Pay off card debt slowly or all at once?

To Her Credit columnist Sally Herigstad
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, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Question for the expert

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

Answer for the expert

Dear 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 score.

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 anything.

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 life!

See related: FICO's 5 factors: The components of a FICO credit score

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Updated: 01-18-2018