Question: I have a credit card that I can pay off in full, but how long after that will my credit score go up? I need to apply for a personal loan for school, but I need my score to go up before I do that. I know it varies by the source, but about how long after I completely pay off my card will my credit score reflect it?
— Samantha in Tennessee
[Debt.com founder Howard Dvorkin]
A reader asks, I have the money to pay off my credit card now, but am not sure it’s worth it?
Well, Samantha it is most definitely worth it! When you pay off a credit card, your credit score improves. Why? Because five factors determine your credit score, and one of the biggest is the amount of debt owed. It is 30 percent of your overall score and the biggest chunk is payment history, which is short for – I pay my bill on time.
But more important than your credit score going up is that your debts are going down.
The AVERAGE credit card interest rate TODAY hovers around 17 percent. If you put all your money in the stock market – obviously a bad idea – you’d be hard-pressed to earn 17 percent on your investments. But if you pay off a credit card bill that has a monthly balance of $5,000, you could save up to $85 a month.
That’s $1,000 a year! And you don’t have to do anything to save that money, other than pay off a debt right now. If you don’t think you can afford to do that, call Debt.com today. We know how to make it happen.
Howard Dvorkin answers…
Short answer: There’s no way to know for sure, because the three credit bureaus — Equifax, Experian, and TransUnion — that decide your credit score have never explained their process in such detail.
Shorter answer: About 30-45 days, give or take. Most credit card companies update their account information once a month.
Longer answer: Depending on your circumstances, paying off your credit card won’t make much of a difference for a personal loan — which might be an unwise decision, anyway.
Let’s break this down.
First, there are many ways to boost your credit score. Check out How to Improve Your Credit Score Step-by-Step. If you really need to raise your score in a hurry, check out all your options.
Second, your credit score is based on five factors, but all of them aren’t equal. For instance, “payment history” is the biggest at 35 percent. That’s just a fancy way of saying, “I pay my bills on time.” The next biggest is “debt owed” at 30 percent. So paying off a credit card will definitely help you, but it’s still only 65 percent of the total.
It can also cost you, because 15 percent of your score is “length of credit history.” The credit bureaus like to see that you can maintain long-term relationships with your creditors. So in this case, if you pay off the card and close the account, that’s bad. You can, of course, leave the account open. Learn more at Understanding Your FICO Credit Score.
Third, and perhaps more importantly toward your overall financial situation, I worry about you taking out a personal loan to go to school. I don’t know if you mean college for the first time, or back to school after working for a few or many years.
Either way, I’d first suggest you explore other options, including scholarships. If you apply for many of those, you’re instantly eligible for the Debt.com Scholarship For Aggressive Scholarship Applicants, which is awarded every two months.
All that said, I feel very strongly about this: Anytime you can pay off a credit card and still maintain healthy finances, that’s one of the absolute best tactics for achieving financial freedom. So if you can afford to pay off a credit card, doing so is its own reward.
Have a debt question?
Email your question to email@example.com and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.
The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the opinions and/or policies of Debt.com.