Why Your Credit Score Might Dip When You Pay off Your Debt

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When you start reading the advice of financial advisors, you will discover that most of those experts agree that the first step toward getting out of debt is paying off your credit cards. This will make your budget more flexible when you do not have to make credit card payments each month.

But what they don’t tell you is that your credit score may drop a little as a result. Doesn’t make sense? Well, there are a few reasons why it happens. However, it is not usually a serious problem. Let’s discuss some of the reasons so that you can understand and be prepared if this happens to you.

How Good Your Credit Score Is Matters

If your credit score is already high (over 720), then you probably have nothing to worry about when you pay off your credit. You might see a slight, temporary dip in your credit score, but when you have a solid credit history you have nothing to worry about.

Having an 850 is not necessarily required. There is a range when it comes to “excellent” credit. Generally anything in the mid-700s and above will get you approved for any financing you need.

Why Does A Credit Score Drop?

It might seem strange to have your credit score drop when you show that you can pay off what you owe. But, when you understand the various things that go into figuring a credit score, and you understand the concept of credit utilization, it might make more sense.

For most of the credit bureaus, 30% of your credit score is based on credit utilization. While you should aim to keep this figure low—by owing no more than 30% of what you can borrow, having no credit utilization is not necessarily the best thing.

What Should I Do To Keep My Credit Score High?

For the best credit scores, it is wise to utilize your credit cards regularly. Do so within the appropriate credit utilization recommendations, and pay off your credit card monthly. When you do this, your credit score will stay high. Plus, you will show that you are responsible and creditworthy. You will not suffer by having to pay any interest charges.

Applying for more and more credit is not a good idea though. Keep a small number of cards, and choose them well (i.e., based on terms and conditions, rewards, or whatever factors are most important to you). Monitor your credit report regularly to ensure that it is accurate. Immediately address any problems should there be any.

What’s the Bottom Line?

The bottom line is that, when it comes to good credit, you have plenty of control. Make wise credit decisions. Don’t spend beyond what you can pay off. Make every single payment on time. Don’t have more credit than you need.

This is how you can get the best credit score, or raise a poor credit score most effectively! Don’t worry too much if your score dips slightly when you pay off your card. Simply get back to your good credit habits and you will be fine.

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