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Debt Reduction: Why Paying Down Your Credit Card Debt Helps Your Credit Score
Debt 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:
- 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?
- 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.
- Length of Credit History. How long have your credit accounts been open? Which accounts have been closed and why?
- New Credit Accounts. Opening several new accounts can affect your length of credit history, your available balances and could negatively impact your credit score.
- 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.
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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?
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?
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
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.
why are there no responses to the previous questions?
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.
@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.
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!
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.