How Paying Off Debt Boosted My FICO Credit Scores

It’s been 10 years since my wife and I decided to pay off our debt and live debt free (with the exception of borrowing money to buy our first home). While most readers of my personal finance blog have been overwhelmingly supportive of our debt free success story, there have been a few people who have said living debt free is NOT a good idea and will negatively affect our 3 Official FICO Scores from Experian, TransUnion and Equifax.

If you’re a fan of personal finance expert Dave Ramsey, your immediate response is probably something like “If I’m living debt free, who cares what my credit score is?“.

The truth, however, is that your FICO Scores are used for a lot more than just determining your credit worthiness and how much money you can borrow. FICO Scores are considered when you submit rental applications, apply for automobile or homeowners insurance, and even as part of your background check when applying for a job. A high FICO score is generally considered as a sign of responsibility and trustworthiness.

So how has paying off our debt and living debt free actually affected my 3 FICO credit scores?  You might be surprised!

When we started our financial journey of paying off our debt in 2004 (after I was declined a loan for buying a used motorcycle), my official FICO credit score (I can’t remember which of the 3 FICO scores my bank used at the time) was 610.  10 years later of living debt free, paying down debt and not borrowing money (with the exception of our mortgage) my 3 FICO Credit Scores from Equifax, Experian and TransUnion are 828, 828 and 827 respectively (as seen in the screen shot of the MyFico FICO Score Report Page below:

FICO Score and debt

To help illustrate the relationship between paying off our debt and how it affected our credit scores, I’ve created the following graph which compares our debt level vs. credit score over the last 10 years:

Debt Reduction vs. Credit Score Over 10 Years

paying off debt vs affect on fico credit scores

As you can see from the two sequenced graphs above, as we paid off our non-mortgage consumer debt our average FICO credit score continued to rise. Even after we paid off our debt, and didn’t acquire any new debt, our credit scores continued to rise.

While each individual situation is different, the biggest reasons I believe our FICO scores improved significantly after paying off our non-mortgage consumer debt (credit cards, consumer loans, auto/car loans, student loans, motorcycle loans, personal loans and furniture loans) are as follows.

1) As we paid off our credit cards, the ratio of available credit to our actual balance improved. Experts suggest that the less percentage of available credit you use on your credit cards, the more positive your credit score will be.

2) Having an additional 10 years of credit history also helped improved our credit score. According to myFICO (the only source for your 3 official FICO credit scores from Equifax, TransUnion and Experian), the older your credit history is, the higher your credit score will be (all other things being equal).

3) Although we haven’t paid any interest on our credit cards since we became debt free in 2006, we’ve kept one of our credit card accounts open and occasionally purchase an item with it (paying it off within a few days). Keeping these positive accounts “open” on our credit reports has also helped ensure a strong FICO credit score.

4) We are still aggressively paying off our mortgage and this has been another important factor in ensuring our credit scores have improved.

Curious what your official FICO Credit Scores are? Find out today at myFICO.com!

For more information on improving your credit scores, settling old accounts, disputing items on your credit report, and clearing negative data from your credit file check out my articles How to Clean Up Your Credit Reports and How to Remove Late Payments from your credit report with a “Goodwill” Letter.

Too Much Debt?  Download our free Trees Full of Money Debt Snowball Calculator and see how quickly you can pay off your debt.

2 Responses

  1. Rob Edwards 3 years ago
  2. Ben 3 years ago

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