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Effect of Clearing Debt on Your Credit Score

When you repay your debt, you can expect to see a higher credit score. 

A higher credit score increases your chances of getting credit cards, loans and new lines of credit. These can come with better terms like lower interest.

However, do you know how long you’ll have to wait before seeing an increase in your credit score? If you don’t, don’t worry. In this article, we’ll tell you everything you need to know about it. We’ll tell you how long it takes and tell you the factors which influence the increase of your credit score. We’ll also tell you the types of debt you can have.

When does your credit score improve after debt repayment?

Of course, you’ll want debt repayment to have an immediate positive impact on your credit score, but that’s not how it works. Even if you have repaid your loan completely, your score won’t increase till your lender reports the repayment.

How long can this take? It can take a couple of months or a couple of billing cycles. Lenders usually report activity per month to credit bureaus or credit reporting agencies. 

Which factors influence your credit score?

 To really understand how your credit score changes after you pay off a loan, you need to know the elements which comprise the score. 

The factors influencing your credit score are: 

  • Payment history: 35%

  • Amounts owed: 30%

  • Length of credit history: 15%

  • New credit: 10%

  • Credit mix: 10%

Which of these affect your credit score, from most to least?

  • Amounts owed: Extremely influential

  • Credit mix: Highly influential

  • Payment history: Moderately influential

  • Length of credit history: Less influential

  • New credit: Less influential

When you pay off debts, your credit utilization shall get a big positive boost. As you may know, you need to keep credit utilization ratio below 30%. This gets boosted when you pay off credit cards or repay loans. In turn it raises your credit score. Your credit history decreases each time you repay and then close an account. That hurts your credit score.
Your credit history decreases each time you repay and then close an account.

What are the long-term effects of repaying debt?

Paying off debt won’t impact your payment history. If there are already missed payments, those will remain on your credit report for 7 years. As time passes, the negative impacts of such actions diminish.

Types of debt you can have

There are various types of debt that can affect your score differently on repayment. These are:

  • Revolving credit: This credit line remains open for a predetermined period of time. You can use as much funds as you want within the credit limit. A good example is credit cards. Revolving credit is factored in using the credit utilization of Credit score.

  • Instalment loans: These are fixed sum loans which you take for a certain period of time and pay at regular intervals. You can pay off the loan early, but need to pay a fee for that. Examples are mortgages, auto loans, student and personal loans. Repaying these are good for your credit score. Paying instalments on time is certainly beneficial for the score, but it will negatively impact the score if you don’t have other credit lines.

  • Collections accounts: As you know, your loan account goes into collections on non-repayment of loan. When this happens, a debt collection agency takes over. These affect your credit report. Even when you pay off collections accounts, it remains on your credit report for 7 years. While it is good to pay off, it won’t have an impact immediately. 

  • Settled debt: When you settle debt for less than the full amount, it remains on your report for 7 years. This period starts from the day you settle an account since accounts are never delinquent. It is better to settle such accounts, but it is far better to settle an account in full.


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