Does Paying Off Your Credit Cards Help Your Credit Score

Does paying off credit card help credit score
BY Rebecca Lake
Feb 15, 2023
Key Takeaways:
  • Paying off credit cards can increase credit scores.
  • Applying for new credit cards could cost you credit score points.
  • Late payments can damage your credit scores.

Credit scores tell lenders about your experience with credit. But does credit card debt affect credit scores?

Credit card debt can affect your credit scores, but it doesn't always. The most important thing to keep in mind is that paying down credit card debt is a good thing for credit scoring purposes and saving money on interest. 

Wondering exactly how credit card debt affects credit? Here are three possible answers to that question. 

Yes: Why your credit score can increase when you pay off credit card debt

First, keep in mind that you can raise your credit scores by making payments on time every time, as payment history carries the most weight for scoring. Scheduling automatic payments to your credit cards is an easy way to stay on top of your due dates. 

The next most important factor is credit utilization. That’s a fancy way of saying how much of your credit limit you're using. If you have a $500 balance on a card that has a $1,000 limit, your utilization is 50%.

Different credit scoring models, including FICO and VantageScore, take your credit utilization into account. 

Creating a wider gap between your balances and your credit limits can improve credit utilization and potentially boost your credit scores. Of course, there are other factors, but generally speaking, as your utilization (balance) goes down, your credit score goes up.

So how do you do that?

If you have extra cash on hand, you could always make a lump sum payment against your debts. A tax refund or bonus from work, for example, could help you wipe out a large chunk of your debt in one go. 

Otherwise, you’ll need to choose a debt payoff strategy.

Debt payoff strategies

Implementing a debt payoff strategy is a good place to start. The debt snowball method and the debt avalanche are two popular options. 

Both methods have you order your debts, then apply as much money as possible to the first debt on the list, while paying the minimums to everything else. Once you pay off the first debt, you roll that debt's payment over to the next debt on the list. You keep doing that until all your debt is paid off. 

Not sure which one to choose? Here's how they compare.

Debt Payoff FeatureDebt SnowballDebt Avalanche
Pay off debts in orderFrom lowest balance to highestFrom highest interest rate to lowest
MotivationHelps you stay motivated by creating small wins early onMay not provide the same level of early motivation as debt snowball, but can still be motivating as you see your highest interest debt being paid off
Interest SavingsMay not result in the lowest amount of interest paid over time, but can still help you pay off debts quicklyCan help you save more on interest over time by tackling high-interest debt

Pro tip: Don't close your credit cards once you pay them off

Going back to utilization for a moment. Let’s say you had two credit cards, each with a $500 balance, and each with a $1,000 limit. Right now your utilization is 50% for each card and overall.

If you pay off one card, your utilization is still 50% on the other card, but your overall utilization is now only 25% ($500 owed, with $2,000 in credit limits). And it’s zero on the paid off card, which is even better. If you close that paid off card, your overall utilization goes back up to 50%.

If you're paying off cards as you zero out balances, don't shut them down right away.

Instead, consider keeping the cards open and active. You can do that by making one small purchase every few months, then paying it off right away. Or set up a small bill to be auto paid from your credit card, and set your credit card to be auto paid from your bank account.

Either usage strategy can build a positive payment history and it'll keep the credit card company from closing the account due to inactivity. 

Probably: Why your credit score can drop in the short term

Paying credit cards on time can help your credit rating but high interest rates could keep you from paying off balances at a faster pace. In that scenario, you might consider a 0% APR balance transfer offer, debt consolidation loan, or home equity loan. 

Transferring balances or consolidating them with a loan could save money on interest and help you pay off debt faster. There is, however, a catch. 

Opening new credit card accounts can trigger a credit inquiry. An inquiry means someone pulls your credit report.

Hard inquiries show up on your credit history and are factored into your credit scores. Each new inquiry can trim a few points off your score

So how can you avoid that? Here are a few tips for consolidating debt while minimizing negative credit score impacts.

  • Shop around. If you're interested in debt consolidation loans, take time to scout out rates, fees, and loan terms from different lenders before you apply.

  • Get preapproved. Lenders might offer preapproval quotes so you can get an idea of what loan terms you qualify for. Just remember to check and see whether preapproval requires a hard credit check.

  • Limit applications. Even one hard inquiry could affect your score. If you're planning to consolidate debt, it's better to apply for just one loan or balance transfer offer versus several. 

Pro tip: Avoid taking on new debt after consolidation

Consolidating debts, either with a loan or balance transfer offer, can help your credit scores in the long run if you're steadily paying down what you owe. On the other hand, closing your cards when you pay them off, then running up new debt could work against you.

Not only can new credit inquiries hurt your score, but you could also affect your credit utilization if you're carrying high balances on your new cards, relative to your credit limits. 

Here's one more thing to know: Checking your own credit reports won't hurt you.

When you pull your credit reports, that's a soft inquiry and it won't show up on your credit history. In fact, checking your credit reports regularly can be a good way to see what's helping your score or what's hurting it at any given time. 

No: Why your credit score could drop (but you can rebuild it)

If you intended to pay off your balances but now you can’t, because of a financial hardship, you may need to try debt negotiation. That’s when the creditor agrees to accept less than the full amount you owe.

When you pay off a debt this way, it is reported negatively on your credit report, similar to a collection account.

Generally, creditors don’t agree to discount what you owe until they can see that you’re already struggling. That often means your accounts are already in default. It’s that default or collection status that hurts your credit the most. Payment history is the most important factor in credit scoring. If you pay late or stop paying altogether, your scores will probably suffer a serious blow. 

Not only that, but your creditors might sue you to collect what's owed. While judgments no longer affect credit scores, they can still affect your ability to get credit. Not to mention, your creditors might garnish your wages or levy your bank accounts to satisfy the judgment.

Anyone can negotiate their own debts, but some people find it overwhelming or confusing. In that case, there are professionals who can walk you through it. Here’s how professional debt negotiation works:

  • You pay into a dedicated account managed by the debt negotiation company each month 

  • The debt negotiation company works with your creditors to reach a settlement agreement

  • Once a settlement is agreed, the debt negotiation company uses funds from your dedicated account to pay it. The debt negotiation company’s fee is also paid out of your dedicated account.

  • Any remaining balance for the debt is forgiven. 

Negotiating debt can help you avoid bankruptcy, which is often a worst-case scenario when seeking debt relief. Bankruptcy can stay on your credit reports for up to 10 years.

When does it make sense to choose bankruptcy vs. debt negotiation? Here's how to compare them.

Debt NegotiationBankruptcy
Allows you to pay off debts for less than what’s owed.If you qualify for Chapter 7, you might be able to erase debts without paying anything, but you could lose some assets. If you qualify for Chapter 13, you’ll start a 3-5 year payment plan.
Late payments can negatively impact credit scores, though the impact can fade over time.It may be difficult to qualify for new credit in the first few years after filing bankruptcy.
Debt negotiation companies can handle the process of working out agreements for you.Bankruptcy is a legal process that takes place in federal court.
You may need a certain amount of debt to qualify.Eligibility is based on a means test, which measures income and your ability to pay.

Talking to a credit counselor or a debt negotiation specialist can help you decide whether either one makes sense for you. You can go over your budget, debt, and financial situation to figure out the best way to manage credit cards if you've fallen behind. 

Pro tip: Check your credit reports regularly

If you're negotiating debt, it's important to review your credit reports routinely to make sure those debts are being reported properly. If you see that a settled debt is still being reported as past due, for example, you can open a dispute with the credit bureau that's reporting the information. 

The credit bureau is required to investigate your dispute. If it's determined that there's an error on your credit report, it has to be removed or corrected. Either way, that could help add some points back to your score.