It seems intuitive that in paying off your credit card bill, your credit score shouldn’t be negatively affected because you will no longer carry debt in your name. And this is generally true: your credit will probably improve, as a significant portion of your credit score is determined by how much money you owe.
The most influential factor that helps determine your credit score is something called the credit utilization ratio. It represents how much of your credit limit you’re using. If you have a credit limit of $3,000, for example, and you put $1,500 on your plastic, your credit utilization ratio would be 50% in this case. Many experts recommend keeping this number under 30%, though many people do exceed this number. But, once your debt is paid down, your credit utilization ratio improves, meaning this should eventually have a positive effect on your credit score.
You can easily maintain your positive credit score by limiting your spending and ensuring that you keep your credit card accounts paid off and paid off on time. If you have more than one credit card, you may think that it would help you keep your accounts under control by cancelling one of them, but this is not the case. You should avoid closing your credit card accounts altogether, as closing an account can actually lower your score, and be sure to keep any accounts that you don’t often use open and active (even if it’s a small charge). Ultimately, the most important thing is to use your credit cards wisely. Learn more about why closing your credit card account can have a negative effect on your credit score here.
Getting a higher credit limit, which may be offered to you if you have a high credit score, can potentially help you improve your credit situation. That’s because having a higher limit while spending the same amount will give you a lower credit utilization ratio. With that said, applying for a higher credit limit may be considered a hard inquiry, and may cause a temporary dip in your credit score.
Another tip for improving your credit is to not wait until the due date to make your payment. Split your payment schedule into two: one prior to your statement date and then another before your due date.
If you did notice that your score went down, this result might not actually have anything to do with your credit card account at all. The reality is that there are a number of factors and different information that go into creating your credit score. For example, if you are someone who frequently monitors your credit score and you notice that your score changed even though the only difference is a zero balance, this still might not be the cause of your lowered score. There may be information that is not obvious to you, with certain things changing behind the scenes.
Another example is that if you check your credit report before all the information (such as your payment) can be reported to your credit bureau. Your credit bureau may collect information at a different point in the month than another one. As well, different credit bureaus may also use different credit scoring models. All of this, plus a number of other factors, could give you a lower score than you might expect.
The takeaway is that good credit card practices are important. Things like paying off your credit card bill, paying your accounts off on time, and ensuring that you spend within your means will help you maintain a high credit score. Learn more about how you can improve your credit score.
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