Ask Resolvly: Can Paying Off Debt Improve Your Credit Score?

By  //  May 10, 2021

Share on Facebook Share on Twitter Share on LinkedIn Share on Delicious Digg This Stumble This

At Resolvly, we know that not all debt types are viewed equally by credit card companies. For example, credit card debt is often seen as a more “risky” type of debt, as it has no end date.

However, other types of debt – depending on how much you owe – can raise or lower your “average owed” between each of your debts. Paying off the “wrong debt” can actually ding your credit score. And because your credit profile can be a big factor in your life, it can be scary when deciding where to place your money.

How Paying Off Debts Changes Your Credit Score

In most cases, paying off debt improves a person’s credit score. However, sometimes making a misguided payment can result in a dip in your credit score. It’s a very common misconception that paying off a debt always makes your credit score go up, no matter how much you pay off or which debt you decide to pay first. This guide will explain the rare cases where paying off a debt might actually make things worse.

You Only Pay Off Installment Accounts

Credit companies like to see a jack of all trades, or, in their case, debts. If you’re paying off your installments on or before their set due dates, that’s generally a good thing. However, if you are only doing this and never putting any money toward your credit card payments, you look a bit unbalanced to your credit card company. Essentially, fixating on just one debt can be a bad look.

10% of your FICO score consists of your mix of credit. Paying off only one source of credit and letting the others continue to grow can put a dent in your credit score.

You’ve Paid Off Your Lowest-Balance Debt

There’s definitely a rush of satisfaction when it comes to paying off debt. However, your credit card company looks at the average amount you owe across all your debts.

If you pay off the debt with the lowest balance, your “average owed per account” amount increases, as it no longer has that small number to drag the average down.

These amounts owed make up 30% of your credit score, so paying off the lowest debt without first lowering what you owe on other credit lines can bring down your credit score.

There’s Something Going on Behind the Scenes

If your credit score suddenly dips, it could be because of a debt you’ve paid off . . . or not. Sometimes a decrease in your credit score could be coinciding with another cause outside of your debt payments. Did you apply for a loan or a new credit card? Perhaps while you’ve focused on paying one debt, you’ve ended up with a high credit card balance.

Resolvly Can Help You to Resolve Your Debt

Credit and paying off debts can feel like an unfair game where the rules are always changing. If you’re feeling lost, it might be time to reach out for some help.

Resolvly, LLC is a Florida Bar-approved lawyer referral service that helps clients nationwide connect with consumer protection attorneys that specialize in debt resolution. Our job is to help you navigate out of these fear-infested waters and put you on the path to financial wellness.

Our agents help consumers compare the different debt relief assistance programs that are available. Every client is given a free consultation and overview of why legal-based debt resolution is the safest and most effective approach. Resolvly helps with credit card debt, personal loans, private student loans, business debt, medical bills, and vehicle repossessions.

Leave a Comment