Dear Penny: I’ve Paid Down $22K of Debt. Why Doesn’t My Credit Score Show It?

Dear T.,

You’ve improved your credit score by 72 points. You’ve paid off $22,000 worth of debt. You asked me what you’re doing wrong. I’d counter that you’re obviously doing something right.

Your credit score isn’t the GPA of your finances. It’s not a measure of your overall fiscal health. It’s simply a number that helps lenders gauge your likelihood of becoming delinquent or defaulting on debt.

Sometimes what’s good for your finances has a minimal effect on your credit score. Paying off debt, in some cases, is one of those moves: Sure, it’s smart, but it won’t always cause your score to skyrocket.

With credit scores, not all debt is treated equally. Racking up — and subsequently paying off — debt on a credit card or line of credit — will have the most effect. The amount of credit you’re using is a key factor too. Known as your credit utilization ratio, it accounts for 30% of your FICO score, which is the scoring model most lenders use.

Keeping this number below 30% will help your credit score, though 0% is the ideal number.

So yeah, if you told me you’d paid off $22,000 worth of credit card debt, I’d be somewhat surprised that you haven’t gotten more of a boost, provided that your limits haven’t changed.

But loans don’t factor into your credit utilization ratio. So if you’ve reduced your car loan, mortgage or student loan by $22,000, you could expect less of an impact to your score.

In fact, paying off loans can even hurt your score in the short term by lowering your average length of credit and changing your credit mix when you close your accounts. (Ignore your score for a few months in this scenario. It will bounce back.)

But the factor that matters most of all to FICO is your payment history, which determines 35% of your score. There are no quick fixes if you’ve made late payments or missed them altogether, because the negative information stays on your credit reports for seven years.

Harsh? Yes. But the good news is the effect on your credit score is most acute in the first two years. Assuming that you’re now making on-time payments, your score will gradually improve as you build positive history and the damage fades.

In the meantime, here are a few suggestions for jumpstarting your score.

Apply for new credit — either through a new credit card or raising the limit on an existing one — and pay off the balance in full each month. Increasing your overall credit while chipping away at your balances will lower your credit utilization ratio.

You may be denied for a traditional credit card since your score is still in the 500s. If that happens, apply for a secured credit card. You’ll have to put down a refundable deposit and use that as your credit limit. If you make on-time payments for a year or so, your bank will probably let you switch to an unsecured card.

If you’re paying off both credit cards and loans, you might want to prioritize the credit cards. Just keep the accounts open after you finish paying off the balance.

Also, make sure you’ve checked your credit reports and not just your score. About 1 in 5 credit reports contain errors, and getting inaccurate information removed is one of the fastest fixes for your score.

A final piece of advice: For now, try not to focus too much on your credit score. Focus instead on your overall financial health, which is no doubt improving as you pay off debt. A healthier credit score will develop over time.

Robin Hartill is a senior editor at The Penny Hoarder and the voice behind Dear Penny. Send your questions about credit scores to [email protected].