Will My Scores Go Up Considerably If I Pay Off My Debt?

“John, I just sold my house and thankfully I got enough to cover both of my mortgages, a first and a HELOC. When my credit reports are updated to show zero balances on those loans can I expect my credit scores to improve considerably?  I’ll be debt free!.”

Chances are that if you pay off all of your mortgage related debt your scores will go up, but not to the extent you’re expecting. But, if you have paid off your credit cards then you may be poised for massive score improvement.

Is your debt bringing your credit score down? Click here to see your updated credit score.

Installment debt isn’t terribly indicative of elevated risk so the initial impact on your scores isn’t very much. You can have well over $1,000,000 in mortgage related debt and still have scores well above 800. Because of this when you pay them off your scores don’t move much, if at all.

Now, credit card debt is a different story. Credit card debt is unsecured which means the lender is truly fully exposed for the amount equal to your credit limit or credit line. This is maximum exposure for the lender because they cannot come repossess or foreclose something you purchased with your credit card.

Credit card debt, in contrast to installment debt, is very indicative of credit risk and therefore it has more of a negative impact on your credit scores. This means when it’s paid down, or off, the reaction by your credit scores is much more positive.  Credit card debt and its various credit scoring metrics are part of a category worth 30% of the points in your FICO credit score and are “highly influential” in your VantageScore credit score.

You could actually pay off $10,000 in credit card debt and see your scores improve significantly more than if you paid off a $500,000 mortgage. And unless you understand the difference between good debt and bad debt (from a risk perspective) this debt level/reaction comparison would make little sense and would seem bizarre.

A couple of things to keep in mind as you pay off debts…

1. Just because you’ve paid off a credit card doesn’t mean that the balance on your credit reports will be zero dollars. If you use your card after it has been paid off then you’ll always have a balance because credit card issuers report your statement balance to the credit bureaus, not the actual balance on any given day.

2. Just because you’ve paid off an installment loan (car, mortgage, boat, student loan, personal loan) it doesn’t means your credit report will reflect the zero balance right away. It will likely take up to 1 month before your credit reports reflect zero balances on the loan. It takes about that long for your reports to go through a cycle of updates from all of your creditors.

Is your debt bringing your credit score down? Click here to see your updated credit score.

Credit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, founder of www.creditexpertwitness.com and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  You can follow John on Twitter here