How Long After Paying Off Debt Will Your Credit Score Improve?

 December 18, 2020
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As you near the finish line for paying off your debt, you can look forward to an improved credit score.

A higher credit score can boost your chances of getting a loan, line of credit or credit card with a lower interest rate and better terms.

But how long after paying off debt will your credit score improve? We’ll break down how long it’ll take and review the factors that influence your credit score and the types of debt you can have — specifically…

When your credit score improves after paying off debt

The impact can feel like it should be immediate, but that’s not the case. Even if your balance becomes $0 today, it won’t be reflected on your credit report and credit score until your lender reports the payment.

It can take one to two billing cycles — or one to two months. Lenders generally report activity monthly to credit-reporting agencies.

Let’s take a more in-depth look at everything involved.

Factors that influence your credit score

To better understand how your credit score can change after paying off debt, you should know the elements that make up your credit score.

There are two primary credit-scoring sources: FICO and VantageScore. Each has a different model — and lenders have their own algorithms, too.

Several factors impact a FICO Score:

  • Payment history: 35%
  • Amounts owed: 30%
  • Length of credit history: 15%
  • New credit: 10%
  • Credit mix: 10%

Next, let’s break down VantageScore and the role it says each factor plays:

  • Amounts owed: Extremely influential
  • Credit mix: Highly influential
  • Payment history: Moderately influential
  • Length of credit history: Less influential
  • New credit: Less influential

Let’s take a look at a few ways these factors can affect your credit score.

Your credit utilization — or amounts owed — will see a positive bump as you pay off debts. Generally, it is a good idea to keep your credit utilization ratio below 30%. Paying off a credit card or line of credit can significantly improve your credit utilization and, in turn, significantly raise your credit score.

On the other side, the length of your credit history decreases if you pay off an account and close it. This could hurt your score if it drops your average lower.

Long-lasting effects of paying off debt

Paying off debt won’t erase your payment history. If your debt is paid off but you missed payments, those payments could appear on your credit report for up to seven years.

With VantageScore, meanwhile, the impact that negative items have on your credit score goes down as time passes.

Rod Griffin, senior director of public education for Experian, one of the credit bureaus, said the same is true for FICO Scores.

“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,” he said.

Understanding the type of debt you have

Various types of debt will affect your credit score differently as you pay them off. Let’s take a look at a few and why:

Revolving credit

Revolving credit is a line of credit that remains open, or for a preset period. You can use as much as you want up to your credit limit. The most obvious example is a credit card. Home equity lines of credit (HELOCs), personal lines of credit and overdraft protection on checking accounts are other examples.

Your revolving credit is factored into your score using the credit utilization ratio. When it comes to this ratio, lower is better.

Installment loans

Installment loans are fixed sums of money you borrow for a set amount and pay at regular intervals. You can pay them off early, though lenders could charge a fee.

Examples of installment loans include auto loans, mortgages, personal loans and student loans. Many students and graduates wonder: “Does paying your student loans improve your credit?” The answer is yes. Settling your student loans and other installment loans is beneficial.

Installment loans are not part of your credit utilization ratio, but they impact your credit score as part of your total debt. Also, since payment history is important, on-time payments contribute to your score as well.

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 various credit types. Credit mix plays a larger role in your VantageScore than your FICO 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.

It’s also important to note that FICO views installment loans more favorably than revolving debt.

Collections accounts

An account goes into collections if you have not paid your debt and your lender sells it to a debt collection agency. This can happen with loans, lines of credit or unpaid bills, and it can be reported to the credit bureaus and appear on your credit report.

Collections accounts, even after they’re paid off, remain on your credit report for seven years.

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.

Settled debt

Debt settled for less than the full amount owed will show up on your credit report as such 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 or in default and has a history of late payments, 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 — it’s better for your credit to settle it. However, a settled account doesn’t look as good on your credit report as an account paid in full.

What you should focus on

When trying to balance paying off debts with building credit, it can be difficult to understand how to do what’s good for your money while doing what’s good for your credit score.

Rather than stressing, focus on paying your bills and loans in a timely fashion and do what you can to build good credit. These two actions go hand in hand.

Only take on new debt and credit cards if you think you can remain in control of the balances and pay them on time. Otherwise, you risk undoing your good work.

If you worry about how long it will take after paying off debt for your credit score to improve, be patient. Congratulations on paying off your debt.

Andrew Pentis and Alli Romano contributed to this report.