Is paying off your credit cards in full bad?

Paying off credit cards should be a big priority for U.S. financial consumers. After all, Americans tallied up about $893 billion in credit card balances in the first quarter of 2020, according to the New York Federal Reserve.

Any move to curb that mountain of debt is a good one for credit cardholders. But there may be misconceptions about how paying off your credit cards could affect your credit score.

Here's what financial experts have to say about paying off credit cards, eliminating debt altogether, and how that impacts your overall finances.

Is paying off credit cards in full bad?

Not really, financial experts say. In fact, paying off your credit cards in full can actually boost your credit score — and that's not the only positive impact of paying off your debt.

“Paying off your credit card balances is beneficial to your credit score and your financial health,” said Nami Baral, chief executive officer at Harvest, a personal finance platform. “Paying off a debt does lower your credit utilization ratio (the amount of available credit you're using) and is the second most important factor in credit scores, right behind your payment history.”

According to Baral, depending on what other debt accounts you have on your credit file, your credit score will typically go up. “That’s why it's always a good idea for your credit score and financial health to make timely and consistent credit card payments so that you're paying more than just accrued interest,” she said.

Having a good credit score can also boost your chances of getting approved for credit cards with perks — like rewards credit cards, which allow users to earn cashback, points, miles, or merchandise when they make a purchase. Check out the best rewards credit cards here.

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Paying off a credit card can have a significant impact on your credit score, depending on how much it affects your overall credit utilization.

“Paying off a small credit card balance won't have a large effect if you have other significant credit card debt,” said Joel Klein, founder of Crafty Dollar, a digital money management platform. “It is a good idea to pay off a credit card, however, if you are doing it to raise your credit score.

No credit card debt also means most importantly means you're not paying high-interest rates each month to credit card companies.

“Your credit will increase as well, so you'll get approved for lower interest rates on loans, which could be tens of thousands of dollars when looking at a home loan,” said Jordan Parker, a former financial advisor and founder of the ByJordanParker.com business and investment website. “Lastly, there is that emotional/mental sigh of relief of having your debt paid off.”

How are credit scores calculated?

Getting a grip on credit score models and formulas can give financial consumers a better idea of how a credit card paydown impacts credit scores.

“First, realize that credit reports and credit scores are different,” said Freddie Huynh, vice president of credit risk analytics with Freedom Debt Relief and a former data scientist at FICO, the benchmark credit scoring organization. “The three main credit bureaus (Experian, Transunion, and Equifax) use the information from credit reports to develop credit scores, so you will want to make sure the information on the reports is accurate.”

The credit score ranges that most lenders use generally fall between 300 and 850, with high credit scores representing better credit risk than lower scores.

Basically, there are five factors that make up credit scores.

1. Payment history
2. Credit utilization
3. Average age of open accounts
4. Credit inquiries
5. Mix of different credit types

“Your payment history makes up 35% of your overall credit score making it the biggest factor in determining your score, followed by credit utilization at 30%,” said Randall Yates, founder and CEO of The Lenders Network

Beyond that, the average age of your open accounts makes up 15% of your score. “The remaining 20% are credit inquiries (10%) and having a mix of different credit types (10%),” Yates said.

Consequently, when a cardholder pays down a credit card to zero, the decline in credit utilization should boost that cardholder’s credit score. “The increase can be significant considering credit utilization makes up 30% of your credit score,” Yates said.

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How to boost your credit score

There are other ways to raise a credit score besides credit utilization. Once these strategies become a habit, anyone can improve their credit score.

“The best ways to boost credit scores are making timely payments on credit cards, student loan payments (without interruption and more than a minimum amount particularly for credit card), and on personal loans and mortgage payments,” said Baral. “These consistent payments will keep your balance and interest rates low.

“Other quick ways to improve credit scores is to pay off any revolving debts, don’t close unused credit cards, and avoid applying for new credit cards,” Baral added.

Parker adds some handy thumbnail credit boosting tips, as well.

The best ways to boost a credit score include:

• Making all payments on time (biggest impact on your credit report).
• Keeping credit card utilization under 25% (companies don't want to see you spending 100% of your available credit).
• Disputing and remove all inaccurate marks on your report.
• Making credit card payments twice/month to ensure low balance when reported to bureaus.
• Increasing your credit limit (calling your creditor or becoming an authorized user on someone else's card).
• Using a tool like Experian Boost to add bills you're already paying (utilities, etc.) to your report.
• Don't close accounts (old credit cards can increase available credit and the average age of credit).

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