Credit Score and Paying Off Credit Cards
Paying off a credit card is a big accomplishment. If you are considering the pain, you are a problem wanting to know about the benefits, and whether an improved credit rating is one of them. Refer NerdWallet August 2017.
The good news is that your credit will probably improve — and you won’t have to wait till you make your final payment to see those gains.
Paying down credit card balances helps your score
There’s no doubt about it: Paying credit cards down or off can do wonders for your credit score. That’s because a significant portion of your score is determined by amounts owed, and the most influential factor here is your credit utilization ratio.
Credit utilization is simply how much of your credit limit you’re using. For example, if you have a credit limit of $5,000 and your outstanding balance is $2,500, your credit utilization ratio would be 50% on that card. VantageScore calls this ratio “highly influential,” and FICO says it accounts for about 30% of your score.
Most experts recommend keeping utilization below 30% both overall and on any one card, and lower is better. If you were dealing with large balances, it’s likely that you exceeded this 30% threshold. Your credit score was probably not in top shape while you were lugging around all that debt.
As you paid down your balance, your credit utilization ratio improved, so your credit probably did too.
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