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One of the most effective ways to improve your credit scores is by paying off your credit card debt. Credit card utilization is a big credit score ranking factor.
In fact, both of the most common credit scoring models (FICO and VantageScore) has credit card utilization as a primary factor in determining your credit scores.
While FICO claims credit card utilization makes up around 30 percent of your credit score, VantageScore claims it accounts for 23 percent of your credit score.
Before we dive deep to answer your question, it’s important to know that credit scoring models differ. Two great examples of that is FICO and VantageScore, which is 2 of the most commonly used credit scoring systems.
You can get your FICO scores by signing up to FICO. You can get your VantageScore credit scores by signing up with Credit Karma.
In just about every scenario out there, if you’re going to pay off your credit card debt, you’re going to see your credit scores increase.
If you’re aiming to get your credit scores higher, paying off a credit card or two can certainly help you get moving in the right way.
Just as we said earlier, credit card utilization is a big factor in determining your credit scores. If you don’t know what credit card utilization is, it refers to the percentage of the credit card balance you’re using.
For example, let’s say I have a credit card with a $5,000 limit. I have a balance of $4,000 on that credit card.
My credit utilization ratio is 80 percent as I’m using 80 percent of my total balance.
If I had a credit card with a $10,000 balance and I’m only using $2,500 of my credit limit, my credit utilization ratio is 25 percent. To determine your credit utilization ratio, just use this example and see where you stand.
Here’s Why Credit Card Utilization Is Important To Your Credit Utilization
As we’ve been waying throughout this article, credit card utilization is important and plays a big role in where your credit scores fall (good and bad). The general rule of thumb is that you want your credit utilization ratios between 10-30 percent.
If I have a $20,000 limit and I’m using $15,000 of it, my credit utilization is at a high 75 percent.
If I can make a payment on this credit card and get my balance down to $5,000 (which would be a 25 percent utilization ratio), my credit scores are likely to take a good jump higher.
See how that works?
Your goal is to get your credit utilization down to 10-30 percent.
Should I Get My Credit Card Utilization Below 10 Percent?
General rule of thumb would be yes, but every scenario is different.
The only way to know for sure how paying off your credit cards will help your credit scores is by monitoring your scores.
We’d recommend getting sign up to one, the other or both. It just depends on which credit scores you want to monitor.
For FICO, you can sign up with the FICO website. For VantageScore, you can join Credit Karma to see those scores.
Creditors use different credit scoring systems, so if you’re trying to raise your credit scores for a credit card, loan or something else, it would be smart to see what credit scoring model they’re using.
Besides FICO and VantageScore, creditors can also use different versions of those scoring models, a lot of people are not aware of that.
Again, if you’re going for a specific loan or card, ask which model and version they’re using to determine their credit scores.
How Many Points Can My Credit Score Rise Paying Off Credit Card Debt?
Now that you know a few different variables for determining credit scores, we want to get a little more specific to give you a ballpark estimate of how much your credit can increase if you pay off your credit card debt.
As for your credit scores, credit utilization only makes up one factor of your credit score.
The reason we want to bring this up is because if you’re lacking in the other areas when you pay off your credit card debt, the increase may not be as much as one would think.
Predicting your credit score increases without knowing your credit profile is next to impossible.
Even so, we’re going to use a few examples to give you a ballpark number.
Mike decides to go ahead and pay off the total balance of the credit card.
He has over 5 years of credit history.
Over the last 3 months, she’s applied for 3 new credit cards.
Eva has 4 other credit cards that have a total credit limit of $20,500.
Eva also has a mortgage loan and car loan, a busy credit profile but pays on time.
You may be wondering, why did the credit score drop?
One Last Tip
Pay attention to your credit card types as all credit cards are not equal.