, mortgage, or new credit card. That new account comes with a hard inquiry that stays on your report for two years. If other hard inquiries are already there, your score drops even more.
Again, closing the card is the catalyst for having this negatively affect you.
When the length of credit history, credit mix, and credit utilization all coincide on this aspect which plays a large role in obtaining good credit, it can create a substantial dip in your score.
What Happens to Your Credit Score When You Pay Off Your Credit Card?
To recap what we discussed earlier: your credit score typically raises once you pay off your card as long as you aren’t closing it.
Several things may change in that process:
- Your credit utilization lowers depending on how much of your credit card balance you paid off.
- Your score increases based on what’s currently on your credit report.
- Your score might go down if you’ve paid off everything down to zero.
- As long as your card remains open, your credit mix and length of credit history are unaffected.
You might still have some unanswered questions even with all of the information that’s been covered. That’s where FAQs come in.
FAQs
How much will your credit score increase after paying off credit cards?
The specific amount that your credit score increases will depend on the complex financial information included in your credit report. It also depends on how high your credit utilization ratio was to begin with.
If you had a utilization rate above 30% before paying off your debt, you could see an increase of about 10 points on average. If you already had a low utilization ratio you’ll see less of a jump but it’ll still bring your score up a few points.
For a better picture of what your credit could look like after paying off your debt, you could use a credit simulator through one of the three credit bureaus. Your credit issuer may even offer access to one within their online payment system.
Looking to give your score a bigger boost? You might consider a credit builder loan. This is a long-term solution that delivers excellent results. The average Credit Strong credit-builder loan raises users’ scores by about 70 points within the first 12 months of on-time payments.
Why is my credit score not going up after paying off my credit card?
There could be several reasons why your score still isn’t going up after paying off your credit card.
As mentioned earlier, your credit issuer might only report updates to credit bureaus once a quarter and your new balance just hasn’t been updated yet.
You may have paid off one card but others are still close to the limit or maxed out which is keeping your credit utilization high.
You might have applied for a new credit account after paying off your debt and the addition of new credit plus the hard inquiry nullified any potential increase.
Is it better to pay off the credit card in full?
Paying off a credit card in full saves you tons of money in interest and lowers your credit utilization. So from that perspective, it’s a great idea to do so. But be careful not to allow your card to go inactive.
When a credit card company reports an account as inactive, it can lead to an automatic closure of your credit account due to inactivity which can also lower your score.
If you’re planning to keep the card open, it’s best to make a small charge on it each month and pay it off before the credit card bill comes.
This continues to prove your creditworthiness by showing responsible use of your credit even if it’s in small increments.
Does completely paying off a credit card raise your score?
Everyone wants to be debt-free, but it could backfire if it’s not done right. Contrary to what you might think, paying off all of your revolving debt can lower your score!
Credit bureaus recognize cards with no balance to be “zero usage”. The added available balance from paying off your credit decreases your utilization rate, but it signals to credit bureaus that you’re not using the balance you’ve been granted.
Being at zero usage penalizes card users who are not using their available credit. To combat this, you can maintain a tiny balance on your credit card to keep your good credit without the overwhelming balances and interest.
The most effective way to achieve this is to keep all of your credit card accounts with a balance of less than 10% of the total credit limit. Essentially keeping your card in use with a minimal utilization rate and minimizing the amount of interest from carrying a balance.
All in all, most times your credit score won’t update overnight once you achieve your goal of paying off a credit card. But be sure that you’re taking all of the factors that go into calculating your score into account so you can make the best financial decisions for your future.
