If you currently have a bad credit score, you might think paying off the entire amount will help your score. However, that isn’t precisely accurate!
In fact, it may slightly hurt your score as well. Let’s see why this happens
Paying off the credit card completely
It’s true that paying off your debt helps your score. However, you can achieve the same results with only paying a particular amount. Shouldn’t you get more advantage for fully paying the debt, then?
Not really; it doesn’t work that way. Your credit score is influenced by a number of different factors. Completely eliminating the debt affects your score in multiple ways.
Credit utilization ratio
Your credit utilization ratio is calculated by comparing the balance amount to the credit limit. For example, if you have a credit limit of $5,000 and you use only $1,000, your utilization ratio is 20%. Try to keep the ratio below 30% for better score.
Paying off the balance does no good for your score. If you have a $5,000 limit and have a balance of $4,000, your ratio will still be 80%. Even if you pay the amount same month, your utilization ration will remain same and that is what affects your score.
So when you pay off your balance completely, it won’t contribute much to the overall score. Instead, you should try to limit yourself to 30% utilization.
Active credit card
If you plan on paying the balance and not using the card anymore, reconsider this. If you don’t use the credit card for a while, your company might close it. This will decrease your credit limit and your credit score.
What else can you do then?
More than paying off the balance at once, paying them on time will boost your score. Make sure you follow the deadlines. It’s a good idea to make the payment before the deadline so it is cleared early.
If your credit reports show that you pay on time, you are considered good at dealing with credit.
Keep an eye on your utilization ratio. Don’t forget the 30% utilization rule.
Make sure to check your credit report at least once year. If you find an error, then report it immediately.
Keep your lines active if you can responsible manage them. A little balance and timely payments is safer than no utilization at all.