When people begin working on their credit, outstanding debt is usually the first topic they tackle. Although it can be a positive factor, having multiple liabilities is generally not the greatest way to build a solid credit score. Borrowers who end up owing a lot of money on their credit cards, per se, tend to struggle with the repercussions for many years.
One of the biggest surprises, according to Tuck Associates, is the fact that someone’s credit may not improve after they pay off all of their credit cards. As a company that specializes in debt consolidation, Tuck Associates deals with similar scenarios on a daily basis. Based on their experience, there is a lot of reasons why less debt does not necessarily translate to a higher credit score.
Consistency Comes First
Folks who spend a few minutes analyzing their credit will notice that one of the most important factors is “the average age of all accounts.” This is also one of the very few things that the user has very little influence over as it simply takes the mean of all accounts’ opening dates. So, how does such an arbitrary number play into the credit score? Well, creditors have a tendency to prioritize consistency.
For example, if John Doe has been making $100 monthly payments on his 10-year-old account, he may not sound quite promising. After all, 10 years should be enough time to pay off a credit card balance, right? Not exactly. People who are very consistent with their payments are less of a risk because their spending patterns are predictable. Someone who makes no payments for a decade and then suddenly pays $12,000 of credit card debt will see a drop in their credit score. Even though that person paid the same amount of money as John Doe, they did it in an unpredictable manner.
Beware of Account Closure
Tuck Associates also stresses the importance of knowing the side-effects of account closures. Borrowers who make large payments on outstanding debt have a tendency to close their accounts because they want to avoid temptations. Although it is perfectly logical, the financial system is not a fan of these practices. If the user closes one of their older accounts, the first number that will plummet will be the age of their credit. The lower the age, the lower the credit score.
Utilization Concerns
The most important problem with paying off credit cards pertains to the utilization. Most financial gurus advise people to keep this number below 30 percent. In other words, they should use up to one-third of their credit cards’ maximum limit each month. Doing so demonstrates consistency and responsible spending habits. The problem with those who pay off their accounts is the fact that their utilization immediately goes down to zero. Most credit bureaus view this as inactivity that translates to inefficient use of credit. Hence why enormous drops in utilization are yet another indication of inconsistency that is punishable by credit score reductions.
The easiest way to sidestep the aforementioned issues is to build a payment plan that will eliminate debt in a timely fashion. Even those who have the ability to pay it all off immediately should use the chance to build their credit through a consistent repayment scheme