Does Purchasing and Then Paying off Debt Increase a Credit Score?

Build your credit score by making and paying off purchases.

Build your credit score by making and paying off purchases.

Your credit scores are the foundation of your financial security. Good credit paves the way for you to obtain credit cards, mortgages, auto loans, and even certain forms of employment. A good credit score announces to lenders that you are responsible with money and a low lending risk. No one's perfect, and even small debt management mistakes can carry consequences for your credit. If you've made mistakes in the past or you're building credit for the first time, making purchases and paying off debt is a reliable way to improve your credit scores.

Credit Cards

If you have a credit card and use it regularly, your credit card company reports every payment you make to the credit bureaus. Your reliability in paying your creditors accounts for 35 percent of your credit rating. When you pay your credit card debt on time each month, your credit score will increase over time. Using your credit card is a crucial part of the equation. Making small purchases and paying the debt off in full each month benefits your credit more than not making purchases and carrying a zero balance on the card.

Authorized User Accounts

While making and paying off purchases helps you build a better credit score, you don't have to be the one making the purchases and payments. If you have a family member with good credit, you can ask to be added to that person's credit card account as an authorized user. The authorized user account shows up on your credit report and updates each time the primary account holder makes a payment. An authorized user account can help you build up your scores enough to qualify for your own credit card. You can request that the credit card company remove your authorized user status at any time.

Personal Loans

Taking out a personal loan with your bank and repaying the money boosts your credit scores in much the same way that making and paying off credit card purchases does. The bank reports the loan to the credit bureaus, and your timely payments raise your credit rating. If you lack the credit to qualify for an unsecured loan, providing the bank with collateral, such as your savings account or personal property, increases your chances of being approved. You don't have to use a personal loan to make purchases for your credit to benefit. Instead, you could put the money into a separate bank account that you use solely for loan payments, and have the bank draft your payments directly from the account. This not only ensures that the money for the payments will be available, but also prevents you from forgetting a payment and undoing the progress you're making with your credit.

Improving Your Credit

While paying off debt is a surefire way to increase your credit scores, there are other ways to give your scores a boost. Watching what you spend is one of them. Carrying a high balance on your credit cards — even if you always make the minimum payment on time — isn't good for your credit rating. Your credit benefits most when you carry a balance of less than 10 percent of the card's total spending limit. Reviewing your credit report for errors and disputing mistakes can also improve your scores. Negative entries, such as collection accounts and late payments, hit your credit hard. Major errors such as these can wreak havoc on your score. If you don't recognize a negative entry that you find in your credit records, you can dispute the entry. If the credit bureaus determine that the information is inaccurate, they will delete it from your credit reports and your scores will improve.


About the Author

Ciele Edwards holds a Bachelor of Arts in English and has been a consumer advocate and credit specialist for more than 10 years. She currently works in the real-estate industry as a consumer credit and debt specialist. Edwards has experience working with collections, liens, judgments, bankruptcies, loans and credit law.

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