This crucial indicator depends on the contents of your credit reports. Paying off debt is a positive event, but its effects are not immediate. In this article, we will look at several typical scenarios.

When you pay off an account, this must be reported to recording agencies. Every lender may share data with just one bureau. Generally, the information is passed once the billing cycle is over. The report may be changed 30 or even 45 days after the debt is paid in full.

How to Check Scores and Reports

Consumers may keep track of their scores through special apps like Credit Karma. You may also get help from Credit Repair companies — aside from fixing unfair scores, they provide monitoring tools. Sometimes, these are available as a separate service.

Every citizen of the United States can get a free copy of their report from each of the three major agencies. By law, this is possible every year. Due to the pandemic, reports may be obtained weekly until April 20, 2022. Thus, keeping track of any changes is easy. In addition, if the records contain errors (which is not uncommon), you can raise the score by deleting them.

How long will it take to repair credit? This depends on the nature and number of false derogatories. To have any entry removed, the repair company collects evidence and communicates with lenders, bureaus, and collectors (if necessary). The simplest cases are resolved in a few months. Most firms charge a monthly fee and offer a money-back guarantee if no entries disappear within 60-90 days.

Collecting the Reports

When paying off debt, find out which reporting agency the lender works with. It is not necessary to contact all three bureaus (Experian, Equifax, and TransUnion) individually. Go to www.annualcreditreport.com and send your request. Getting a digital copy is the easiest way to check all of your records. Alternatively, you could use the toll-free number or send your request by mail. In this case, the organization responds in 15 days.

What Type of Account Are You Closing?

Depending on the type of account you pay off, your score increases differently. The change also depends on your history in general. Consider what happens with these common types.

1.   Installment Loans

You may be surprised to learn that paying off a conventional loan may cause the score to fall. This is because the account is closed. Fortunately, the total should go back to normal in a few months.

2.   Collection Accounts

Some score calculation models exclude such debts once they are fully covered, so the effects are immediate. Moreover, paid collection accounts are viewed positively by employers and landlords. Otherwise, you could even be unable to rent an apartment. The mortgage may also be out of the question.

3.   Credit Card Account

Recurring forms of borrowing have their own subtleties. It is not advisable to cancel credit cards, even if they are not used. Their limits determine your credit utilization ratio. This is calculated as the sum of your balances divided by the total of limits.

The lower the percentage — the better it is for the score. For example, if you have $10,000 and limits, but use just $500, this is a very good rate of 5%. It is advisable to keep the rate below 30% at all times. Thus, pay off the debt, but keep the accounts open.

What Score Do You Need?

Different lenders use different thresholds to choose eligible applicants. It also depends on the type of loan you are applying for. For instance, mortgages insured by the government require a lower score (e.g., 620).

Generally, the FICO range (the most popular scoring model) is between 300 and 850. The best conditions are guaranteed if your total is 800. Or if it falls below 700, borrowing gets complicated. Depending on the institution, your application may be rejected, or the interest could be excessive.

Repair Vs. Rebuild

Paying off your debts will raise your total. In general, damaging information remains on reports for up to 7 years, while positive information may stay there forever (unless you close the associated accounts). If any of the negative information is false, you may dispute it (or pay a firm to do it on your behalf). If the score is low because of your own reckless decisions, all you can do is rebuild it.