Is it Better to Pay Off Credit Cards or Pay Them All Down to Under Half the Available Balance?

Save

If you have credit card debt, you should work to pay it off to reduce your payment obligations and boost your credit score. You can either focus on paying off the cards one at a time or pay a little bit on each one to reduce each of balance. The strategy for your credit card debt should depend on your financial goals.

Lowest Cost

  • If you are trying to pay the least amount of interest possible, you should start by paying off the credit card with the highest interest rate. This debt that is costing you the most to carry, so the sooner you get rid of it, the better. Once you have paid off a card completely, do not use it for new purchases, which gives you more bills to pay at a high interest rate. Instead, focus your attention on the credit card with the next highest interest rate.

Credit Score Boost

  • If you are trying to pay down your credit card debt to boost your credit score, the best strategy is to pay off the balances that are proportionally closest to the card's limit. Your credit scoring formulas penalize you for cards that have a high credit utilization ratio, which is the amount of debt you carry relative to the card's credit limit. If the card is maxed out -- which means the balance is equal to the credit limit -- that hurts your score most. Having each card carry a balance that is less than half of the card's credit limit helps your credit score, according to the MyFICO website. Your overall credit utilization, which is the total of the balances on all your cards divided by the total credit limits, also should be under 50 percent, according MyFICO. The lower the ratio, the better. For example, assume Card A has a balance of $3,500 and a credit limit of $4,000, which is 87.5 percent utilization, and Card B a balance of $1,500 and credit limit of $3,000, which is only 50 percent utilization. Even if Card B has a higher interest rate, focus your extra payments on Card A to boost your credit score, because its high utilization ratio is hurting your credit score more. When all cards are under 50 percent utilization, work on decreasing your credit utilization further to continue boosting your score.

Cancelling Credit Cards

  • If you are trying to keep your credit score high, do not cancel a credit card after you have paid it off. Instead, keep the card open because it has a utilization ratio of zero percent, which decreases your overall utilization ratio. If you are tempted to use the card, put it somewhere that forces you to wait before using it. After you have paid off all your credit cards, you can cancel the ones you do not need without damaging your credit score.

Carrying Balances

  • If you can afford it, it is better to pay off all your credit cards than to carry balances. Credit card companies charge interest if you carry a balance from the previous month, but if you pay your card in full each month, you are not charged any interest. You do not have to carry a balance to have a good credit score, but you should use your credit card regularly and pay it off so you have consistent payment history on an active credit card account. That's because payment history is another factor in the credit scoring formula.

References

Promoted By Zergnet

Comments

You May Also Like

Related Searches

M
Is DIY in your DNA? Become part of our maker community.
Submit Your Work!