How Long After You Pay Off Debt Does Your Credit Improve?

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How Can I Get My Credit Re-Scored Quickly?

If you’re trying to raise your credit score a few points to get approved for a loan or to qualify for a better interest rate, your mortgage lender might be able to pay a fee for a rapid re-score that updates your credit report in two or three days. But only if there’s proof of a credit report error or you’re able to pay off an account right way and need the balance to reflect on your credit report.

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Less debt, better scores — its a win-win

It's always a good idea to pay off credit card debt, regardless of how that debt repayment impacts your credit scores. Unless you have an intro APR deal, any outstanding balance carried from month to month accrues interest — at a high interest rate.

Happily, you don't have to choose between paying down high-interest debt and your credit score — you should almost always see an improvement in your score when you pay off credit card debt. It's hard to predict how much your credit score will change, but hopefully this guide helps you estimate the potential change.

How fast can you raise your credit score?

How fast you can raise your credit score will depend on:

What category on the VantageScore® or FICO® credit score range your credit score currently sits

If your score is very low, even a small sign of improvement in your payment history and reducing card balances might increase your credit relatively fast. But it will take more than paying your credit card bill on time for a month or two to really move your score into a range that’s considered good enough to get unsecured credit cards:

  • Developing a solid payment history
  • Keeping your card balances at less than 30% of each card’s credit limit

How long you’ve been trying to improve your credit score

Although time is of the essence to improve payment history, there are some very powerful moves you can make to see noticeable signs of improvement within weeks:

  • Checking your credit report for errors and disputing them
  • Paying down a balance on a credit card to zero
  • Improving your utilization ratio by paying all balances down to less than 30% of credit limit

Whether you have recent missed payments or defaults on your report

Missed payments can stay on your credit report for seven years and bankruptcies for 10. You will more than likely need to re-establish a history of making payments on time, as well as reducing your principle debt every month, by paying more than the minimum payment due. Although missed payments stay on your report for seven years, their impact fades over time. All may not be lost if you’ve missed your payment by a few days. If the missed payment is an exception rather than the rule, then pay the bill as soon as you can and ask the lender if they could refrain from reporting the late payment to the bureaus this one time. There’s no guarantee this will work, but it might–you could set up automatic payments in return, as a goodwill gesture. Just be sure that you catch that missed payment as soon as possible, because its impact on your credit score will get worse with every day it’s in default.  

Problems with Credit Reporting

Here’s where it gets complicated. Some businesses only provide information to the CRAs when an account is past due (60, 90, 120 or 180 days) or has been written off and/or turned over to a collection agency. Creditors will write off a debt when it is deemed uncollectible.

Some of these creditors include:
  • Utility companies
  • Local retailers
  • Landlords and property managers
  • Insurance companies
  • Magazines and newspapers
  • Doctors and hospitals
  • Lawyers and other professionals.

The three reporting agencies are making increasing efforts to gather monthly information from utility companies, phone companies and local retailers. That increases the amount of data in an individual’s credit profile, which cuts down on the guesswork.

Tips for improving credit score after paying off debt

While paying off your credit card debt is important, what matters more is on-time payments and your utilization rate. Many times, borrowers will ignore these factors, thinking that clearing up their debt as quickly as possible is the key to a stellar score. But there are a few other methods to consider:

  • Be strategic with the order in which you pay off your debts. Personal loans and credit cards often have higher interest rates than mortgages, car loans and student loans. Paying off those first not only helps keep your credit utilization in check, but will also save you money in interest. You can also use a debt paydown calculator to help decide what order it makes sense to tackle your debts.
  • Check your credit utilization. If you’ve paid off your debt and your credit score went down, look at just how much of your credit you are using. If it’s above 30 percent, you might consider charging less each month. If that isn’t an option, you could speak with your issuer about increasing your credit limit. Both of those should help increase your credit score.
  • Open another credit card. While opening accounts could temporarily lower your score due to hard credit checks, opening a new card could increase your total available credit and spread your charging among several cards.

What goes into my credit score calculation?

Every consumer's credit history is unique. And most credit scoring agencies don't publish their formulas.

However, FICO — the most commonly used credit scoring agency — does publish what types of data it considers, and how much it weighs each factor.

Here are FICO's official scoring factors:

  • Payment history (35% of score)
  • Amounts owed (30% of score)
  • Credit history length (15% of score)
  • Credit mix (10% of score)
  • New credit (10% of score)

To understand your credit score, ask yourself these five questions:

  • Do you pay all your debts on time every month? (Payment history)
  • Are you maxing out your credit cards? (Amounts owed)
  • Do you have a solid history of paying back debt? (Credit history length; older is better)
  • Do you know how to manage a variety of types of debt? (Credit mix)
  • Have you applied for several new loans, credit cards, or other forms of credit recently? (New credit)

At a glance: How credit scores factor in collection accounts

VantageScore

3.0

VantageScore 4.0 FICO Score 8 FICO Score 9
Ignores paid collection accounts

Ignores medical collection accounts that are less than six months old

Weighs unpaid medical collection accounts less heavily than other types of collection accounts

Ignores small-dollar “nuisance” accounts that had an original balance of less than $100

Treats medical collection accounts, including those with a zero balance, like other collection accounts

Ignores paid collection accounts

Weighs unpaid medical collections less heavily than other types of collection accounts

Benefits of Paying Off Collections

Though your credit score will not automatically improve when you pay off your collections, there are certain benefits to it:

  • For overdue medical or credit card payments, you avoid a debt collection suit.
  • You don’t have to pay the debt collector’s interest costs. Debt collectors acquire and sell accounts all the time, and they can keep charging you fees and interest on accounts they have bought.
  •  Your credit record may show “settled” or “paid in full.” Lenders who consider your credit history and your credit score may be positively impacted by these labels. An individual who repays a significantly overdue account compared to someone who does not demonstrates greater financial discipline and stability.
  • Take advantage of the new FICO® Score methodology. Although FICO 9 is being phased in gradually, most lenders will ultimately utilize it. Medical bills are given less weight in this approach, while paid accounts in collections are wholly ignored.

Should I apply for another loan?

If you have paid off a debt and are looking to keep up your credit score, you may be wondering what you can do. If you close a loan, it may seem like opening another loan will keep your credit score points high. However, applying for another loan may only help your credit score in certain scenarios.

If the loan you closed was held for a while, meaning you had a long credit history with that loan, opening a new loan won’t help with any credit score points lost. A new account won’t bring you any wins with credit history length.

However, if paying off a loan means you lose some diversity in your credit portfolio, applying for certain types of loans could help your score. You get some points for having different types of credit (i.e. credit cards, auto loans, student loans, home loans, etc.). If the loan you pay off is the only one you have of its kind, you could gain some points back by opening a new type of loan. For example, if you pay off your car loan and are left with only credit cards, consider applying for a different type of loan.

A bigger contributing factor than credit mix for your credit score is whether you can make payments on time. If applying for a new loan will impact your ability to make any payments on time, you shouldn’t risk applying for the new loan.

How Much Can a Collections Account Affect Your Credit Score

Whenever a collection appears on your credit report, it can lower your credit score by approximately 110 points, bringing it from fair to bad. You might lose even more points if your credit score is high to begin with.

Potential lenders will know that you have defaulted on a loan and that you could represent the same risk if they let you borrow money through them.

Negative Items

Just as responsible spending and debt repayment can benefit your credit for years to come, negative items on your credit report can hurt your score. Most negative items stay on your credit report for seven years, but others can last a decade. Here’s what to expect:

  • Late or missed payments: When a significantly late payment on a loan or line of credit is reported to the credit bureaus, it can stay on your report for up to seven years.
  • Collections: Debt that’s past due enough that it’s sent to collections will be noted on your credit report and remain there for seven years. Collection accounts can have a significant negative impact on your score.
  • Bankruptcy: Filing for bankruptcy can significantly hurt your credit score, and for a long time. Chapter 13 bankruptcy remains on credit reports for seven years, while Chapter 7 bankruptcy sticks around for 10 years.
  • Other negative marks: Credit reporting agencies can also report foreclosures, repossessions and debt settlements for up to seven years since these all indicate that credit wasn’t paid back as agreed.

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