Will Paying Off My Bills Raise My Credit Score?

Reader Question: Will paying off all of my bills raise my credit score?

It can certainly help. But you should be selective with what you pay off first. I would start with your credit card balances. As far as bills go, this will help improve your credit score faster than anything else. And to explain why, I have to hit you with some heavy financial terminology.

Credit Utilization Ratio -- (n) The percentage of your available credit that you are currently using. One of the factors used to determine your score.

Let's say you have two credit cards, and they each have a limit of $10,000. So your total available limit is $20,000 (between the two cards). Now let's assume that you have a balance of $1,000 on each of those cards. So you are using 2K of the 20K in available credit. In this scenario, your credit utilization ratio is only 10% ... and this is pretty darn good. Better than most people in this country!

As you can see by the handy chart below, this single factor (amount owed) accounts for about 30% of your overall FICO credit score. The FICO number, by the way, is the one used by most lenders when considering you for a loan. So it's important.



Now let's assume that you go on a spending spree (kind of like Sarah Palin hitting Neiman Marcus on the campaign trail), and you drive your balance up to $10,000 between the two cards. Ouch! Now you're using 10K of the 20K you have available ... so your credit utilization ratio has gone from 10% to 50%. This will hurt your credit score.

This is why I suggest you start with those credit card balances. When you pay those down, you are also achieving a more favorable utilization ratio. And this will help you increase your overall credit score. Combine this with the fact that most cards have a ridiculously high interest rate (I hate credit card companies, by the way), and you can see the many benefits of paying those things down!

I would keep the accounts open though, especially the oldest accounts. If you close your older credit accounts, you are actually shortening your credit history in the process. And as you can see from the handy chart above, the length of your history accounts for 15% of your FICO score. So pay the balances down, but keep the accounts open -- the oldest ones, at least.

So if you're looking for something to pay off, that's where you should focus your attention at first. But reducing your overall debt is beneficial as well. In addition to improving your life in general, it also improves your debt-to-income ratio ... which is another factor used by mortgage lenders and other creditors when considering you for a loan.

Hope that helps. Good luck!

-Brandon