Does Becoming Debt Free Affect Your Credit Score?

The amount of debt you carry plays is a major factor in your credit score. Your debt shows potential lenders how well you manage the credit you have and how close to the edge you are living financially. Becoming debt free can dramatically increase your credit score, but just how much your score might soar depends on other aspects of your credit history.

Debt and Your Credit Score

Your credit score is determined by evaluating five different factors: payment history, length of credit history, types of credit, new credit and amount owed, or debt. Your debt makes up 30 percent of your credit score, so carrying a lot of debt might spell big trouble for your credit score, depending on how much of your available credit line your are using. Maxed-out credit cards and a list of personal loans can drag down your credit score significantly, even if you always make your payments.

On the other hand, paying off that debt can send your score climbing.

Score Increases

The credit bureaus won't reveal their exact formulas for calculating credit scores, so there is no way of knowing specifically how many points your score will go up when you set your debt balance to zero. Expect your score to increase, but don't expect miracles. Paying off your debt doesn't erase past credit missteps. For instance, when you pay off a delinquent account, the negative information about that account will stay on your credit report for seven years. Paying off debt is beneficial to repairing credit, but remember that debt is only part of your credit score picture.

Closing Accounts

If you are trying to improve your credit score, think twice before closing revolving credit accounts, like credit cards, when you pay off debt. When you close accounts, the overall credit available to you is reduced. Having a high level of credit that you're not actually using -- for instance, having a credit card with a high limit but a zero balance -- is ideal for credit health. If you pay off all your debt but close your accounts, you could neutralize any benefit to your score and could, in fact, end up decreasing it.

Tracking Your Score

The best way to see how your debt repayment has affected your credit score is to check the score yourself. Consumers are entitled to check their credit report with each of the three credit bureaus (Experian, TransUnion and Equifax) for free once per year by ordering their reports through annualcreditreport.com, but those free reports don't include your actual credit score. To see your score, contact one of the three credit bureaus or use their websites. There is a charge to view your score.