Full Payment Vs. Partial Payment: What Matters Most? How Payments Affect Your Credit Score

Most people who have debts understand that paying them off quickly helps their credit score. If you can show a consistent record of paying off your bills when they come due, that will keep your credit report looking healthy.

However, you might not be clear on whether it’s better for your credit score to pay off your entire debts all at once or pay them in part. We’ll address that question in the following article.

Understanding Your Credit Score

Most individuals know their credit score ranges higher or lower depending on their financial activity. They may not know any more details than that, though.

There are different credit scoring systems, but FICO is one of the most well-established ones. FICO determines your score through the following formula: your credit payment history accounts for 35%, amounts owed is 30%, length of credit history is 15%, and credit mix and new credit account for 10% each. Because of their weight, credit history and amounts owed are most important. With this information, timely debt payments increase your overall score and late ones detract from it.

If you are looking to build your credit or repair it, minimum on-time debt payments help, and often, paying off your entire debts at one time can help as well. However, it’s sometimes possible that paying off certain debts in full can lower your credit score, at least temporarily.

Paying Off Different Debt Varieties

If you have a goal of gradually lowering your overall debt load, you may feel that doing so will result in you having a higher credit score. That’s sometimes true, but there are notable exceptions.

There is something called revolving credit. Paying off your credit cards is an example. Revolving credit is a credit extension that has an assigned spending limit without an end time to the loan. There’s also installment credit, such as a personal loan. The entity from which you borrowed gives you a fixed amount of money that you are meant to pay back over a specified time period.

No matter the debt variety you owe, you need to pay interest on the outstanding balance. The faster you can pay off the debt, the less money comes out of your pocket as interest. 

You might think that paying off any kind of debt will instantly increase your credit score, but that’s not always the case. Getting rid of revolving debt, such as a credit card balance, helps your overall score because it lowers your credit utilization rate. Closing particular lines of credit, though, can temporarily cause your score to lower. Examples would be paying off a mortgage or a car loan in full.

Representatives of credit bureaus such as TransUnion and Experian sometimes mention how frustrating it can be to see your credit score take a hit when you do something financially responsible, like paying off an installment loan. What you should understand, though, is that this drop is temporary, and your score should recover quickly. 

Both Full and Partial Payments Can Help

There is no simple answer as to whether it’s better to make full payments vs. partial ones if you’re trying to improve your score. If you make full payments of revolving debt, such as a credit card balance, you should see a rapid increase in your score. Closeout a line of credit, such as for a vehicle loan or mortgage, and you should notice a dip.

Probably the most crucial thing to remember, though, is that even if your FICO or VantageScore take a hit because you closed out a line of credit, you should be able to recover from that soon. You’re still demonstrating responsible consumer behavior. In due time, your score will begin to reflect that again.