Debt shifting helps your score, but paying it off is better

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,
I'm looking to refinance my house, but for some reason my credit is not so good. Now, I kind of know how credit-to-debt ratio works. I have a total of approximately $14,000 in debt, from $39,000 available credit. That puts me at about 30 percent. I have about 10 credit cards revolving. Some are revolving anywhere from 20 percent to 70 percent of credit available. Do you think I can increase my credit score by just shifting my debt from card to card so I can have all my individual cards near 30 percent? Because I know that the credit bureaus look at overall debt ratio, then at individual debt ratios with credit cards. -- Mike

Answer for the expert

Dear Mike,
Yes, I believe shifting balances among your cards to reduce some of the highly utilized balances to around 30 percent could help your score. But by how much, and whether it will be enough to qualify for that refi, I'm not so sure.

Raising a not-so-good score to a good one is likely to require more in the way of debt reduction than debt shifting, and that will require the added ingredients of money and time. And, if you have any recent late payments, even more time.

Not that some strategic debt shifting can't raise your score quickly. It can, particularly if you are able to move the credit card debt to an installment loan, such as a refinanced mortgage, which, of course, is what you're aiming for.

So let's look at how you can, first, get your score to where you'll qualify for the refi and, then, be able to pay off the remaining card debt with the proceeds from the newly refinanced mortgage.

The two main credit scoring forces at work in this discussion are the credit utilization (card balance/limit) percentages calculated on both an individual and combined account basis, with combined utilization always having the most scoring impact. Simply by shifting existing debt around to reduce the utilization percentage on individual cards you can expect to increase the score by a few points or more -- particularly when bringing all cards to below 50 percent -- yet it's going to take an actual reduction in your overall debt to drop that combined utilization to where your score rises significantly.

You have three ways to go about shifting and reducing your debt to where, with a good dose of persistence and patience, you should soon begin to see your score moving steadily upward toward the refi-qualifying level:

1. Balance transfers. By transferring balances among cards, within a couple of months you could see some of the score increase you're looking for, as the individual card utilization on your most highly utilized cards drops. Be forewarned, however, that you'll be paying a high price for those points, with the typical transfer fee being about 3 percent, plus high interest on the transferred amount.

2. "Snowball" debt elimination method. This tactic focuses on paying off the smallest balances one by one to minimize the number of cards with balances, an often-overlooked scoring factor that looks solely at the number of cards in which some balance amount is reported. Fewer accounts showing balances can raise your score at least slightly, while also providing a bit of a morale boost with each balance eliminated.

3. Paying highest-interest balance first. Scores pay no direct attention to interest rates. But by adding to the principal each month -- particularly when only minimum payments are made -- high interest works against efforts to pay down your debt. For this reason, it can make good sense to pay this costliest portion of your debt first, giving priority to the part of your debt in which the greatest proportion of your monthly payment is currently going to interest.

To put these ideas into action, you may want to try the following strategy that manages to incorporate all three of the above methods for raising your score through debt shifting and reduction:

First, begin to pay off any small balance cards, whether bank, department store or gas cards, to lower your number of accounts with balances.

Next, using balance transfers, move amounts from all cards with greater than 50 percent utilization to cards having enough availability to absorb the additional balance amount without exceeding the 50 percent mark.

Then, once you've paid off your smallest balance cards, apply as much of a payment as you can each month to the card with the highest interest balance until it's paid off or down substantially, followed by the next highest interest balance, and so on.

These debt shifting and reduction techniques should enable you to increase your score enough to qualify for a refinanced mortgage, and then use those lower interest funds from the refi to pay off the remaining card debt and raise your score even higher.

See related: 2015 balance transfer offer survey

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Updated: 01-18-2018