The best way to obtain a high credit score is to use your cards as needed, then pay the balance in full every month. This shows potential lenders you’re taking advantage of your credit resources and are capable of paying your obligations as agreed. If you carry a balance for a few months and pay it off in one lump sum, your credit score might drop at first. You can try various strategies to mitigate this effect.
Utilization Rate Improvement
Paying off your credit card benefits your credit score in several ways. One involves your utilization rate. Credit issuers like to see you’re using credit responsibly, so having several accounts open is a positive. However, they also like to see that you’re not maxing out your cards and living beyond your means. A utilization rate of 30 to 50 percent or less is ideal. Paying your balances improves your utilization rate, and keeping your credit card debt below that threshold will boost your score.
Multiple Factors Affected
Credit scores are based on a number of factors, so paying off one card doesn’t guarantee your score will rise. Approximately 35 percent of your score is based on your payment history, and 30 percent is the amount owed. Both of these are boosted by making payments. The length of your credit history makes up 15 percent, and new credit and type of credit used account for 10 percent each. When credit scorers consider your amount owed, they consider the number of accounts with a balance, as this can indicate a higher risk of overextension. As a result, it may help your score more to pay one credit card balance off than to pay multiple cards down by an equal amount.
Short-term Effect Uncertain
Experian notes that paying off your debts in sudden, large spurts introduces some instability into your credit history that can temporarily hurt your score. That often changes soon afterward, but it’s best to pay off cards a few months before you’ll need to make another significant purchase. In addition, because there’s a lag between when you make the payment and when it’s reported to the bureaus, the effect isn’t immediate. As a result, you’ll want to pay off a credit card debt several months in advance of applying for a major commitment like a mortgage loan.
Despite the positives that come from paying off your card, it doesn't guarantee that your score will rise. Some cardholders will reduce your credit line once it’s paid off, particularly if you’ve had problems with the account in the past. This negates the expected utilization rate benefits. If your balance was small anyway, or your total amount of debt was large, the benefits likely won’t be significant. If you have a total of $55,000 in available credit lines and a total of $40,000 in credit card debt, paying off the balance on a $5,000 card still would leave your credit utilization ratio at 70 percent -- $35,000 in balances for $50,000 in available credit -- well above the desired 30 to 50 percent threshold.
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