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The bad news is I am in debt to nine different credit cards $60,000. The good news is the house has sold and I will get a $120K profit from the sale. So in about a month I will be able to completely pay off my credit card debt and owe absolutely nothing on my credit cards. I will owe nothing to any other creditor after that too.
Here is my question: My FICO score is average due to the fact that I have always paid my credit card bills on time but mostly only the minimum payment. I have had at least 40K owed on a variety of credit cards for at least 4 years. My FICO score is only average because I owe about 75% of my available credit. So my utilization rate is bad.
So when I COMPLETELY pay off my credit cards next month will be credit score be really high? Or will my FICO score be impacted for a while because of my long history of excessive debt and years of minimum payments?
On the good side:
* I have had credit cards for over 20 years. Most of the cards I have now I have had for over ten years minimum
* Always paid them on time, never late
* I have a history of high balances that will have been paid off completely without any late payments
* I have had a car payment and a mortage in the past that were always paid on time
So, what is going to happen to my credit rating after I pay off all my credit cards? After I pay off my debt all at once next month what impact will my years and years of high balances and minimum payments have on my credit rating? (I know they will hold it against you if you pay late but how about years of minimum payments on high balances, will that impact my credit rating and FICO score in the future after all my debt is paid off?)
Thanks for your reply but you have misunderstood my question!
Maybe I was not clear in my orginal posting. My goal is not figuring out how to get the perfect score but to understand this question:
FIRST: I am not paying off the $60K in debt over time, but instead I am going to pay it off immediately after I get the funds from my house sale.
Here is my question reclarified:
If I have a long history of high balances and minimum payments (over four years of at least $40,000 in debt) but next month I completely pay off my credit cards and have a zero balance on everything, will my long recent history of high debt on multiple cards and minimum payments hurt my FICO score AFTER I pay off all my debt?
I would think creditors and the credit reporting agencies could look at my situation in two ways AFTER I PAY OFF ALL MY DEBT::
1) Great, she has now paid off all her debt. She has a long history with credit, always paid her credit card bills on time, handled high debt and now owes nothing. She deserves a really high FICO score.
or
2) Yes she has recently paid off all her debt but she has a history of charging up her credit cards almost to the max and then sending in minimum payments for years. It is likelyshe will do this again and again. Her history of high debt on muliple credit cards should limit her FICO score in the future even though she owes nothing
Depends on what happens. Your creditors may thank the gods that you paid off your debt and then go and cut your limits or shut off your accounts. Has happened to a few people I know this past year. In that case you may have long histories but now your limit is smaller and there is some history that can be shown that shows it was reduced.
FICO at times can be a real beast. I have had high balances before (never higher than a total of 18k) and my FICO definitely increased when I paid them off...
First it will take at a minimum of 6 months before all three bureaus will be reporting that you've paid off your credit lines.
Second, the available amount of credit available (cards still open) will be a negative when calculating your score. It is NEVER a positive.
Third, your score will improve, despite the length of time and minimum payments after all the bureaus recognize you've paid them off. However I would not expect it to be immediate. I would expect that within 1 year max you should see a significant increase in your score, but not until then.
Your assumptions are spot on. #1 will come within the 8-9 month period of review. #2 will be the immediate scenario you will face.
If I were you, I would judge the amount of credit you need, and then close down what you don't. For every credit line available if you exceed 51% of your balance erodes your FICO score. The higher your usage level, the more it impacts your score.
Second, the available amount of credit available (cards still open) will be a negative when calculating your score. It is NEVER a positive.
Actually, this is false. From a FICO perspective, a lower percentage of credit utilization is a plus, no matter the total credit line. However, an underwriter might view excessive availability of credit as a warning sign. Therefore, having $60-80k of open credit cards can be both a positive (overall FICO) and a negative (underwriter) at the same time.
To the OP, if you've always made at least the minimum payment to all of your creditors (credit cards, mortgage, auto loans) on time, your credit score will increase substantially as soon as the credit reports record a low balance to available credit ratio. The recency of high debt does not factor into the FICO score. FICO is a blend of a snapshot in time and a history. Things like length of average open account and payment history are helped by a long history. Credit limits and amount owed on the account (ie, the factors that make up the credit utilization ratio) is based on what is reflected in the most recent report. To the best of my knowledge, FICO does not use a weighted average credit utilization percentage.
Again, though, an underwriter would look at the historical balances and may request additional information/documentation if your balance drops significantly right before you apply for a loan. If, however, you wait a year, and the aveage monthly balance went from $60000 in 2010 to $2000 in 2011, the underwriter would probably assume that a windfall was responsible for the decrease in debt and that the borrower had shown an ability to not run into the same troubles again.
No it will nnot hurt once the amount is paid off. The day are gone that crdit score is the only factor;now days insome to outstanding debt is getting more important.Yuo would be the same boat at elast for awhile as the person who pays off credit early or maintqins no balance. But you will be betetr offf than the perosn who never uses crdit and has no history. You will i time if you amintain a incomne find you are the perosn those fine print advertisements for )% auto loans mena;well qaulitifed borrowers. A good history combined with a good income to debt ratio means alot how days compared to just the resent past.
I agree with Mike. Whether having a history of high balances will hurt your credit depends on who you are asking.
I think from a SCORE perspective, it will probably have little to no impact. I don't think "high account balance" weighs into the calculations much, if at all. They look at number of lates, variety of credit available, total credit available, total debt against that credit, age of available credit (how long you've had the accounts), etc. If "high account balance" or "average account balance" figure into that, it is fairly minimal.
However, from the perspective of a human being analyzing your credit, whether a potential landlord, underwriter, employer, or whatever, the fact that you got that far into debt may count against you, although the fact that you were able to keep up without having lates, and that you eventually paid it all off counts heavily in your favor.
You can count on most of them cutting your available down once you pay them off.
I don't know about that. I just paid off $6,000 on one card which still has a $4,000 balance. Just got a letter from the credit card company saying they had INCREASED my line of credit $3,000. Go figure. I have NEVER had a card reduce their limit. Never - not in 40 years.
I belong to Equifax for $17/mo. Instant credit scores from all three agencies on demand and alerts everytime something changes plus identity theft protectioin. Worth the money imo.
I do think when balances are paid, your credit scores will show an immediate improvement. Also agree with poster upthread, your history of carrying large balances on your credit cards will not impact your score.
Closing accounts will, however. I would keep everything open for while. However, if you don't intend to borrow again anytime soon, then close what you don't need. Those cards must have fees. I'm doing that with all my fee cards later this year after I do a mortgage restructuring.
Now that you got rid of that house and have extra money after paying everything off, you should be in good shape. No maintenance or headaches and cash in the bank.
Congratulations!
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