Will Paying Off $75k in Credit Card Debt Raise My Credit Score?

The average family had $8,000 in credit card in 2009, according to financial expert Dave Ramsey, so having $75,000 on credit cards can be very troubling. Tackling this debt is the wisest move you can make for your financial future, and it will help raise your credit score, too. However, to boost your score the most, be careful how you pay it off.

Identification

Paying off a $75,000 credit card balance almost assuredly raises your score, probably by dozens of points, because the FICO scoring system is most concerned with revolving credit card debt because it is unsecured. Your total balance accounts for 30 percent of your score and because you have far more revolving debt than the average person, that credit card debt has probably been dragging your score down.

Credit Utilization

Credit utilization refers to how much of your credit lines have already been used. Unless you have significant credit card debt left, bringing down your credit utilization to zero percent is a huge boost. The Fair Isaac Corporation found that a maxed out credit card damages a typical score by 10 to 30 points---more if the consumer has a better credit score. A high credit utilization ratio when you aggregate all of your accounts does even more damage.

Considerations

The credit bureaus ignore credit card utilization on accounts with no reported limit or use the highest balance on the history of the card. This usually occurs when you have a charge card, which bases your limit on spending habits. When this happens paying off the credit card debt will help your score, but won't improve your credit utilization as much as when the lender reports a limit. If you ran up all $75,000 on one card and the credit bureaus use this as the card limit, it will help you if you never come close to this amount again, because you will have a high limit, but a low balance in comparison.

Tip

Assuming you hold debt on other credit cards, you have a choice between saving the most money and boosting your credit score. The most efficient use of your money is to pay off the accounts with the highest interest rate first. To avoid a high credit utilization limit on any card, you should spread debt evenly across your accounts.