Pay off card debt slowly or all at once?
To Her Credit
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also writes regularly for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Steward Radio and other programs. See her website SallyHerigstad.com
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Dear To Her Credit,
My question is, if I owe $3,500 in credit card bills and pay
them all off in one month, would that affect my credit score? Or is it better
instead to make big monthly payments? -- Yaritza
Before you think about what is good for your credit, think
about what is good for your total financial picture. Paying high interest rates
for one day longer than you have to is definitely not good for you in any way.
If you can afford to pay your credit card bills off without jeopardizing your
basic needs, emergency fund or other bills, do it.
Paying the cards off should actually improve your credit
score, as long as you keep the accounts open. That's because your credit card utilization
-- the relationship between how much you owe and your available credit -- will
go down. Say your available credit right now is $7,000. With $3,500 in
outstanding balances, you have a 50 percent utilization rate ($7,000 divided by
$3,500 equals 50 percent). You pay it
off, and your credit card utilization is now zero. That can only help your
Some people mistakenly think that paying off a card more
slowly helps them show a pattern of responsible repayment. However, you can
show just as much responsibility making a small purchase, such as a tankful of
gas, on a card once in a while and then paying it off before the grace period
is up. That way you've responsibly handled credit, and it hasn't cost you
So paying off your cards won't hurt your credit. More
importantly, what will it do for you?
- Getting rid of $3,500 in credit card debt will save you around
$630 per year in interest, assuming an 18 percent interest rate. That's $630
you could invest, use to start an emergency fund or make money-saving
investments such as winterizing your home to save on your heating bill.
- You'll have more borrowing room available when you need
it. Of course, you will have the now-unused credit limits on your cards. But
you'll also find it easier to qualify for more affordable interest rate loans to
buy a car or a house, for example, with a lower debt-to-income ratio. Your
debt-to-income ratio -- total monthly debt payments divided by gross monthly
income -- may be as important as your credit score to potential lenders.
- Having zero consumer debt changes the way you think about
carrying debt. When people already have a balance, perhaps one they've been
carrying so long that they can't remember what it was for, it doesn't feel much
different to add to it. But when your balances are zero, and you have a
commitment to never carry a balance from month to month again, you think twice
about spending money you before you have it.
- You'll be more ready for anything. Consumer debt is a
burden. It limits your options in good times, and it makes hard times much
worse. If you want to go back to school or have a baby, debt can get in your
way. If you lose your job, being in debt makes it that much scarier.
It's hard to think of any downsides to paying off your debt.
Getting out of consumer debt, and staying out of it for good, could change your
See related: FICO's 5 factors: The components of a FICO credit score
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