Does Paying Off Furniture Help Credit?

Many individuals finance significant purchases, such as furniture, rather than paying the full amount upfront. This article clarifies how paying off furniture can influence your credit score.

How Payments Influence Credit Scores

A credit score provides a numerical representation of an individual’s creditworthiness, primarily based on data found in credit reports. Several factors contribute to this score, with payment history holding the most weight, accounting for approximately 35% of a typical FICO Score. This component reflects whether bills are paid consistently and on time.

The second most influential factor is the amounts owed, which makes up about 30% of the score. This category considers the total debt across all accounts and, for revolving credit, focuses on the credit utilization ratio. A lower utilization ratio, indicating less of the available credit is being used, generally benefits the score. Other factors include the length of credit history (around 15%), the mix of different credit types (about 10%), and new credit applications (roughly 10%).

Furniture Financing and Credit Types

Financing a furniture purchase typically involves one of two main credit structures. The first is an installment loan, where a fixed amount is borrowed and repaid through regular, equal payments over a predetermined period. This could be a loan directly from the furniture retailer or a third-party lender. These loans have a set end date, and once paid off, the account is typically closed.

The second common method is using a revolving credit account, such as a store-branded credit card or a general-purpose credit card. With revolving credit, a credit limit is established, allowing funds to be borrowed, repaid, and re-borrowed up to that limit. This type of financing remains open as long as the account is active, even if the balance is paid to zero.

Paying Off Installment Loans

When an installment loan, like one used for furniture financing, is paid off, it generally has a positive effect on your credit history. The successful completion of the loan demonstrates a consistent ability to manage debt responsibly through on-time payments. This positive payment behavior remains on credit reports for many years, continuing to contribute favorably to your payment history.

Once the loan balance reaches zero, the “amounts owed” for that specific account are eliminated, which is also beneficial. While some credit scoring models might show a minimal, temporary dip in score when an installment loan is fully paid off and closed, this is often due to a slight change in the average age of accounts or credit mix. However, the long-term benefit of a completed repayment history usually outweighs any minor, short-term fluctuations.

Paying Off Revolving Credit Accounts

Paying off a balance on a revolving credit account, such as a store credit card used for furniture, typically has a significant positive impact on credit scores. This is primarily due to the reduction in the credit utilization ratio. This ratio compares the amount of credit used against the total available credit, and lowering it demonstrates responsible credit management. Experts generally recommend keeping this ratio below 30%, with lower percentages often leading to higher scores.

After paying off a revolving balance, the decision to keep the account open or close it can also affect your score. Keeping the account open, especially if it has a high credit limit and no annual fee, maintains the total available credit, which helps keep the utilization ratio low. Closing the account, particularly an older one, could potentially reduce the overall available credit and shorten the average age of accounts, which might negatively influence the score. Therefore, keeping the account open, even if unused, often provides more long-term benefits for your credit profile.