Does Paying Off a Large Balance Affect Your Credit Score?

If you have several open accounts and a large chunk of money, you may wonder if you would be wise to pay off a large balance on an open account. The effect that paying off an account has on your credit score differs depending on whether you pay off a balance on a revolving account, such as a credit card, or on an installment account, such as a car or student loan. Paying off the balance on a revolving account is more likely to significantly raise your credit score. The best strategy to raise your score is to pay down the credit card that is closest to its limit.

Paying Off Large Balances

Part of your credit score is determined by taking the amount of credit for which you have been approved and comparing it with the amount of debt you actually have. For example, if you have a $5,000 limit on an account and you have borrowed $4,875, this adversely affects your credit score. If you pay off the balance on the account, the credit reporting agencies will see that even though you have credit you can take, you choose not to. This is an indicator of fiscal maturity and responsibility. Thus, your credit scores increase in these instances. A good rule is to never borrow more than 30 percent of your maximum allowance.

Keep Cards Open

Do not close your credit card accounts if you pay them off. As long as your account stays open, the company likely will continue to report to the credit bureaus that you have a large amount of available credit that you are not using. Consider using a credit card periodically for small purchases and pay them off immediately. This will cause the credit card company to continue to report your usage to the credit bureaus.

Pay on Time

Always pay your bills on time. If you put a large purchase on your credit card, pay it off as quickly as possible. Delinquent charges have a more adverse effect on your credit scores than having too much credit does. This is especially true of the bills you have that are reported to credit agencies. These include credit card bills, mortgage bills, auto loan bills and cable bills. Failing to pay a bill may cause the lender to send your account to a collection agency. Collections stay on your credit report for up to seven years.

Decide on Loans Quickly

Each time a potential lender pulls your credit score, the score has the potential to decrease a few points. Having your credit pulled several times could significantly decrease your score. If the scores were all pulled several times within two weeks, the credit bureaus do not look unfavorably on this, thus you can continue to maintain your credit score.