At a Glance

You’d think paying off debt would only help to improve your credit. It’s counterintuitive, but your credit score can potentially drop after paying off debt for several reasons.

So, let’s get into why that could happen, as well as other questions related to how paying off your debt can help or hurt your credit score.

Does Paying Off a Loan Early Hurt Your Credit?

While paying off a loan or debt won’t inherently hurt your credit, you could see a drop in your credit score under certain circumstances.

The factors making up your FICO score are payment history (35%), credit utilization ratio or amounts owed (30%), length of credit history (15%), credit mix (10%), and new credit (10%). So, if any of those are negatively affected, you’ll likely see a dip in your credit score.

With that in mind, here are times your credit score could drop after paying off debt:

  • You’ve gotten rid of only one type of debt: While your credit mix isn’t the biggest chunk of your credit score, it’s still important to show creditors that you’re able to manage different types of debt. If you pay off your student loans and credit cards are your only remaining debt, then you’ve eliminated your installment debt and are just left with revolving debt. This lack of credit mix can cause your credit score to dip.
  • The average age of your credit has dropped: Your length of credit history carries slightly more weight in your credit score than credit mix. The longer you have credit accounts open, the better off your score will be—assuming those accounts are in good standing. If you’ve had a starter credit card since college that you don’t use, your first instinct might be to close the account. But if it’s your oldest credit account, that can drastically affect your length of credit history and hurt your credit score. Instead, consider leaving the account open and using the card for here and there for small purchases so the card issuer doesn’t close the account. Alternatively, you could try to upgrade your existing card to a rewards card that better fits your needs.
  • Your credit utilization ratio increased: Your credit utilization ratio (CUR), or the amount you owe compared to your credit limit, makes up almost 1/3 of your credit score. The general rule of thumb is to keep this number below 30%, but the lower, the better. If you’re targeting that 800-mark, you should strive for 10% or lower. If you pay off a credit card or other revolving line of credit in full and close your account or leave it inactive, you’re not just messing with your length of credit history, you’re also affecting your credit utilization. In other words, decreasing your available credit increases your CUR.

#TLDR
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Avoid unused cards, keep a check for revolving & installment debts.

How Long Does It Take For Your Credit Score To Update After Paying Off Debt?

It generally takes about one to two billing cycles (or one to two months) for your credit score to update after you’ve paid off debt. Your updated balance has to be reported to the three major credit bureaus (Equifax, Experian, and TransUnion), which usually happens monthly when statements go out. Your credit score essentially reflects your credit report.

Depending on how much debt you’re paying off and how you respond, this could have a significant impact on your credit score, but don’t get your hopes up for a huge surge. The best way to boost your credit score is to consistently make on-time payments every month—preferably more than the minimum—and if you’re really going for the gold, paying the entire balance.

Will Paying Off Collections Improve Credit?

Depending on the credit score model your creditor or lender uses, your credit could either improve or see no effect when you pay off debt that’s in collections. The newest credit scoring models—FICO® 9 and VantageScore® 3.0 and 4.0—don’t factor in collections with no balance, so your score could increase when you pay or settle collections and your credit report is updated with the zero balance.

Older credit scoring models, which many lenders (particularly mortgage lenders) still use, penalize paid collections, so your score wouldn’t improve under these models.

Regardless of whether your credit score goes up, it’s still a good idea to pay or settle your collections to get debt collectors off your back and prevent your debt from hanging over your head.

Does Paying Off Debt Help Your Credit Score?

Are you sick of responses with various forms of “it depends?” Well, it doesn’t end here.

Paying off debt can in fact help your credit score in some situations and in due time. Eliminating a credit card payment or other line of credit can increase your credit utilization ratio, which can boost your score. Just remember to keep those unused accounts open and active by making small purchases that you know you’ll be able to repay. If a credit card becomes inactive, your creditor may close the account, which can hurt your length of credit history, and in turn, your credit score.

There’s almost never instant gratification in the debt repayment game. It could take several months for your increased credit score to show up.

What Debt Should You Pay Off First to Raise Your Credit Score?

Paying off revolving debt, like credit card debt, should be your priority if you want to raise your credit score. But if you have multiple credit cards, there’s still strategy involved in deciding which revolving debt you should pay off first.

The debt snowball and debt avalanche methods are two of the more popular debt repayment strategies.

The debt snowball method has you prioritize paying down your lowest balance by throwing as much money at that as possible while paying the minimum on your other accounts. Once that balance is paid off, you move to the next lowest balance and continue the cycle until you’re debt-free. This approach is ideal for people who are motivated by small wins. Decreasing the number of cards with a balance can help to improve your credit score (since it’ll lower your CUR).

The debt avalanche method follows a similar pattern, but instead of paying off the lowest balance first, you prioritize the debt with the highest interest rate and work your way down until you’ve paid off each debt. The goal of this tactic is to save money on interest in the long run.

If you’re sticking to either method by the book, you’d go with the lowest balance or highest interest rate among all your debts, regardless of whether they’re revolving or installment debts. Strictly prioritizing revolving debt over installment debt would be more of a hybrid debt payoff approach, which could be the best way to go if your top priority is boosting your credit score.

#TLDR
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Paying off revolving debt like credit cards first can help boost your score.