If I Pay Off My Credit Cards in Good Standing Will That Increase My FICO Score?

Paying off credit cards in a timely manner sounds like a positive action, but its effects on a consumer's credit score is mixed, according to the FICO score compiling firm. Certain aspects of a payoff are positive, but others are neutral or even potentially harmful when weighed against other factors.

Definition

The Consumer Federation of America explains that a FICO credit score is a three-digit number ranging from 300 to 850 that gives a fast indicator of a person's likely creditworthiness. Lenders are more likely to give credit to consumers with scores above 700, while they avoid people with scores below 600, or charge inflated interest rates to offset the risk.

Factors

FICO credit scores are compiled based on a variety of financial factors, including credit card payments and balances. FICO explains that it also looks at how many accounts a consumer has, balances, credit lines, how long accounts have been open and the number and length of any delinquencies. It gets this information from credit reports, so the score can change regularly as lenders and banks report new information, including account payoffs.

Benefits

A FICO score is always helped by keeping a credit card in good standing with on-time payments. Of the total score, 35 percent comes from a consumer's payment histories on credit cards and other accounts. Paying off a card completely lowers a person's total outstanding debt. This may raise the FICO score if the original debt load was high.

Drawbacks

A credit card with a zero balance gives the person more available credit. Too many inflated limits can hurt the credit score, FICO warns. Paying off all credit cards eventually lowers a credit score if the consumer stops using them completely. FICO looks at a consumer's mix of accounts, and no active credit can be harmful. The paid-off accounts usually drop off credit reports in seven years, after which they no longer count toward the credit score. It will go down if there is more recent negative activity.

Considerations

Consumer advocate Clark Howard recommends periodically using paid-off credit cards and paying the bills immediately to create recent positive activity on credit reports. The cards can be used every few months for modest transactions. Paying the statement in full as soon as it is received prevents any interest charges. The prompt payoffs help increase the FICO score when they show up regularly on credit reports and get figured into the score.