Paying off credit card debt is a huge accomplishment. It feels good to know that your income is no longer going to be gobbled up by payments on your plastic.
You’re probably also wondering how eliminating a credit card balance will affect your credit score. 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.
As you paid down your balance, your credit utilization ratio improved, so your credit probably did too.
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. Still working on paying down other cards? You can use NerdWallet’s free credit score to monitor both your score and your credit utilization.
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Maintaining the gains
If you’ve whittled down your credit card balance and seen your score go up, you likely want to maintain that progress. If you think you can control your spending, keep paid-off credit cards open and use them occasionally. Closing a card can hurt your score by reducing the average age of your credit accounts and by increasing your utilization.
You can keep utilization low in a couple of ways: A higher score might make you eligible for a higher credit limit. Having a higher limit while keeping your charges about the same will give you lower credit utilization. But applying for a higher limit often counts as a hard inquiry, which can cause a small, temporary dip in your score, so be strategic.
Consider making multiple payments throughout the month to keep utilization low throughout the billing cycle.
You can also make multiple payments throughout the month, so your utilization is low no matter when in the billing cycle your card issuer reports to the credit bureaus. Even if you pay off cards every month, if your balance happens to be high when the issuer reports, it can damage your score.
Paying attention to basic good credit habits is essential.
- Pay your bills on time, every time. Payment history is the other major factor in scores, along with utilization.
- Keep the 30% rule in mind. Don’t use more than 30% of your available credit on any card at any time during the month.
- Apply only for credit you actually need
- Check your credit reports at least once per year for accuracy. If you spot an error, take steps to have it corrected.
Updated Aug. 11, 2017.