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Will Paying Off Credit Cards Hurt Your Credit Score?

Maintaining a good credit score is an essential part of a solid personal finance plan. Also important is paying off any debts you may owe. What happens, however, if you pay off your debt and your credit score falls sharply? Here’s what you need to know about paying off your credit card debt and a dropping credit score.

Can Paying Off Your Credit Card Hurt Your Credit Score?

It seems counter-intuitive that paying off a credit card bill can hurt your credit score – and that’s because it can’t. Still, many consumers who remove all their credit card debt are finding their credit scores falling, but why?

The reason doesn’t have anything to do with the debt itself. After all, paying down debt also reduces your credit utilization. Keeping your credit utilization below 30% is key to maintaining (and raising) your credit score. The reason why consumers who pay off their debt are finding their scores plummet is that they are also closing their credit card accounts.

How Can Closing a Credit Card Account Hurt Your Credit Score?

When an individual closes a credit card account, it impacts their credit score in two ways.

First, closing an account increases the person’s credit utilization. When a credit card account is closed, it no longer counts towards overall credit use, thus harming a credit score.

Since credit utilization is the second most crucial impactor of a credit score (after payment history), keeping accounts active is essential for raising a credit score. Even if the credit card account has a zero balance, keeping it open is best for maintaining a good credit score.

Second, closing a credit card account impacts the average age of a person’s credit. While the average age of credit is nowhere near as important a factor as credit utilization, it still can lower a credit score in the short term.  

What Do the Credit Bureaus Say?

Opting to keep a credit account open with a zero balance might sound strange, but it is something the major credit bureaus (Experian, Equifax, and TransUnion) encourage.

VantageScore

“Having a zero balance does not cause any negative impact to your score. You get the maximum value for having your utilization at zero — for having all that credit available to you,”
vantagescore
Sarah Davies
SVP, Analytics at VantageScore

VantageScore is the second-most-popular credit scoring model, behind Fico Score. The VantageScore model was the creation of the three biggest credit reporting agencies as an additional resource for lenders.

Experian

“Some mistakenly believe that closing their credit card accounts once they are paid off will help their credit scores, but closing a revolving account reduces your available credit. If you still have a balance on one or more other credit card accounts, closing an account with a zero balance will cause your overall utilization to increase — and that will cause your credit scores to go down, at least temporarily.”

Should You Always Leave Old Credit Accounts Open?

Since closing accounts can hurt a credit score, you should always keep all your accounts active. However, it isn’t always that simple.

Before keeping any account open – even with a zero balance – always ensure to consider every aspect of the account. The most important consideration is the cost of keeping the account active.

If a credit card has an annual fee, it might be more of a financial burden to keep the account open than it is to take a short-term credit score hit. In instances where a card has an annual fee, check with the issuer to see if there is a no-annual-fee version of the card. If there is a fee-free version, consider downgrading. If not, take the time to think if the annual cost of keeping the credit card active is worth it.

Conclusion

Summing it all up, paying off your credit card balance won’t hurt your credit score, per se. Instead, it’s the myriad of other factors associated with paying off debt that impact your FICO or VantageScore scores.

Keeping your accounts active – even with a zero balance – can help maintain (and improve) your credit score but must be weighed carefully against the negatives, such as any annual fees for keeping a credit card account.

If you pay off your credit card in full, keep the account active, and still find your score dropping, consider checking your credit report to see if any other factors are harming your score.

About: Cory
Cory Santos

Cory is BestCards.com's "Jack of all trades" and resident rewards expert, covering all facets of the points game – especially travel, hotels, and airlines. In addition to credit cards, Cory finds that jogging, cats, and memes are essential parts of a balanced day.