You'll have a credit score if you’ve opened a credit card or taken out student loans. It’s a number typically ranging from 0 to 1000 and signals a consumer’s creditworthiness. Your score is determined by various factors, including whether you pay off debt, your payment history, and the types of loans you take out.
Unfortunately, bad credit follows you, affecting your ability to get a home loan, your loan rates, and the types of credit you can take out. Improving your credit score is, therefore, vital to the future of your personal finance.
Let’s get to the following commonly asked questions:
Generally speaking, paying off debt will improve your credit in the long run. However, the impact on your credit will vary depending on your credit utilisation ratio, i.e. the amount of revolving debts you have divided by the amount of revolving credit available to you. If you’ve reached your credit limit and paid your total balance, your score could climb by as much as 10 points. However, if you’ve used under 30 per cent of the credit available, your score might only improve by a couple of points.
There are other factors in play besides your credit utilisation rates. Paying off your credit card debt will only boost your credit score if you pay using your own money. Taking out debt consolidation loans to pay off your credit cards won’t improve your credit score–although it can cut the interest you pay. To start saving the money you need to pay off your debts, open a high-interest savings bank account, and start growing your assets.
Note: If you’re looking for ways to save money, please visit WeMoney’s Offers to find out how we can help you save money, consolidate personal loan debt, and raise your credit scores.
There’s a common misconception that paying your debts in full will help your credit score. The truth is there’s no guarantee of a credit score change. Paying off your debt hurts your credit score in the short term, and you could see a score drop after payment. In the long term, it is good to pay your debts as it lowers your credit utilisation ratio, but you should always leave a line of credit open to build your score over time.
Related: How to refinance your car loan?
As we’ve said, paying off your debts in one go can negatively impact your credit score. Here’s a breakdown of why your score might have significantly dropped:
Read our recent article ‘how can you revive your credit score?’ for ways to counteract lowering your credit.
Important: If you’re looking to find out how much your current repayments are, or estimate future or ongoing costs, then head on over to the calculator section, which has calculators for home repayments, loan comparison, and personal loans.
Getting an 800 credit score means you’ll have one of the best FICO scores possible, which will take a lot of financial planning. To achieve an 800 credit score, you’ll need to make many positive financial decisions, likely have a long credit history, and only use a small amount of your utilisation rate. Before aiming for an 800 credit score, check your existing credit score range to identify the easiest ways to start building credit.
Here’s the best way to achieve excellent credit and get an 800 credit score:
So, does paying off a loan improve credit? Well, yes and no. While paying off your debts in one go can hurt your credit in the short term, it allows creditors to see that you’re reliable and can pay your bills on time.
There are pros and cons to paying your debts in one go, but we recommend keeping a few lines of credit open to benefit your score.
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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs, or financial situation.