Does Paying off Credit Cards Every Month Improve Your Credit Score?

Your FICO credit score is based on the credit data contained within your credit report. The Fair Credit Reporting Act gives consumers the right to dispute inaccuracies in a credit report. This is the first step to ensuring that your credit score is as high as possible. If you use credit cards, it's important to understand if paying them off each month will help improve your credit score.

FICO Scores

Thirty percent of your FICO score measures how much debt you have. In the calculation of your score, it considers your credit utilization ratio. This is the difference between how much available credit you have versus how much debt you have. The higher the ratio, the more debt you have and the lower your score. The lower the ratio, the less debt you have and the higher your score. FICO scores run from 300 to 850 and the higher a score is, the better your credit.

Significance

To improve your score, keep balances low on revolving accounts, including credit cards. Paying them off in full each month, however, may not increase your credit score. Remember, FICO calculates your score based on the information in your credit report. According to FICO, depending upon when the card issuer updates the account with the credit bureau, your account may not report with a zero balance. The reported balance will be included in your credit utilization ratio and this may or may not raise your credit score.

Solutions

If you want to pay your credit card accounts in full each month and ensure that the account reports with a zero balance to the credit bureaus, pay the balance and avoid making any new charges during the following month, according to FICO. This will ensure that the account reports with a zero balance instead of the balance that exists at the time the card issuer updates the account.

Considerations

The largest factor in the calculation of your FICO score is payment history, which represents 35 percent. Making all of your payments promptly will improve your score over time. The higher your score, the more damage a missed payment can have. According to MSN Money, a single 30-day late payment can drop your score between 60 to 110 points. Plus, if you max out your credit card and the issuer reports that balance before you have a chance to pay it off, that could drop your score anywhere from 10 to 45 points.