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Topics addressed on November 10, 2010:
Paying off all debts will help scores in the long run
I was told by a realtor that paying off everything on my report will cause my score to drop. Is this true?
Initially your credit scores may decrease somewhat, but generally, reducing your debts usually results in an overall improvement.
The sudden, large changes introduce some instability in your credit history that temporarily could have a negative effect on your credit scores. However, by paying off your existing balances, you may greatly reduce your utilization rate, which is a major factor in credit scoring systems.
Your utilization rate is simply a comparison of your overall balances to your available credit limits. A low utilization rate is considered very positive. If you reduce your utilization rate by paying down balances it can often result in an overall improvement in your credit scores.
Just be sure you pay them down several months in advance of applying for a mortgage and give your credit history time to stabilize. But, don’t stop using credit completely. Remember that you have to demonstrate that you can manage it well or else you have no recent activity to score.
Even if you have collection accounts or late payment in your credit history you should work to pay off existing balances. Doing so won’t necessarily have an immediate or significant positive impact on your credit scores. However, eliminating those outstanding debts is the first step in taking control of your finances and eventually rebuilding a strong credit history.
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- The "Ask Experian" team