How Much Will Paying Off Credit Cards Improve My Credit Score?

Ben Steele
Several credit cards stacked on top of one another.

If you’re struggling with your credit score, paying down credit card debt is one of the best ways to improve it. Basically, if you have a high credit utilization rate, or a history of missed payments, paying down your debt and establishing a history of consistent, on-time payments are the best ways to improve your credit score.

Remember that the act of carrying a balance itself is not necessarily negative. Your credit score is based on utilization ratios and history. If you don’t have much credit history, it could be more advantageous to carry a balance, which you pay down monthly, rather than to pay everything off immediately. On the other hand, if you struggle with a high credit utilization ratio, paying off balances all at once, in full, will be the most efficient strategy.

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Paying Credit Cards Off in Full

Generally, the faster you pay off a card, the better. This is for two main reasons:

  • A zero balance won’t cost you anything in interest: the faster you pay down the principal balance, the less interest you pay on it.
  • No carried balance means no or low utilization gets reported to the bureaus: credit card issuers only report snapshots of your credit card activity to credit bureaus, usually just once a month. If you pay down your balance before the report goes out, you’ll show lower utilization of your available credit.
  • Remember that your credit utilization ratio is your maximum available credit compared with how much you’re currently using / exists as debt.

If you have a high credit utilization ratio, this is the best strategy to reduce it quickly, and start seeing more success with credit applications. If your utilization ratio is above 30 percent, then this becomes easily the most important thing: pay down your credit as quickly as you can.

However, if your credit score is low due to either a limited history, or a history of missed payments, it might be more worthwhile to pay off most of your credit but make sure to use and then pay off a small balance every month. This helps you establish a history of responsible and timely payments. Fixing your credit history takes time and requires you to establish a pattern. It’s important to work out how your score is being affected in order to plan the best way to improve it.

Paying Off Credit Card Debt Over Time

This strategy is less effective in the short-term, but still a huge help and the primary way to handle issues with credit utilization. The goal is getting the balances that you carry lower, which requires paying more than the minimum payments and interest payments on your cards. This is often the most feasible option, as not everyone has the resources to immediately pay off credit cards in full.

This will help your credit score, but you’ll see progress more slowly. This, in some cases, can actually be advantageous to you. As already noted, if your problems are due in part to a short credit history, or a history with missed payments or accounts in delinquency, establishing a regular history of timely payments is a very good idea.

Paying Off Credit Cards With Balance Transfers

The balance transfer tactic is a legitimate, if slightly more risky one. It requires you to be extremely careful about paying off cards in a timely fashion.

The number one reason for performing a balance transfer is for low or no interest promotional periods on new credit cards. Many credit cards offer periods of reduced, or sometimes zero percent APR for balance transfers, to encourage you to open their card and start borrowing.

The vital thing to remember is that almost all promotional interest deals are conditional on you paying off the entire balance in full within a set time limit. If you fail to pay off the entire balance on time, interest will be applied to the entire balance over the entire period. That means that if, at the end of the promotional period, you still have $0.50 to pay, you will suddenly find that you’ve accrued interest charges for the entire balance, as if the promotion had never been applied.

As long as you pay off the entire balance within the promotional period, however, it’s a great way to reduce the interest pressure on your credit card balances. Again, this is slower than simply paying off all or most of the balance, but it can be an attractive option as it has the double purpose of increasing your total credit limit, and therefore improving your utilization ratio.

Using a Credit Card To Improve Credit Scores

Here are a few best practices for managing credit cards in a way that improves and keeps your credit score stable.

Keep Utilization Rate Under 30 Percent

This is a basic rule of thumb for credit utilization. Ideally, you want to be using less than 30 percent of your total available credit every month. You can adjust this by paying down balances and by acquiring new credit.

Try to Pay Off Balances In Full Every Month

This is the ideal way to operate credit cards as it completely avoids interest. It also helps to keep your utilization rate manageable and controllable.

Always Make Your Payments on Time

Failing to do this is one of the fastest ways to tank your credit score. Whether you’re paying off a balance in full or just doing minimum payments, make absolutely sure to do it on time. Late payments can be long-term blights on your credit score.

Avoid Applying For Too Many Accounts Too Quickly

Some credit applications do what’s called a “hard pull” on your credit score, which can actually decrease the score. If enough of these happen too quickly, it can lower your score, as it can send the message that you are in financial trouble.

Don’t Close Old Credit Accounts

Age is an important factor when it comes to credit history. Holding accounts that you’ve had for a while is a great way to help your score, as the longer you hold them, the more effect their age can have on your score. Even if you don’t use them, having the age of the account and the additional available credit is a boon.

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