Will Paying Off Your Credit Cards Hurt Your Credit Score?

There are many benefits to paying off your credit cards and never is there a scenario in which paying back what you borrowed from those credit cards hurts your credit score. Paying down debt is almost always a good idea.

The Benefits

No More Interest Payments

• If you are carrying a balance, paying off that balance will mean you are no longer paying interest on those debt obligations. So, you’ll save more money on interest payments which is a tremendous benefit. Revolving lines of credit have the worst associated APR’s in terms of debt so eliminating the worst interest rate accounts in your credit portfolio will also be another plus.

Displaying Financial Responsibility

• You are displaying financial responsibility and your ability to repay the debt back is a great thing for your credit worthiness.

Better Utilization Rate

• You are lowering the utilization rate on your lines of credit. This is the second most important factor in regards to your credit. Utilization accounts for 30% of your credit score. It might seem counterintuitive, but those who have the most “available credit” and do not utilize it to their full potential, are typically the consumers with the best credit.

Better Balance Sheet

• Less payments to worry about overall once you completely bring down the balance to $0. This will add some simplicity to your life and mean you have less bills to worry about overall.

What’s in a Credit Score?

In general, your credit score defines your ability to pay back any debt obligations. Lenders use this score to gauge how likely it is that they will receive repayment of any loans, etc.

• Payment history – Accounts for 35% of your score (make sure to avoid late payments and always remain current on your debt obligations to keep this as high as possible).
• Credit Utilization – Accounts for 30% of your score (how much credit you use versus how much you have available).
• Length of Credit History – Accounts for 15% of your score (the longer you have established lines of credit, the larger the boost to your credit worthiness).
• New Credit – Accounts for 10% of your score (avoid opening multiple lines of credit as lenders will typically view this is a red flag).
• Credit Diversity – Accounts for 10% of your score (this factor is dependent on how diverse your credit portfolio is). It helps to have auto loans, credit cards, mortgages and other types of debt. Secured debt is generally considered to be the best kind of debt to carry.

No, It Will Never Hurt You

It’s always a good idea to pay down debt. This can never hurt your score. A myth here might be that you need to have debt or a balance to maintain credit but that is simply false. You should always keep all lines of credit active because letting your accounts go inactive can be bad for your credit, but this doesn’t mean that you have to have debt in order to do so. Paying down debt will always be good for your credit because you are repaying what you borrowed and are demonstrated financial responsibility to all applicable lenders.

Best Way to Boost Your Score

The best way to boost your credit score is by improve the points mentioned above. The difference between someone that has “fair credit” and “exceptional credit” is typically dependent on the utilization rate. Many consumers can demonstrate good payment history and do not miss payments but many often forget to demonstrate a good utilization rate by making less use of their available credit.

Otherwise you can also use self-reporting methods like Experian boost, successfully finish repaying any loans that are near the end of the amortization, get increases in your total credit availability to increase your utilization, etc. You can also look towards opening a secured credit card in order to help diversify your credit portfolio.