Allocating card payments on a limited budget

Use free tools to plan your debt attack, don't close the account afterward


Speaking of Credit
Speaking of Credit columnist Barry Paperno
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO (formerly Fair Isaac Corp.) and consumer operations manager for Experian. He writes "Speaking of Credit," a weekly reader Q&A column about credit scoring and rebuilding credit, for His writings about credit scoring have appeared in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.
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Dear Speaking of Credit,
I'm several months behind on paying my credit card monthly balances, I did go over my limit once. I did, however, make sure to at least pay the monthly minimums each month. Now that I'm starting to get my money situation back on track, I'm not sure if it is better for me to make a lump payment before my next due date or make several payments.

Also note that this lump payment or several payments will not pay off my entire balance but about half of it. I'm a student and have a job that's sort of "come when you can" and my parents also give me money. I'm looking for the best way to improve my credit score, though I don't know what it is right now and am not sure what site I can trust to give advice to me safely and for free. -- Greta

Answer Dear Greta,
Generally speaking, the most you can pay and the soonest you can do so will always deliver the highest score as quickly as possible. But what I believe you're really asking is how best to allocate the payments across your different cards within your limited budget so that your score rises as quickly as possible and stays that way.

Let's take a look at a couple of the most popular paydown plans that have been proven to work well for consumers over the years:

Debt-snowball method
The snowball debt reduction strategy consists of paying off one account at a time, starting with the smallest balance until it's paid off, then the next smallest and so forth. Of course, to protect your score, this and any other plan must include paying at least the minimum due on all accounts with balances. The big attraction of this method is being able to see, one by one, cards hit a $0 balance and be crossed off the list of problem accounts. Starting with the smallest balance can hopefully enable you to pay at least some balances in full relatively quickly, which can provide you with that feeling of accomplishment sooner and keep you enthused enough to stick with it.

Debt-avalanche (or debt-stacking) method
Here you'll apply the highest payment amounts to accounts charging the highest interest, regardless of the balance size. Following this process should have you paying the lowest possible amount of interest over time, which, depending on what you owe, can amount to hundreds of dollars. Unlike with snowballing, avalanching is likely to require more time before seeing that first $0 balance, as you're likely to be spreading out those payments a little more among the various balances. Both the snowball and avalanche methods should take about the same length of time for total debt elimination.

A word of warning
There is one recommendation advocated by some debt reduction experts you should avoid if you're looking to maximize your score on the way to becoming debt free. And that is avoiding the temptation to close accounts after you've paid them off. It may feel good at the time to be say goodbye to a card that may have caused such misery in the past. Yet there are at least two strong credit scoring-related reasons to leave cards open after payoff:

  • Credit utilization (balance/limit ratio). In calculations that evaluate how much of your available credit is being used, closing an account after payoff eliminates the credit availability (credit limit) associated with that account from utilization calculations that make up almost 30 percent of your score. The result of closing that account can be higher combined utilization percentage and a lower score.
  • Length of credit history. A card kept in good standing prior to payoff will continue to appear on your credit report for about 10 years after it's closed. During this time, your score's length of credit history calculations that make up about 15 percent of your score will continue to benefit from this account's ever-increasing age. But when eventually removed from your credit report, such positive contributions to your score will go by the wayside, and your score could drop.

Credit management freebies
Fortunately, there are many free tools available to consumers that can make the process of lowering your debt much easier and effective: 

1. Use a credit card payoff calculator to help estimate out how much and how long it will take to retire each of your debts using different payoff scenarios.

2. Take advantage of the free credit reports available once per year from each of the big three credit bureaus -- Equifax, Experian and TransUnion -- at If you haven't seen your credit reports from all three credit bureaus within the past year, this would be the perfect time to do so, as you plot out a debt reduction strategy. An effective way to access these reports throughout the year at no cost is to pull a report from one of the bureaus every four months.

3. Free credit scores are now offered at many trustworthy credit sites to help you track the progress of your credit improvement with the lowering of your debt each month. While the scores provided at many such sites are only rarely used by lenders in their credit decisions, most tend to work similarly in terms of measuring how you pay, how much you owe and how long you've been using credit. Better yet, one or more of your card issuers may already be providing you with a free credit score each month along with your card statement. Whichever score you follow and from whatever source, for the sake of tracking consistency stick with the same model each month, since it's not so much which score you use but that you follow the same score's progress each month to get the best understanding of the progress you'll surely be making.

See related: How payments are allocated on a card with different rates

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Published: February 18, 2016

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