Will Paying Off All Debt Be Good for My Credit Score?

Many factors go into determining your credit score. One of these is total debt. The amount you owe counts for approximately 30 percent of your credit score. Paying down that debt will raise the score. However, paying off all debt will not necessarily give you the score you want. Be careful not to do more damage than good.

Credit Scores

A credit score is a three-digit number that tells lenders whether you are a good bet. The lower the score, the riskier the borrower. Credit bureaus calculate credit scores based on the information provided to them by lenders. Every time you borrow money, it will affect your credit score. Every time you miss a payment, your score will drop. A high credit score will make it easier to borrow money at a lower interest rate.

Paying Down Debt

Thirty percent of your credit score reflects how much you owe and what percentage of your credit line you are using. Paying down debt will improve your debt-to-credit ratio and raise your credit score. However, it will not erase any negative information on your credit report. Positive information counts for a lot less than negative information. Making payments on time is important, but it's what you should be doing, anyway. Missing payments is considered very bad and will hurt your score quicker than making payments will improve it.

Settling All Debt

Paying off all your debt can have a positive effect on your credit score, but you have to do it right. Don't automatically cancel all your credit cards once you've paid them off. The length of your credit history accounts for approximately 15 percent of your credit score. If you cancel your oldest cards, your history will be shorter. This will hurt your score. Instead, use the cards once in a while to keep them active, but pay off the balance in full each month. That way you'll maintain your credit history without paying interest.

Raising Your Credit Score

There are other ways to improve your credit score. The quickest is to fix any errors you find on your credit report. It can be something small, like a typo, or something bigger, like a long-settled account that still shows that you owe money. Either way, it could be hurting your score. Get a free copy of your credit report from annualcreditreport.com. Go through the report line by line and look for errors. If you find one, file a dispute with the credit bureau. The bureau will investigate and remove any negative information that you can prove is inaccurate. This can raise your score in as little as 30 days.

Warning

Many companies promise to raise your credit score by 100 points or more in a matter of weeks. Don't believe them. The only way to do that is to erase negative information from your credit report. This is almost impossible, unless the information is inaccurate to begin with. If it is incorrect, you don't need to pay someone to fix it. You can do it yourself.