How Quickly Will Paying Off an Account Affect My Credit Score?

How Will Paying Off an Account Change My Credit Score?

How paying off an account will impact your credit scores depends on your credit history as a whole as well as the type of account that is being paid.

Paying Off a Collection Account

If the account you are paying off is a past-due collection account, you may not see an immediate credit score increase once it's paid off. Whether you see an increase in credit scores depends on the scoring model being used and on the rest of your credit history. Some credit scoring models exclude collection accounts once they are paid in full, so you could experience a credit score increase as soon as the collection is reported as paid.

Medical collections are treated differently than other types of accounts in collections. Some credit scoring models ignore unpaid medical collections or give these accounts less weight than other types of collections. In addition, unpaid medical collections under $500 will not appear on your credit report, so paying these accounts off has no effect on your credit scores.

Most lenders view a collection account that has been paid in full as more favorable than an unpaid collection account. You will likely have an easier time qualifying for credit, employment or even renting an apartment if any collection accounts that appear on your credit history are paid in full. This shows that although you may have had financial difficulties in the past, you have since taken care of any debts owed. For instance, most mortgage lenders will not approve you for a home loan until any past-due accounts have been paid off, no matter how small the dollar amount.

Paying Off an Installment Loan

While it's always good to pay off debt owed, paying off an installment account, such a home or car loan, may result in an initial dip in credit scores since that account is now closed and no longer active. The good news is that any decline is temporary and scores should bounce back up within a month or two.

Paying Off a Credit Card Account

If the account in question is a credit card, paying that balance can improve your credit scores quickly. Just keep in mind that it's usually best to keep revolving accounts open even after you've paid them off. That's because your utilization rate is the second most important factor in credit scoring, right behind making all your payments on time.

You can calculate your credit utilization rate, or balance-to-limit ratio, by taking the total of all your credit card balances and dividing that number by the total of all your credit card limits. Multiply by 100 to see your rate as a percentage.

The lower the utilization rate, the better for your credit scores. People with top credit scores tend to have credit utilization in the single digits. Closing a credit card removes that available credit from the calculation, potentially causing your utilization rate to increase, which in turn can cause your credit score to go down.

The Bottom Line

Have you paid off an account recently? You can check your credit report to see if the account already has been updated and get your FICO^® Score^Θ 8 for free from Experian to see how your credit score has changed. Your free Experian account also includes credit monitoring, so you can get notified of changes in your credit report and track your score over time.