How Much Will Your Credit Score Increase If You Pay All of Your Credit Balances?

Credit scores play a big role in your finances. It is important to keep in touch with the credit scoring model and to determine what methods you can take to raise your credit score or keep your credit score at a healthy range. Paying down debt is a smart way to improve your credit score.

Credit Score

A credit score is a three-digit number that informs potential lenders of your past financial history. The better you have handled your previous credit, the higher your credit score will be. A low credit score can prevent you from getting credit, getting a job, renting a home or getting favorable terms in loans.

Credit Score Components

There are five components to a credit score: age of credit history, payment history, amount of credit being used, new credit and credit inquiries. A full 30 percent of your credit score is determined by the amount of credit you are utilizing. Credit utilization is the amount of credit you have charged in relation to the amount of credit you have available. Credit utilization is the only area of your credit score that you can change almost immediately. Going on a spending spree and maxing out your credit cards will result in your credit score dropping, while paying down your balances will usually raise your credit score.

Revolving Credit

Revolving credit is credit that comes with a limit, but you can pay down the balance and charge additional items on the account. Credit cards are examples of revolving credit. Store credit at a furniture store is also often revolving credit if you are given a credit line that can be used at anytime rather than a fixed loan for the exact amount of the furniture purchase. Revolving credit is the type of credit you want to pay down to increase your credit score. Your goal should be to reduce the balances to 30 percent and under 20 percent if possible.

How Much of an Increase

Every person's credit report is unique to his financial history. A credit score is also composed of multiple components, so it is impossible to give a blanket statement on how much a credit score will rise with paying off credit. A general rule is to remember that 30 percent of the credit score is determined by credit utilization. A person who has maxed out credit cards and lowers all card balances to under 20 percent will see a large increase in credit scores. A person who has balances of about 50 percent of his credit limit and reduces the balances to 30 percent will see a rise in credit score but not as drastic as the previous person. There are many factors involved, but the bottom line is lowering your revolving credit balances to under 20 percent of your credit limit will without a doubt increase your credit score if your previous balances were above 30 percent of credit limit. Lowering your credit utilization from 20 percent to 5 percent will not result in much, if any credit score increase, because having balances under 20 percent of your credit limit is the ideal range.