Paying Off Debts - How Long Until My Credit Score Improves?

Reader Question: "I have a question about my credit score. Why is there such a difference between the three credit agencies? TransUnion has me at 761, Experian - 732 and Equifax 701. I am looking at buying a house sometime this year. I think I'm sitting pretty well for a good rate on a mortgage but would like to improve the lower two scores. In the past month I paid off my car, one of my student loans and my credit card. So right now I only have student loan debt. How long will it take for these payoffs to affect my score, and will they change it much?"

Question #1

Let's start with your first question, since it's the easiest one to answer. The reason the credit bureaus don't agree is because they are three different companies with different procedures. They collect information differently from one another. They convert data into credit scores differently. And they keep their own data proprietary -- they don't share it.



Your credit scores are based on the information contained within your credit reports, and the information in your reports comes from your financial activity. But each of these companies interprets your past behavior in different ways. So the scores rarely match. Sometimes, there is a big difference between them (like the 60-point difference between your TransUnion and Equifax scores).

Question #2

There's no way for me to predict how long it will take for your score to improve, because there are too many variables at work. Your credit utilization ratio is one of the biggest factors that affect your credit score. This ratio measures how much of your available credit limit you are using. If I have a credit card with a $5,000 limit, and my current balance is $2,500, then my utilization (or usage) is 50%. I'm using half of my available balance. If I keep that card open by pay the balance down to $500, then my utilization ratio improves considerably -- and so will my credit score.

However, if I pay off my credit card balance and close the account, then I don't have any utilization at all. No cards ... no credit limits ... no balances. Now it becomes harder for an imperfect scoring model (like the FICO score) to measure my "performance." Additionally, by closing my older credit account, I might even shorten my credit history. This can also lower my score.

Of course, if you have a solid payment history on all of your debts, then closing a credit card is not going to make a huge difference in your score. Not in the grand scheme of things, at least. You can see what I mean by there being a lot of variables at work. This is why it's impossible for me to offer you any predictions, as far as time frame is concerned.

Some lenders will look at all three of your scores when reviewing you for a loan. This would work out in your favor in this case, because the highest score would bring up the average. Other lenders will only look at two out of the three, or perhaps even a single preferred score.

I think you're in good shape for getting a mortgage loan, with your current scores. If everything else checks out, you would probably get a good rate on a loan. Of course, if all three of your scores were in the 760-or-above range, you'll probably qualify for the best rates the lender has to offer. And that can make a big difference in your monthly payment.

If you can afford to wait a few month before getting a loan, you might want to do that. There's a good chance your score(s) will go up by then.