When you’re getting close to the debt payoff finish line, it’s fun to imagine all the aspects of your life that will improve. Soon you’ll have less worry and more money to put towards actual fun things. The ball and chain around your bank account will finally be broken.
But there’s something else to look forward to as you near debt payoff: an improved credit score.
A higher credit score means any future debt can come cheaper, you can potentially get lower rates on insurance, and future employers who wish to see your credit report will know you’re not overly indebted.
The question is, just how long after paying off debt will credit score improvement take place? It can happen in as little as one to two billing cycles, but there are other factors that come into play. Here’s how to understand the improvement you will see and when you’ll see it.
First, know the factors that influence your credit score
To understand how long after paying off debt it takes for your credit score to improve, you should first know what makes up your credit score.
There are two main credit scoring sources: FICO and VantageScore. Each offers a variety of scores based on different models, and lenders add their algorithms on top of them. But the most important factors for each score remain the same.
Here are the factors that make up your FICO score:
And the factors that determine your VantageScore:
Here’s why these factors matter to your debt payoff:
- Paying off debt won’t erase your past payment history — so if your debt is paid off but you missed payments in the past, they’ll still show up on your credit report and impact your score.
- The length of your credit history can decrease if you pay off an account that then closes, such as with a loan, which can have a slight negative impact your score.
- The amount of credit being used will get a huge positive bump when you pay off your debt.
Next, understand what type of debt you have
Different types of debt will affect your credit score differently when you pay them off. Let’s take a look at what they are and why.
Revolving credit is a line of credit that you keep open as long as you’d like and can use as much as you want, so long as you don’t hit your credit limit. The most obvious example of this is a credit card.
Your revolving credit is factored into your score using the credit utilization ratio, or your balance compared to your credit limit. When it comes to this ratio, the lower the better.
Therefore, paying off a credit card or line of credit can significantly improve your credit utilization and, in turn, significantly raise your credit score.
Installment loans are fixed sums of money you borrow for a fixed amount of time, although you can pay them off early if you choose (though some lenders charge a fee for this).
Examples of installment loans include auto loans, mortgages, and student loans. Although not part of your credit utilization ratio, these loans impact your credit score as part of your “total debt.”
Paying off an installment loan can help your credit since it reduces your overall debt, but it can also hurt your credit if you don’t have any other loans or lines of credit.
This is because of your “credit mix,” a factor in your score that improves when you have more than one type of credit. However, credit mix only makes up 10 percent of your score. In the end, taking a hit on this one factor might be worth it for the money you save once the debt is paid off.
An account goes into collections if you default on your debt and your lender sells it to a debt collection agency. This can happen with loans, lines of credit, or even unpaid bills.
So why the special distinction? Collections accounts, even after they’re paid off, remain on your credit report for seven years, starting from the day your account first went delinquent.
Although it’s beneficial to show that you paid off the account, the negative aspect of this won’t just drop off your credit report when you do repay the debt.
Debt settled for less than the full amount owed will show up on your credit report as such and will do so for seven years, just like collections accounts. For accounts that were never delinquent, the seven years starts on the day you settle the account. If the account was delinquent, the date it first became delinquent would be the starting date.
If settling a debt is the only way to pay it off rather than have it go into or remain in default, then it’s better for your credit to go ahead and settle it. That said, a settled account doesn’t look as good on your credit report as an account that’s been paid in full.
Here’s how long after paying off debt a credit score can take to improve
Theoretically, the impact on your credit score when paying off debt should be immediate, right? Not so fast.
Even though you can see a zero balance today, that balance won’t be reflected in your credit report and credit score until your lender reports it.
According to credit reporting agency Experian, it can take one to two billing cycles for this to happen after paying off a credit card. Lenders report installment loan activity to credit reporting agencies once per month, so roughly the same timing applies.
And although a paid-off account will show on your credit report (even after it’s closed) for 10 years, the negative effects will stay too. For example, late payments on that paid off account will still be visible on your credit report for seven years.
The good news
With VantageScore, the impact that negative items have on your credit score goes down as time passes.
Looking at the chart above, you can see the downward slope of the negative items on your score as the months and years go on. (Note: The timeline on the chart is not to scale.) And, according to Rod Griffin, director of public education for Experian, the same is true for FICO scores:
“Late payments will remain in the history for seven years from the original delinquency date of the missed payment. However, the further in the past the late payment occurred, the less impact it will have on credit scores.”
What’s more, Griffin highlights the way positive activity on your accounts can help:
“Catching up on late payments and keeping the account current in the case of credit cards, or paying off an installment loan in full, will help rebuild your credit history and improve your scores as the late payments fall further into the past.”
What you should focus on
In the effort to build good credit, it can be difficult to understand how to do what’s good for your money while also doing what’s good for your score. Rather than stressing about that, simply do what you can to build good credit, but only as long as you feel you can remain in control of any debt you might take on.
And when you worry about how long it will take after paying off debt for your credit score to improve, remember that the benefits will show up in as little as a month or two. And even though prior negative items will remain for years, their significance downgrades as time goes on.
So, instead of worrying about that, why not focus on your big win? Congratulations on paying off your debt!
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