Does Paying Off Credit Cards Improve a Credit Score?

If you're ready to improve your credit score once and for all, there's no better way to start than to pay off your existing credit cards. Not only will potential lenders start to see you as creditworthy, but you'll also feel the personal pride of getting your finances under control. And although it's important to pay off other lines of credit like student loans and mortgages, your score will actually improve more if you pay off your credit card debt first.

Improving Credit Score

Your credit score is made up of many things: type of active and inactive credit accounts, credit-to-debt ratio and the length of your credit history. However, the factor that has the highest impact on your score is your payment history. Payment history indicates whether you've paid your bills on time and how much you paid. According to MyFICO, payment history accounts for 35 percent of your credit score---so the quickest way to boost your score is to pay off as much debt as you can, and always on time.

Strategies for Paying Off

If you're ready to start paying off those credit cards, it's easy to feel overwhelmed by juggling multiple bills. Try paying off your cards that are closest to their limits first, since these look the worst to credit scoring companies. Although paying down the cards with the highest interest rates first will save you more money, it won't help your credit score as significantly as using the former technique.

Help With Paying

In some situations, you may want help paying down your credit cards. This is where a credit counseling agency can help you. Find an in-person counselor (to avoid signing up with a fraudulent company) to help you set a budget or enroll in a debt management plan if you're seriously in debt. If you go the debt management plan route, you'll pay one amount of money to your credit counselor who will use that money to pay each of your debts. Sometimes, the credit counselor will be able to reduce your interest rates or fees, meaning you'll be able to pay off your credit card debt faster than if you attempted it alone.

Paying and Closing

Though it may seem like common sense to close accounts after you've paid them off, it's better to leave them open. Closing unused accounts or freshly paid-off accounts can actually hurt your credit score. Since credit scoring companies give you more points for cards that have been open longer, it's better to keep your older accounts open once you've paid them off. Additionally, closing credit accounts hurts your credit-to-debt ratio---another important factor companies use to determine your credit score.