Best way to apply tax refund to multiple card balances


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.
Ask a question.
'Speaking of Credit' archive

Question for the expert

Dear Speaking of Credit,
I currently have a Wal-Mart credit card, Victoria's Secret credit card, two Visa credit cards and one MasterCard credit card. I need to get my credit utilization down, as currently my Wal-Mart card and two credit cards are basically maxed out. One is $3,000, one is $2,000 and one is $1,300.

My question is this: With our tax returns, I will have $3,500 to use to pay down my cards. Would it be better to pay them all down, or to pay a few off, leaving one card almost maxed out? I was thinking of paying off the highest one, which is $3,000, then using that do balance transfers to pay off Wal-Mart and the other credit card, leaving a zero balance on all my cards, except the one which will then be maxed.

What is the better option? What would look better, as I need to do this because we are applying for a mortgage soon. Any help would be greatly appreciated. -- Marcy

Answer for the expert

Dear Marcy,
Good thinking! With three cards maxed out, I can't imagine a better use for your tax refund, especially since you will be applying for a mortgage soon.

Whichever way you choose to distribute that $3,500 windfall among your cards, your credit score will surely thank you for reducing those maxed out balances and lowering your credit utilization (balance/credit limit percentage). It's also good that you're asking how best to apply these funds, since how you allocate these payments can further impact the size of the score increase you're likely to see.

With a mortgage on the horizon, I'll stick here to simply addressing how best to raise your credit score without consideration for some of other factors -- such as the amount of interest you're paying and how long you've been using a particular card -- that typically enter into a decision over which accounts should be paid and how much. When a mortgage is at stake, your credit scores and the amount of debt appearing on your credit reports will matter more to the mortgage lender.

The fact that you're asking how you should pay down these cards indicates that you already have some awareness that when credit scores evaluate utilization, they do so on both an individual and combined basis. That is, while the combined or total utilization weighs most heavily in your score -- almost 30 percent -- attention is also paid to how cards are utilized on an individual basis. If the majority of your cards have a low individual utilization, you're seen as a lower risk and your score will be higher. 

For your situation, my preference would be for you to pay all three cards down, rather than pay off one card and transfer the other two balances to it. While that won't get you to the admittedly enticing goal of having a card with 0-percent utilization, it will do something more important: ensure that you don't have any cards whose individual utilization is in those dangerous-to-your-score upper ranges. And to help you implement this plan, I will also show you how to allocate payment amounts that will put each card at as close to an optimal individual utilization percentage as possible.

For now, I'm going to leave your Victoria's Secret and the single non-maxed out credit card out of this discussion, since they don't appear to be a big part of your debt picture. That will allow us to focus on the maxed-out Wal-Mart and two other cards that together show a combined balance of $6,300, the majority of which will be paid from the proceeds of your $3,500 tax refund.

The following charts will help illustrate some of the score-impacting differences between the payment strategies you've suggested. While you'll see that paying this debt down by $3,500 will reduce your combined utilization percentage to 44 percent in each of the scenarios, regardless of how you allocate the funds, you'll also be able to see how the individual card utilization levels vary within that overall 44 percent according to how much you pay on each card. Again, our goal will be to eliminate any high percentages, even if it means raising some of the low ones.

Option 1, Part 1. When going the route you've suggested, this is how your combined and individual utilization percentages might look after using the $3,500 to pay off Card 1, pay Card 2 down by $300 and the Wal-Mart card down by $200. Notice that Card 1 utilization becomes zero percent while the other two cards remain high at 85 percent:

  Credit limit Old balance Payment New balance Utilization
Card 1 $3,000 $3,000 $3,000 $0 0%
Card 2 $2,000 $2,000 $300 $1,700 85%
Wal-Mart $1,300 $1,300 $200 $1,100 85%
Combined $6,300 $6,300 $3,500 $2,800 44%

Option 1, Part 2. For the second stage of your proposed balance transfer option, the Card 2 and Wal-Mart balances are transferred to Card 1, which takes Card 1 utilization back up to 93 percent and the other two card utilization percentages down to zero. These balance transfers provide for a better individual utilization outcome than in scenario #1, since there are fewer highly utilized cards, but we're aiming for no highly utilized cards.

  Credit limit Old balance Payment New balance Utilization
Card 1 $3,000 $0 $0 $2,800 93%
Card 2 $2,000 $1,700 $1,700 $0 0%
Wal-Mart $1,300 $1,100 $1,100 $0   0%
Combined $6,300 $2,800 $2,800 $2,800 44%

Option 2. Now looking at the better of your suggestions -- paying them all down -- all three of your cards come close to staying within the overall 44 percent without any highly utilized cards in the mix.

  Credit limit Old balance Payment New balance Utilization
Card 1 $3,000 $3,000 $1,680 $1,320 44%
Card 2 $2,000 $2,000 $1,120 $880 44%
Wal-Mart $1,300 $1,300 $700 $600 46%
Combined $6,300 $6,300 $3,500 $2,800 44%

There can be one problem with this last option, however, and that is knowing how much to allocate to each card so that you can match the individual and combined utilization percentages as closely as possible.

Using the example in Option 2 above, the following four-step process should help guide you toward calculating the best individual payment amounts, regardless of the size of your debt, credit limits or available funds. Although, be prepared to make some minor adjustments due to rounding errors in some of these calculations:

  1. Decide how much you can pay in total, then subtract the total amount you're paying from your combined credit card balance. This will be your "combined new balance."

Step 1 Combined balance - Combined payment = Combined new balance.  $6,300 - $3,500 = $2,800

  1. Divide the combined new balance by the combined credit limit. This will be your "combined utilization".

Step 2 Combined new balance / Combined credit limit = Combined utilization.  $2,800 / $6,300 = 44%

  1. For each card, multiply the credit limit by the combined utilization percentage you have just calculated. This will be your "new balance" amount.

Step 3 Credit limit multiplied by combined utilization = New balance. Card 1: $3,000 x 44% = $1,320

  1. Finally, for each card, subtract the new balance from the (old) balance. This will be the "payment" amount.

Step 4 Old balance - New balance = Payment.  Card 1: $3,000 - $1,320 = $1,680

Then, going forward, you'll want to continue reducing those balances further, using these same calculations until your individual and combined utilization percentages fall within the 1-9 percent range. At that time, as long as you have had no late payments, you could be seeing scores well into the 700s and some of the best available interest rates and terms on mortgages, auto loans and credit cards.

Best of luck with your scores and your mortgage!

See related: Forget the 30 percent credit utilization 'rule' -- it's a myth, 5 steps to a mortgage-worthy credit profile

Meet's reader Q&A experts

Does a personal finance problem have you worried? Monday through Saturday,'s Q&A experts answer questions from readers. Ask a question, or click on any expert to see their previous answers.

Published: February 12, 2015

Join the discussion
We encourage an active and insightful conversation among our users. Please help us keep our community civil and respectful. For your safety, do not disclose confidential or personal information such as bank account numbers or social security numbers. Anything you post may be disclosed, published, transmitted or reused.

If you are commenting using a Facebook account, your profile information may be displayed with your comment depending on your privacy settings. By leaving the 'Post to Facebook' box selected, your comment will be published to your Facebook profile in addition to the space below.

The editorial content on is not sponsored by any bank or credit card issuer. The journalists in the editorial department are separate from the company's business operations. The comments posted below are not provided, reviewed or approved by any company mentioned in our editorial content. Additionally, any companies mentioned in the content do not assume responsibility to ensure that all posts and/or questions are answered.

Follow Us

Updated: 10-26-2016

Weekly newsletter
Get the latest news, advice, articles and tips delivered to your inbox. It's FREE.