Should I Pay Off Balance on My Credit Report?

Paying off debt always makes you less risky to lenders, but it is not necessarily the best thing for your credit score. Some types of loans need to stay on your report to boost your credit. This, however, does not mean you should avoid paying off loans. Lowering your debt load will make you more creditworthy, even with a lower credit score.

Identification

Normally, paying off a balance listed on your credit report raises your score, because your balances owed counts for about 30 percent of your score, according to the Fair Isaac Corporation. Also, paying off credit card accounts lowers your debt-to-credit ratio -- another factor in the "amounts owed" category of the FICO score.

Potential Problem

Paying off installment loans that have a set monthly bill, like a mortgage on a house, could hurt your credit score by reducing the mix of loans you own -- worth 10 percent in the FICO formula. Once you pay off an installment loan, the FICO credit scoring formula does not differentiate between a borrower who has paid off an installment and someone who never had one. If this is your only loan, paying it off could do significant damage to your credit score.

Considerations

Keeping a debt active may not be the wisest idea if you plan apply for a mortgage or other large loan in the future. Lenders will look at more than just your score when judging an application. They also consider how much debt you have and compare it to your monthly income. If it looks like you cannot tackle any more debt -- usually when your debt payments make up 30 to 40 percent of your income -- you will get denied no matter how great a score you have.

Should You Pay off Balance?

If your goal is to max out your credit score, it may be wise to pay off other debts and keep an installment loan on your credit report. Keep in mind, however, that the installment loan could harm you future financial health. The loan probably has a higher interest rate than any investment vehicle you own, so it is costing you more money in the long term to keep it than pay it off now. Also, the longer you have a debt, the more likely you are to miss payments.