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Fact or Myth: Paying off an old debt will improve my credit immediately

You’ve probably heard that your credit score is a numerical picture of your credit-worthiness on a scale of 300 to 850. You may have also heard that whether it’s a FICO score or a VantageScore, or another scoring model, it is generally comprised of the following factors:
  • Payment history
  • New accounts and inquiries
  • Amounts owed and used
  • Account mix
  • Age of credit
Beyond that, credit scores can be confusing and many myths abound so let’s examine each common misconception by factor and set you straight on a path to a better credit score.
Payment history
MYTH: Paying off an old debt will improve my credit immediately.
FACT: While paying off debt is always a positive thing to do in the long run, the negative account is not immediately removed from your credit report. It will be marked “paid as agreed,” “satisfied,” “charged off,” or closed, depending on how and at what point in the collections process you pay the collection amount. And, the negative account will remain on your credit report for at least 7 years from the date of the default so that your credit score will improve once that negative account finally falls off your credit report due to its age.
New Accounts and Inquiries
MYTH: Checking my credit score will negatively affect my credit score.
FACT: Only “hard inquiries” will negatively affect your credit score, and only temporarily. Checking your credit score is considered a “soft inquiry” and will not affect the score itself at all. However, if you apply for many loans and credit cards all at the same time, lenders see that as scrambling for money which does not look like responsible financial management. However, if you are shopping around for a mortgage lender or an auto lender which creates several inquiries, it is not viewed negatively and will not permanently affect your credit score.
Amounts Owed and used
MYTH: As long as I pay the minimum payment amounts due on time on all my accounts, I will have a good credit score.
FACT: Actually, the minimum payments are designed to keep you in debt longer. And, as long as your balances are very high, your credit score is suffering from a high rate of “credit utilization” or a high amount owed. This means you are using most of the credit extended to you, which does hurt your credit score significantly. Most lenders like to see amounts owed below 30% (some say even 10%) of your total amount of credit available.
Account mix
MYTH: A high amount of student loan debt is hurting my credit score.
FACT: Because student loan debt is considered an installment loan (meaning you make a fixed payment on a fixed debt) it can actually help your credit score if managed responsibly. The positive factor is that it’s a different type of loan than a credit card and if paid on time can positively affect your credit score. Of course if you default (don’t pay for 270 days after a payment due), student loan debt cannot be discharged even in bankruptcy and any late payment marks will remain on your credit report for at least 7 years, so use your student loan debt (and work immediately with the Department of Education if you get into trouble paying) as a tool to build a higher credit score.
Age of credit
MYTH: If I’ve paid off a credit card, I should close the account.
FACT: It’s not always a good idea to close accounts, especially if they are long-standing accounts. That’s because the age of your accounts is a positive factor in a good credit score so if you’ve paid off an account you’ve had for many years, keep it open and active with small charges paid on time in full. This way your score will benefit from the age of the account and it will also keep your credit utilization lower because you will have this amount of credit available but largely unused.


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