How Much Will My Credit Score Jump by Paying Off a Credit Card?

A credit score --- or FICO score --- says much about a consumer's credibility to repay loans and manage money. Considering credit cards as plastic loans, how those balances are paid off and whether those cards are used at all weigh heavily on a person's credit score. Maintaining a high credit score is key to securing loans, earning low interest rates on loans, and sometimes even getting a job.

Utilization Ratio

Using credit reaps rewards for consumers who know how to use it in a responsible way. It helps build a strong credit history. When a potential lender examines your credit score, payment history indicates your risk as a borrower. If you pay off credit cards each month, you demonstrate responsible money management. But paying off one credit card won't necessarily boost your credit score if it is the only card you have. Credit reporting agencies use the "utilization ratio" to determine your credit score. This ratio takes into account the number of cards, their use, and their history. Lower ratios tend to result in higher credit scores.

Pay-Offs and Your Utilization Ratio

Because the utilization ratio is determined by how much credit you use in relation to how much credit you have available, the key is to use the credit. A dormant credit card with no activity reflects no money management. A card with a monthly balance that is paid toward or paid off shows activity and can therefore lower your utilization ratio, which translates to a higher FICO, or credit, score.

Up-and-Down Credit Scores

Your credit report lists each card, its payment and use history, and its balance. The credit score, however, examines all cards, taking into account closed accounts. A closed account can raise your utilization ratio, which can lower your credit score. Paid-off accounts don't necessarily raise or lower your credit score; the overall result of a paid-off account is determined by the other accounts you have. Paying off an account and then officially closing it, however, can potentially damage your credit score because it closes off good credit history. A better tactic may be to pay off the balance, but keep the account open.

Should You Close a Paid-Off Account?

Credit scores are determined in part by how long you have had the oldest card. A good rule of thumb is to keep open the oldest accounts because the score is calculated by the average number of years. If you close an old card, you are lowering the average and damaging your credit history. Another caveat is not to close out accounts (even if they are paid off) within six months before you apply for a loan. Lenders want to see long, established histories of activity and good money management. Even if the account you want to close has bad history, the bad history remains on your credit report for seven years.