What Happens to My Credit Rating If I Pay Off All My Credit Cards?

Your credit score is sensitive to many different financial actions. For instance, the score increases when you make timely payments and drops when you send money late. Scorers consider all your accounts, including credit cards, and your credit rating is affected if you pay off all of the cards.

Benefits

Your score goes up when you pay off any account, including installment loans like auto financing and student loans, but revolving debts like credit cards have the biggest positive impact. MSN Money writer Liz Pulliam Weston explains that your score benefits even if you just reduce the balances without entirely paying off the cards, as long as you get the balances down to 30 percent of the credit limit or lower.

Drawbacks

Over time, your credit score can actually drop from paying off all your credit cards. Lenders want to see that you are managing your finances properly. You will not show a current payment history on your credit reports if you pay off all your accounts and stop using them altogether. Pulliam Weston recommends using them regularly for small purchases, especially if you have had the accounts for a long time. MyFICO.com explains that part of your score comes from the length of your history. Older paid-off cards that go unused for long time periods lose their positive effect.

Considerations

You do not necessarily help your credit score if you pay off a delinquent credit card that was charged off by the issuer. Bankrate.com columnist Steve Bucci explains that banks charge off accounts when a person stops paying for about six months. The bank gets a tax benefit, and the charge-off goes on Experian, Equifax and TransUnion credit reports and pulls down the consumer's credit score. You can call the creditor and arrange payment, but a paid charge-off is still very damaging. Ask the bank to erase the charge-off from your credit reports or alter the status to "paid as agreed" as a condition of your pay-off. Either of these changes helps your credit rating.

Process

Focus on your credit card accounts with the highest interest rates if your pay-off plan is stretched over time. Interest is assessed monthly, so a big chunk of each payment goes to that month's interest charge rather than reducing the actual balance. Consider making the biggest possible payments on your high interest accounts. Move that money to your other accounts once the high rate cards are paid off.