How much does credit score go up after paying off a credit card?

Impact of Paying Off a Credit Card on Credit Score

Paying off a credit card can have both positive and negative effects on your credit score. While it may seem counterintuitive, closing a credit card can actually harm your score. Here’s why:

Decrease in Total Available Credit

Your credit utilization ratio is the percentage of your total available credit that you’re using. When you close a credit card, you reduce your total available credit. As a result, your credit utilization ratio increases, which can negatively impact your credit score.

Credit Score Calculation

Credit scoring algorithms consider several factors, including your credit utilization ratio. A high credit utilization ratio indicates that you’re using a significant portion of your available credit, which can be seen as a sign of financial distress. Conversely, a low credit utilization ratio suggests that you’re responsibly managing your debt and have ample financial resources.

Benefits of Maintaining Open Accounts

To avoid lowering your credit score, it’s generally advisable to maintain open credit accounts, even if you have zero balances. This is because your credit history, which includes the length of time you’ve had credit accounts open, is also a factor in calculating your credit score. Closing a credit card can shorten your credit history, potentially reducing your score.

Exceptions to the Rule

In some cases, closing a credit card with a low balance and high interest rate may benefit your credit score. This is because the improved utilization ratio from closing the card could outweigh the negative impact on your credit history. However, it’s essential to carefully consider all factors before making this decision.

Conclusion

Paying off a credit card can improve your financial situation, but it’s important to be aware of the potential impact on your credit score. Closing a credit card can decrease your total available credit and increase your credit utilization ratio, which can harm your score. Maintaining open accounts, even with zero balances, is often the best strategy for preserving and improving your credit score.