How Much Can I Raise My Credit Score If I Pay Off My Debts?

The purpose of the credit scoring system is to assist lenders by helping them identify those consumers most likely to repay their debts. To your bank, a low credit score means you are less likely to meet your financial obligations than someone with a high credit score. Because of this, banks, credit card companies and other businesses are less likely to deny applications from consumers with high credit scores. One way you can increase your credit score is by paying off your current debts.

Amounts Owed

One factor that influences your total credit rating is how much outstanding debt you owe. A portion of your income each month goes toward paying down your current debts. The less debt you owe, the more disposable income you possess. Thus, paying off your debts increases your credit score because it signifies that you take your financial responsibilities seriously and can afford to take on new ones. The amount you owe your creditors accounts for 30 percent of your total credit score.

Credit Utilization Ratio

Paying off your debts isn't the only way to raise your credit score. Paying down your debts, in some cases, can prove just as effective a credit repair tool.

The credit scoring formula compares the spending limit on your credit accounts to your balance. The difference between the two numbers is your "credit utilization ratio." A significant gap between your spending limit and balance indicates that you manage credit well and results in a higher credit score. If your credit cards are nearly maxed out, however, your credit will suffer. The good news is that if you cannot pay off your credit cards altogether, paying down the balance still benefits your credit score.

Scoring Factors

How much your credit score will increase after paying off your debt depends on a variety of other factors such as the type of debts you carry, the length of your credit history and if your credit report reflects any derogatory items like a past charge-off or bankruptcy. The mathematical formula the credit bureaus use when calculating scores is a trade secret. Thus, there is no way to know ahead of time how much your credit score will increase after you pay off your debts.

Derogatory Debts

While paying off most types of debt makes you appear more financially stable and results in a higher credit rating, the benefit your scores receive from payments you make does not extend to all accounts within your credit history. Paying off derogatory entries, such as a collection account or civil judgment, does not improve your credit. Derogatory items remain a negative influence on your scores until they age off your credit report -- regardless of whether or not you paid them.