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Debt Reduction: Why Paying Down Your Credit Card Debt Helps Your Credit Score

Written by Robin Holland on June 28, 2010 in Credit  |   46 comments

Debt Reduction: Why Paying Down Your Credit Card Debt Helps Your Credit ScoreBy Robin Holland We get lots of questions from consumers on Equifax.com, our Facebook page, Twitter and now the Equifax Personal Finance Blog about what factors impact credit scores. The truth is, you…

Reduce debt to increase credit scoreDebt Reduction: Why Paying Down Your Credit Card Debt Helps Your Credit Score
By Robin Holland

We get lots of questions from consumers on Equifax.com, our Facebook page, Twitter and now the Equifax Personal Finance Blog about what factors impact credit scores.

The truth is, you have control over your credit. Only you determine what accounts you open, how much debt you carry, how you make your payments, and how responsible you are with your credit and how that behavior translates to your credit report. Your credit score is comprised using the information from your credit report, so understanding how your credit behavior, especially paying down debt, may impact your credit score over time is important.

How Is My Credit Score Calculated?

Your credit score is a number based on different factors in your credit history, including:

  1. Payment History. Do you make your payments on time or are you late? If you’re late, how late are those payments? Are you paying in full or only making minimum payments?
  2. Amounts Owed and Available Credit Balances. Creditors look at how much installment and revolving debt you owe. But they also want to know what percentage of your available credit balance you are using.
  3. Length of Credit History. How long have your credit accounts been open? Which accounts have been closed and why?
  4. New Credit Accounts. Opening several new accounts can affect your length of credit history, your available balances and could negatively impact your credit score.
  5. Types of Credit. Creditors like to see a variety of types of credit, including installment loans (such as auto loans), revolving loans (such as a mortgage or home equity loan), and open credit accounts (such as credit cards).

Paying your bills on time and your available balance are the two biggest factors in calculating your credit score, accounting for over 65 percent of your credit score computation. It’s basic math – handle these two things well and you’re more likely to have a higher credit score, generally speaking.

While the last three factors only account for 35 percent of your credit score calculation, if you keep applying for new lines of credit, it will affect your score.

Learning how to think differently about the components of your credit history and credit score is the first step toward being more in control of your financial life. Read more about what factors impact your credit score at Equifax.com.

Read More.

46 comments

  1. dldani says:

    Okay, so for the past 4 years I have been aggressively paying down my debt. As I paid off one account, I added that amount to my payment on the next account to accelerate that one. Last month, I made my final payment. The same day that creditor reported my new balance, my credit score DROPPED????? by 5 points. What the gives?

  2. Susanna says:

    I have a credit score of 806. I pay my bills as I get them, and pay off all my charges during the same month.

    I have one credit card thru an airline that I use to rack up flyer miles, which gives me an average of one trip per year, with the $75 anual fee being far less than the price of a roundtrip ticket.

    I pay off my balances immediately, basically, charge with the main card, and go home and transfer from my checking account to pay it off, so I don't incur interest (at this time).

    I see that new fees have been enacted at my banks, so I'm thinking of returning to cash or debit. But am not sure how to go about this.

    I have a few cards from other sources I really don't use, and they all have zero balances. I thought to close those accounts, but each of them has a credit limit of $10,500.00 and I've held them the longest.

    I don't know how it will affect my credit score to close them.

    The reason I thought to cancel the unused cards, and to close my accounts at one of my banks that charged me a $25 maintenance fee when I have over $7k in a savings and another $1,500 (average) in my checking.

    Any comments?

    • alsee says:

      It seems you are managing your credit wisely, never close accounts, the fact that you are able to manage a variety of accounts is what makes your credit score so high, if you close the accounts your score will drop significantly.

      • EFX Moderator, EM says:

        Alsee, you have quite a few good points. Showing great creditworthiness is about managing the credit you have, maintaining a positive report for a long time, and making on-time payments on those accounts. We have more information on how your credit score is calculated here and I hope it helps you maintain a positive credit report.

  3. Equifax Experts says:

    Hi Susanna, thanks for your comment. We're addressing how closing credit accounts can affect your credit score in a future blog. Check back next month for the answer to your question. In the meantime, you might find some more insight in the other blogs at http://equifax.com/blog/credit/en_ff

  4. Cheryl says:

    Ok..how is it that my credit score has been rising as I paid off 11 collections (not much mind you but steady) Then suddenly, when I'm down to 1 small bill left and several paid offs are deleted from history, it drops 10 points in less than 3 days?? no new lines of credit, bills continued to be paid on time…makes no sense. I truly question the accuracy and fairness of this system. Personally, I see where we have little control over our scores.

    • Jane says:

      I also believe we have no control over our credit that is reported. I paid off a bill that had been in collection (3 month delinquency) but it was reported and is on my credit report because I paid late. Was paid off months ago but still on my credit report. Actually, it was paid off before it was reported to credit bureau. This is nonsense!

    • alsee says:

      I agree with you 100 percent the system is flawed, I have a $300 limit on a Kohls store credit card. I purchased some items for $161 and my score dropped about 25 points, I paid the bill down to $39 and the score rose up 75 points. So now my balance is only 39.00 Kohl s reported that my balance was $55 they added 16 dollars because I did not pay the bill on the scheduled date( it was not over 30 days late) I was not reported delinquent. from 39 to 55 is a 42% increase in my balance, this is what caused my score to drop again by 10 points. But I’m still way below 35% of my credit limit, but yet they dropped my score.

      • EFX Moderator, EM says:

        Alsee, It sounds like you’re narrowing in on the debt-to-income ratio. Keep your balances low and avoid carrying a balance of more than 30% of your credit limit. Lenders may view high debt-to-income ratios as excessive debt with which you may not be able to stay current, and it could lower your credit score. Here’s more information on improving your credit score. Great observation and thanks for posting.

    • Darrell says:

      I was told that paying off a old debt will lower your score because it shows recent activity on a bad account

  5. Maryell2 says:

    why are there no responses to the previous questions?

    • AggieMissi says:

      I did the same thing and paid off 5 credit cards and 3 collections. 2 of those collections were removed from my report and 3 cards received increases. The next 2 months I monitored my report and noticed a 10 to 20 point decrease across the 3 reporting agencies. Now 2 of the credit card companies are showing as “possible negative” last reported in November with a 0 balance.
      This is all so confusing and misleading. I have recently began using the cards again and will pay the off 90% in February. A friend told me to leave a 10% balance on each and continue making payments or use each card every month and pay it off every month. You must show a payment history. I hope this helps but probably not. I am just as frustrated as you since I’m trying to refi my house.

  6. Editor, Equifax Personal Finance Blog says:

    @Maryell2 – Thanks for reading the blog and commenting. Sometimes we answer comments specifically, other times we may answer a question personally, to protect sensitive information. Often, we use questions as ideas for future posts and answer the questions at a later date.

    Thanks for checking out the Equifax Personal Finance Blog and keep coming back for more real estate, insurance, tax, retirement and credit information.

  7. Dan says:

    I have balances on three credit cards that are all being paid off with debt-wise over the next 12 months:
    1.) The first is close to its limit, but, I'm paying 0% interest for another 11 months.
    2.) On the second I'm paying 15% interest and it's current balance is about half it's limit.
    3.) The third was closed at my request and has about 1/3rd of it's original available credit remaining that I continue to make payments on every month. Unfortunately, it carries the highest interest at 20%.
    If my goal is to raise my credit score as much as possible in the next three months, which card should I target? As I've said, cards #2 & #3 both have balances at 50% or less than their respective limits. Card #1 is enjoying 0% interest for 11 more months. It would seem clear that I should target card #3…But I've heard that having such a high utilization of credit on ANY ONE CARD (card #1) can be deleterious. Is this true? Or does the total utilization of all revolving credit remain the overriding factor in that portion of the score? Thank you!

  8. Ken says:

    I opened a 300$ secured credit card account and am using it to make my credit score skyrocket past 700. When I got my Equifax report in 2009 my credit score was mired in the low 500's. Paying the bill and keeping the balance low works.

    • Portes says:

      What is a secure card? I need to boost my score before refinancing..?

      • EFX Moderator, EM says:

        Portes, great question. There are traditional credit cards and secured credit cards. You’re probably familiar with traditional credit cards already. We’ll be posting a blog describing secured credit cards soon. I hope you come back and check it out. Thanks!

  9. Renee says:

    It seems we have no control over our scores. An inquiry drops your score alot but paying your bills ontime every month seems to only increase your score a point or two. I recently had my score go down 3pts because they said my mortgage balance increased $14.00. I’m not sure how that happend since I made my mortgage payment(on time).. Doesn’t that decrease your balance?! I had all negative information (1 item) removed from my report, then all of a sudden 1(30 day late) appears out of no where as negative information. I could get no helpful information as to why this happened. I asked if they just needed to add something to my “negative information” to keep my score down. Do they just sit around and up and down our scores all day. 3 years of on time payments, balance reduction, and can’t get to a 700! What the heck????????????

    • EFX Moderator, EM says:

      Renee, Accurate information is important for your credit score, but any bankruptcies, collections, foreclosures, late payments, or other financial problems can negatively affect it. However, negative information only stays on your credit report a set period of time—usually seven years—so positive behavior like on-time payments and responsible credit usage can improve your score over time. Read this blog for more information on how your score is calculated: http://blog.equifax.com/credit/how-your-credit-score-is-calculated/

  10. Jane says:

    Have credit report showing revolving accounts dating back to 2001, all with no delinquencies; paid as agreed. Also, installment accounts and mortgage accounts dating back to then also, no delinquencies,paid as agreed. Only one recent report of late paid med. account (account was already paid when account was reported to credit bureau). However, it seems impossible to get my credit score to 700. I am honest, have always paid all my bills over the last 40+ years (although one was paid 3 months late but it was paid). When creditors check my credit score, they don’t see that, they see me as a high risk! It’s very unfair that I have no control over my credit reports and credit score. What’s the deal. Tired of trying.

  11. Ticked OFF says:

    I’m in the same boat as Jane, you all have my report so screwed up I spend more time trying to fix it than it’s becoming worth. Therefore I’ve resorted to paying most if not all of my purchases by cash. I would figure that if more would follow then eventually any reporting agency would not be needed or not needed near as much. I’ve been fighting this for almost 15 years…I have my case built and all of the coorespondence (175 emails/faxes/certified letters) ready to go with my lawyers. I’m tired of someone else controlling my life and expenses. Especially when the ones entering the information that can control my life is outsourced to other countries that have little or no idea on how our economy works or is structured

  12. Patti says:

    This time last year my credit score was in the 800′s. In June of this year I had a $30.00 late payment (which I thought was paid due to the fact my husband and I both have a card with this company. The 30.00 was due to a late fee. When I found out about the late fee, I paid it off. Next thing I know is my credit score whent from 800 to 688. Quite a drop of a 30 late fee. Nevermind the fact that my house payment was paid off as well as several small bills. What gives with such a big drop? I see where many people say their score drops 5-10 points with a late charge never over 100 points.

    • EFX Moderator, EM says:

      Patti, I’m sorry to hear you missed a payment. Credit scores reflect how likely a borrower is to pay a loan on-time and in-full, so a late payment can add up. It’s great that you caught it quickly and paid it though. The good news is that positive credit information, like on-time payments, could stay on your credit report forever, so the good information will weigh out the bad over time. Here’s some information on improving your credit score, which will hopefully help you and your husband. Let us know your progress and come back soon.

  13. deweyrose says:

    i recently started paying the membership fee to equifax so i can monitor my report every month. one tool i found helpfull on their site is the payoff plan. i entered all my debts into this plan and according to THE PLAN i can be paid off in just a couple years. this sounds great but what if i do pay off my debts a little early, will my rating drop because lenders didnt get their thousands of $ in interest? also why is my score more negatively affected by one late payment on a small credit card than positively affected by years of on time payments for a large vehicle loan? seems like it doesnt take much to have your score lowered substantialy.

    • EFX Moderator, EM says:

      @deweyrose, that’s great to hear! I’m glad the Payoff Plan is working well for you. The earlier you pay off your debt, the sooner your credit report will reflect it. That’s a GOOD thing and it’s a great goal to have. Stick with it and let us know your progress. If you want to learn more about how your credit score is calculated, click here: http://blog.equifax.com/credit/how-your-credit-score-is-calculated/

      Thanks for posting.

  14. Andre says:

    When I get notified of negative activity on my acct. How do I counter if i can’t see why?

    What is the best way to move it from 680 to mid 700′s before I refinance?? Can I get some help to do this at a cost?

    • EFX Moderator, EM says:

      Andre, great question. I’m glad to hear you’re interested in improving your credit score. It’s a great goal. We have some tips on how you can improve your score as well as your creditworthiness. Click here to read more. I hope it helps. Thanks.

  15. Alex says:

    I am happy to say my credit score if very high at 820, but I am left to wonder why it is not even higher. It seems everything on my report is perfect – never late, pay credit card balances down to zero every month, etc. Although I have two credit cards (Amex and Visa) I primarily use Amex and most of the charges are for reimbursed business travel. I pay whatever balance these cards accrue (average monthly balances of about $5K on Amex and less than $100 on Visa) down to zero every month. As far as I can tell, my credit history should warrant a perfect score. What could possibly keep my score from being a perfect 850?

  16. EFX Moderator, EM says:

    Alex, it sounds like you have worked hard to have an excellent credit file and good for you. What you’re describing sounds like exemplary behavior. Your credit score is calculated in-part by determining your payment history. Other factors are also considered though, such as your balance to available credit ratio, how long you have had your credit accounts open, number of inquiries to your account, and types of credit you have open. We have more information about how your credit score is calculated. A score of 820 demonstrates to lenders that you are a good risk.

  17. Frustrated says:

    I had a negative item come up on my report. The credit card company changed finance companies. The original finance company closed the account and then the new company issued me a new card with a new card#. Well, the original company, CHASE bank, reported that the old account was closed without any further explanation. The account was not closed due to nonpayment, but it was closed because Pier 1 started using Community Bank instead!

  18. JD says:

    I settled for “less than full” on a few collections will they stay or be removed from my credit report. if they stay on my report how will it read and how will this affect my score.

  19. Stupified says:

    How is it that when you refinance a car at a lower interest rate your credit score drops? I paid off about a third of the balance of the first loan which was mirrored in the corresponding debt-to-credit ratio, yet that ratio is back to 1 with the new loan with no credit score consideration, evidently, for the previously paid off loan. What gives?

    • EFX Moderator, EM says:

      Without knowing more details, I’m not sure what exactly happened, but it sounds like your lender added the refinanced loan as a new account, which impacts your score in a few ways: your old account was closed, you have a new debt-to-credit limit ratio, you probably have a new credit inquiry, you changed your average length of credit accounts. Again, I’m not sure if that’s how it’s showing up on your credit report, but your credit score is based off of quite a few factors in your credit report. The good news is that you’re saving money with the lower interest rate on your car and your positive credit behavior can stay on your credit report forever. Here is more information on how your credit score is calculated. I hope this helps.

  20. extremely frustrated says:

    My credit card company(Orchard Bank) was bought out by Capital One in May 2012, now I find out they are reporting a 30 day late on me for Oct. 2012. I filed disputes with all three agencies and informed them that I had bank statements to support the payment was made on time. I have just found out that they will not remove the late payment because Cap One said they never received the payment. How is it that a credit card company that was clearly in transition can just say we didn’t receive the payment and all the bureaus just take it for the gospel? I was never contacted by anyone to provide the bank statements or any other proof supporting my claim. This is preventing me from obtaining a mortgage loan since I had a previous bankruptcy. I have had a flawless payment history over the last five years and one 30 day late for a $25 payment should tell someone with any common sense that something is not right.

    • Bob Hope says:

      So what your saying is your fustrated that a morgage company won’t finance you because you want a thirty year loan, but you only have 5 years of good payments? thats right they have a term it’s called high risk. A brief period of instability a few years back, multiple accounts reported late, a judgment and collections, and maxed out credit cards, and i’m steadily pulling out of my credit funk, and i just bought a house. you have 2 more years before that bankrupcy goes bye bye, Just keep steady and you’ll get there. it took me 6 months to get a morgage, i just keep at it, and talk to a few banks i went through a few. right now, 620 seems to be the average fico score they look for. I found out wells fargo looks for 600. I guess thats why they have the largest retail morgage portfoilo.

  21. Just Thought I'd Ask says says:

    How is your credit score affected, say, by charging 50, 60 or 70% of your total credit allowance on several cards each month and then paying the balances off completely each payment period as opposed to keeping running balances over several months? I know it’s better for me, financially, because I get the free use of money for up to a month, but is it detrimental to my credit score by having what appears to be high debt-to-credit ratios each month?

    • EFX Moderator, EM says:

      Great question. High balances may negatively impact your credit score, because some lenders may worry that you have taken on too much debt and view the high balances as risky. Although you pay off the balance every month, each lender may update your credit file at different times, so you’re not sure which balance is being reported—the one that’s paid off or the one that is 70% of your credit limit. Here is more information on how your credit score is calculated. I hope this helps.

  22. Confused and Conflicted says:

    I have an installment account that I paid off in late February of this year.
    The lender simply stopped reporting the account, without showing that I had a zero balance. Is this hurting me? If I had them report my zero balance would that hurt my score? Not sure what to do

    • EFX Moderator, EM says:

      Great question. It’s important that your credit report be accurate. If the creditor isn’t reflecting the correct information, you can speak with them about it or file a dispute with the credit reporting agencies. Your score can change because you have less debt and because the account would be shown as closed, but it’s hard to know for sure since each credit report is unique. I hope this helps and thanks for posting.


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