Credit Score Today, January 23: Will Paying Off Debt Hurt Your FICO?
Your credit score guides what you pay for mortgages, cards, and auto loans. Today, many ask if paying off debt with a $250,000 inheritance could hurt a credit score. Here is how FICO reacts when you clear credit cards and student loans, what may cause small dips, and how to plan the timing. We focus on mortgage shoppers in the US who want the best rate. We share steps to protect your FICO score while cutting interest costs and risk.
How FICO Scores React to Debt Paydowns
Credit cards drive a big slice of your credit score because of utilization. FICO checks your statement balances against limits. Under 30% is decent. Under 10% is better. Paying cards to zero almost always lifts a credit score fast. You also erase high APR costs. Keep accounts open so your total available credit stays high. That helps both individual and overall utilization.
Paying off a student loan or auto loan can cause a small, short dip in a credit score. You remove an active installment account, which trims credit mix and balances reported. Positive, closed accounts usually stay on reports up to 10 years, so payment history remains. Any score loss is often minor and fades. The cash flow you free up is a clear win.
Student Loan Impact When You Pay in Full
When you pay a federal or private student loan in full, the account shows closed with a $0 balance. On-time history keeps working for your credit score while it remains on file. Late payments, if any, still count. Forgiveness and payoff both end the account. Paying in full lowers debt and may improve mortgage ratios, which lenders review with your FICO score.
Planning a home loan? Aim to show $0 card balances on the statements that will feed your reports. Pay before the statement date and allow 30 to 45 days for updates. Paying a student loan can boost debt-to-income, which helps approval, even if a credit score moves a few points. Avoid new accounts or hard pulls within 60 days of underwriting.
Credit Cards: Pay Off vs Keep Open
After paying off debt, do not rush to close cards. Closing a card cuts your available credit and may raise utilization. Ask issuers to keep lines open with no annual fee. Set a small recurring charge and use autopay in full. This maintains activity and supports a stable credit score while you enjoy zero interest costs.
Most scores do best when at least one card reports a small balance, such as 1% to 9% of its limit. That shows active use. You can still avoid interest by paying the statement in full by the due date. Keep other cards at $0. This mix can add points to your credit score during mortgage reviews.
Plan for a $250,000 Windfall
Consider paying highest APR credit cards first, then any private student loans, and finally lower-rate federal loans. Keep three to six months of expenses in cash. Review loan benefits before you clear federal balances. A $250,000 windfall can also fund closing costs and reserves. For context, see the MarketWatch analysis.
Common score dings follow big paydowns: closing your oldest card, maxing one card while others sit at zero, or opening new accounts. Check reports for updates and errors 30 days after payments post. Read the full MarketWatch Q&A on paying off debt and a credit score before a mortgage application.
Final Thoughts
Paying off debt with a windfall is almost always good for your credit score and your wallet. Card balances drive utilization, so clearing them tends to lift scores quickly. Paying an installment loan, like a student loan, can cause a slight, short dip from credit mix changes, but the effect is usually small. Your clean payment record keeps working while the closed account stays on file.
If you plan a mortgage, focus on timing and optics. Show low or $0 card balances on statements, keep cards open, limit hard pulls, and allow 30 to 45 days for updates to flow. Use any freed cash to bolster reserves. That helps approval and locks better pricing. In short, erase high-cost debt first, protect utilization, and stay patient while your credit score updates. Pull free reports, check utilization by card, and target 1% to 9% on one card before underwriting. Keep proof of paid-in-full letters for lenders and dispute any balance that failed to update.
FAQs
Will paying off all my credit cards lower my credit score?
Typically it helps. Lower utilization is a key driver, so $0 balances often raise a credit score. Keep the accounts open to preserve available credit. For best results, let one card report a 1% to 9% balance, then pay it in full by the due date.
Should I pay off student loans before applying for a mortgage?
Often yes, if rates are high or payments strain debt-to-income. Paying off a student loan may trim your FICO score a few points by reducing credit mix, but lower monthly debt can improve approval odds and pricing. Time it 30 to 45 days before underwriting.
Is it better to close a credit card after payoff?
Usually no. Closing a card shrinks available credit and can raise utilization, which may lower a credit score. Keep the account open, set a small recurring charge, and autopay in full. Ask for a product change to a no-fee card if an annual fee applies.
How long until my credit score updates after I pay off debt?
Most lenders report monthly. Expect updates within 30 to 45 days after the statement showing a $0 balance closes. You can monitor progress with free reports from each bureau. If a balance fails to update, contact the lender and file a dispute if needed.
Disclaimer:
The content shared by Meyka AI PTY LTD is solely for research and informational purposes. Meyka is not a financial advisory service, and the information provided should not be considered investment or trading advice.
