Having a credit score higher than 700 opens up your ability to get loans and credit cards at favourable rates. One of the factors in determining your credit score is how much debt you carry. In general, the lower your debt, the higher your credit score will be. So if you can pay off your credit cards while keeping them open, you could see your credit score rise more than 100 points.
Factors In a Credit Score
Your FICO credit score can range from 300 to 850. This number comes from a total of five areas: Payment history (35 per cent or up to 193 points), amounts owed (30 per cent or up to 165 points), length of credit history (15 per cent or up to 82 points), new credit (10 per cent or up to 55 points) and types of credit use (10 per cent or up to 55 points). Credit scores are used to identify people who are good credit risks, which are those people with credit scores of at least 700.
Debt to Credit
To figure out how much your credit score will increase if you pay off your credit cards, you need to understand how the credit score views your debt. Divide the total amount of credit you're carrying with the total of your credit lines. The result is your debt-to-credit utilisation. For the best rates, you want your utilisation rate to be no more than 0.30 or 30 per cent of your total credit.
Changes in Score
Credit Karma surveyed 70,000 credit scores and compared the scores to the utilisation rates. Each 10 per cent change in your credit utilisation will change your credit score by 15 to 25 points on average, but the Credit Karma survey did not take into account other factors. According to the "amount owed" factor of your credit score, each 10 per cent change in your utilisation score is worth 17 points on your credit score. However, what the Credit Karma survey did show was that totally paying off your revolving credit debt actually caused a drop in the credit score compared to people who have a utilisation rate in the single digits.
Keep It Gone
If you pay off credit cards in full each month, it does not mean that your utilisation rate will be zero. This is because you don't know when the credit card reports balances to the credit agency. It could be reported before your balance shows as being paid off. Also, according to the Credit Karma survey, carrying a small amount of debt from month to month is not a bad thing. Also, don't close accounts you don't use because this will increase your utilisation rate since your total credit is reduced.