How Can I Improve My Credit Score if I Paid All My Debts?

A credit score is a three-digit number created from information included in your credit report. While it is impossible to predict the exact impact your credit habits have on your score, you can control whether your credit score increases or decreases. Controlling your debt is the key to maintaining a positive credit rating. Paying off certain debts, however, can be harmful to your score.

Repay All Debt?

There are two primary types of debt impacting your credit score each month. First, installment loans are repaid in monthly installments until the full amount of the debt is cleared such as with a car, mortgage or student loan. Next, revolving accounts include credit card or lines of credit. A mix of installment loans and revolving accounts make the greatest impact to your credit score each month. Repaying your installment loans in full can reduce your ability to earn the maximum amount on your credit score each month.

Credit Utilization Ratio

Your credit utilization ratio is the amount of credit you have available relative to the amount you originally borrow. With a credit card, a credit utilization ratio refers to how much you charge to your credit card relative to your available credit limit. The lower your credit utilization ratio, the higher your credit score increases each month. The closer you get towards paying off your installment loans in full, the lower your credit utilization ratio.

Small Payments

Responsibly using your credit cards is just as important as eliminating debt. Credit cards are not loans. Pay off unaffordable credit card debt and replace it with responsible credit management to improve your score each month. Charge small amounts that can be repaid within one billing cycle to keep your credit utilization ratio low and remain debt-free. Creditors seek low-risk borrowers when issuing new credit accounts. A low-risk borrower does not charge more than he can afford to repay. Repaying your debt in full each month demonstrates to creditors that you understand how to use your credit cards.

Considerations

Becoming debt-free for the sake of raising your credit score is a contradiction. Credit ratings are determined by how well you manage your loans and credit accounts. Without any loans or credit card balances, your credit score improvements are minimal each month. For a boost in your credit score, you need activity on both installment and revolving accounts. If you get to the end of your installment loan period, you can obtain a small personal loan to continue your mix of installment and revolving accounts. However, this option does recreate debt. Determine whether you prefer the maximum benefit to your credit score or to remain debt-free.