To boost score, let credit utilization guide your debt payoff


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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Question for the expert

Dear Speaking of Credit,
We have 12 store cards, five credit cards, two car loans, three loans. We are doing the Dave Ramsey plan on our own. We just paid off and closed 10 of those store cards and paid off a credit card in full. Does paying off this many cards at once affect our credit? Our credit is around 740 because of a short sale two years ago. Our goal is to have 800+ by the end of the year. Is that possible even if I keep closing cards? Dave Ramsey says to pay off the lowest and close it, but my credit cards are at 90 percent should I pay off to 30 percent first? Thank you. -- Yuri

Answer for the expert

Dear Yuri,
I've split your question into three related questions and answers, which, at times, may be at odds with some of Dave Ramsey's advice about debt and credit scores.

Q: Does paying off this many cards at once (12 store cards, five credit cards) affect our credit?

A: Whether accomplished all at once or over time, paying down card debt can only help your score and eliminating it entirely can only help your score more.

Q: Our goal is to have 800+ by the end of the year. Is that possible even if I keep closing cards?

A: There's good news and bad news on this front. The bad news is that, due to the short sale from two years ago, which will probably continue to appear on your credit reports with the derogatory description of "settled for less than the full balance" for another five years, it's unlikely you will be able to achieve 800+ during that time. The good news is that you won't need such a high score to obtain approval for the best interest rates on a future mortgage, car loan or credit card, as you're just as likely to qualify with a FICO credit score of 750+. And the best news is that you already appear to be on that path and should be achieving such a score within the next few years by simply continuing to do what you're doing.

That is, except for one thing. Regardless of what Mr. Ramsey may say, you must stop closing cards after paying them off. There are at least three important reasons for leaving as many cards open -- and active -- as possible after paying them off without going back into debt:

  1. Reporting to the credit bureaus. At least one credit account has to have been recently reported to the credit bureaus to keep your credit scores alive and well. You don't have to use a card every month for it to remain open and continue reporting each month, but making small charges and paying them off without interest every few months will be enough to generate a good credit score.

  2. Credit utilization (card balance/limit ratio). Now that you're aware of the importance of continuing to make at least small occasional purchases after paying those card balances off, know that by leaving cards open you'll also be providing enough available credit to ensure those charges make up only a small proportion of your credit limits and keep your credit utilization -- which counts for almost 30 percent of your score -- low.

  3. Credit history. Though closing a card doesn't immediately stop that card's history from being included in your scores, after about 10 years a closed account is typically removed from your credit reports, along with the many years of positive and score-enhancing credit history associated with it..

Q: Dave Ramsey says to pay off the lowest balance card and close it, but my credit cards are at 90 percent. Should I pay them off to 30 percent first?

A: Regardless of the method you use, as long as you're paying your card debt down and leaving paid-off cards open you're helping your score. Whether paying the card with the smallest balance first, as Mr. Ramsey recommends, or paying the highest interest or highest utilization first, as long as your total debt is getting lower and all payments are being made on time each month your score should be getting higher.

The most cost-effective method of paying off debt is to pay the highest interest balances first. Ramsey recommends the method that may provide the biggest psychological boost -- paying smallest balances first. But if you want to raise your score the fastest, you want a third method.

For score-raising purposes, I would suggest giving payment priority to your most highly utilized cards. Pay each card down to where no card's balance is more than 50 percent of its limit. Then continue to work each of them down so that none are above 25 percent, 20 percent, and so on, until all cards are paid off.

With that 800+ score being a bit out of reach for you for now, the following steps should help you move forward on your debt reducing -- and score-raising -- journey:

  1. Continue to pay down your cards using whatever strategy works most comfortably for you.

  2. Since card debt has much more of a negative impact on credit scores than installment (loan) balances, make only the minimum required payments on your loans while applying as much as you can to your cards each month.

  3. After payoff leave each of the remaining store and credit cards open and keep them reasonably active by making occasional small purchases and paying in full before interest accrues.

Keep in mind that while it can feel great to be debt-free, it can feel even greater to be debt-free with a high credit score!

See related: Payoff order for multiple cards: Which one first?, How to defeat debt and still have fun, Yay! 3 cards paid off. Now what?

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Published: May 28, 2015

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