Paying off debt almost always improves your credit score, but which debts you pay off first determines how fast your score rises. However, you never know how much your score will rise after making the last payment on a debt. In general, it is better to try to pay off all of your debts and accept whatever points you gain than to try to calculate the exact point value of eliminating a certain debt.
Considerations
The FICO scoring model is so complicated that asking for the exact point value of paying off debt is impossible. While the Fair Isaac Corporation reveals that 30 percent of a credit score comes from the amount of debt owed, several variables with unknown values affect the number of points taken away when you add debt to a credit profile. In general, the FICO model gives more weight to paid debt on a revolving account than a secured debt, such as a mortgage, because secured debts have real property against the loan.
Credit Utilization
The Fair Isaac Corporation, designer of the secret FICO formula, sometimes reveals data on the effect of certain events on a credit rating. A 2009 Fair Isaac Corporation study found that a maxed-out credit card takes 25 to 45 points off a FICO rating of 780 or 10 to 30 points off a rating of 680. If you settle an account for less than the value of the debt and the lender reports the account as settled to the credit reporting bureaus, the account does 105 to 125 points of damage on a score of 780 or 45 to 65 points of damage to a rating of 680.
Closing Delinquent Accounts
Much of the effect of closing an account depends on other data in your credit history. If you have several missed payments, or if the lender writes off a debt or sends a debt to a collection agency, paying the bill has little effect on your credit rating compared with the damage the presence of a negative account will do. In some cases, you can get the lender to agree to remove record of the account with the credit bureaus. For example, if you pay off an IRS lien, the agency withdraws the lien from the public record if you make that a part of your payment terms.
Benefits
Paying off debt usually is a good idea regardless of how it impacts your credit rating. Lenders like to see borrowers paying off collection accounts because it shows good character. Reducing debt levels means your outstanding balances do not accrue finance charges. Review state law to ensure you actually owe on the debt. Unsecured debts usually become noncollectable after a few years. The bureaus cannot report most debts after seven years on your credit report.
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