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Does Paying Off a Credit Card Lower Your Credit Scores?

Dear Experian,

I am paying off my credit card bills on time, and my scores are going down. Why?

- SPD

Dear SPD,

Paying off your credit card balances is beneficial to credit scores because it lowers your credit utilization ratio. Utilization, which is the amount of available credit you're using, is the second most important factor in credit scores, right behind your payment history. Lower credit utilization is better for your credit scores.

Some mistakenly believe that closing their credit card accounts once they are paid off will help their credit scores, but closing a revolving account reduces your available credit. If you still have a balance on one or more other credit card accounts, closing an account with a zero balance will cause your overall utilization to increase—and that will cause your credit scores to go down, at least temporarily.

If you are closing your credit card accounts as you pay them off, this could be the reason for the decline in credit scores. Usually, scores will recover after a few months when you close cards. By that time it becomes clear your utilization rate did not change because you took on new debt, but rather that you closed an account.

Know Your Risk Factors

If you've been leaving your paid-off credit cards open, there may be other changes in your credit history that could be affecting you. The easiest way to find out which factors in your credit history are currently impacting you the most is to request your credit score.

When you get your free score from Experian, you will also receive a list of your top risk factors. This will give you insight into what could be lowering your scores and help you to determine what changes you can make to improve them.

Credit Scores May Vary Depending on the Model Used

You should also make sure you are comparing your credit scores from the same lender, bank or credit reporting company each time. There are many different credit scoring models available on the market. Each one can have different criteria and even a different numerical range, so your credit score may vary depending on where, when and how you obtain it.

How Can I Improve My Scores?

If you are trying to improve your credit scores, paying down credit card balances and paying attention to your individual risk factors are both great ways to start. Here are several more things anyone can do to help increase your scores:

  • Bring any past-due accounts current. Payment history is the most important factor in credit scores. If you have any past-due accounts, bringing them current is an important step in improving scores.
  • Pay off any charge-offs or collection accounts. If you've had accounts written off or sent to collections due to non-payment, paying them off can help you begin rebuilding your credit.
  • Make all payments on time. Late payments remain on your credit report for seven years, and missing just one payment can hurt credit scores. Even if you've had late payments in the past, making all your payments on time going forward is key to improving your credit. One way to help ensure payments are made on time is by automating your monthly payments.
  • Add your utility and cellphone payments. When you sign up for Experian Boost , you can add your positive utility and cellphone payments to your credit report, which can improve your Experian FICO® Score . You will receive a free credit score before and after the payments are added so you can see how much your score has changed.

Thanks for asking.
Jennifer White, Consumer Education Specialist

This question came from a recent Periscope session we hosted.

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