How to restore credit after maxing out cards

Pay off your balances as soon as possible and rein in your spending

The Credit Guy columnist Todd Ossenfort
Todd Ossenfort has been chief operating officer for Pioneer Credit Counseling since 1998. He writes our weekly "The Credit Guy" column, answering reader questions about credit counseling and debt issues.

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Question

Dear Credit Guy,
I have two credit cards, one from Clearpath Federal Credit Union with a $1,000 credit limit, and one from Credit One Bank with a $300 credit limit.

I maxed out both cards, but I pay my monthly payment on time. Did this mess up my credit? – Dohnycia

Answer

Dear Dohnycia,
Making your payments on time, every time is the single best thing you can do for your credit score, because your payment history makes up 35 percent of your FICO credit score.

That said, maxing out credit cards very likely caused your credit score to drop because credit utilization is the second most important component (30 percent) of your FICO score. Credit utilization is the amount you borrow compared to your credit limit, and since you maxed out both of your cards, your credit utilization is 100 percent. 

By sending only the minimum payments, it will take you years to pay off these two cards. How long? Use CreditCards.com’s Minimum Payment Calculator to learn the true cost of (in interest and years) of sending only the minimum payments on your credit cards.

You need to find a way to pay more than the minimum payments every month to put these debts behind you sooner. To do this, you will need to assess your finances and create and stick to a budget. And while you are tackling this debt, avoid using your credit cards. 

Here’s a three-step plan to pay down your card debt and restore your credit score.

1. Stop using the cards.

I know not using your cards may be hard, but you should carefully consider any future charges.

You may be forced to use your credit cards in a financial emergency, but be sure it is truly an emergency. If so, develop a plan to pay off those charges as soon as possible.

Also, keep in mind that any efforts you make to reduce your card debt will be lost if you max out your cards as soon as you can use them again.

 

Video: What is your credit utilization ratio?

2. Continue to make your payments on time.

Consider making multiple payments (more than the minimum payments) on these accounts over the next several months. Multiple payments will help you pay off your balances sooner and speed restoration of your credit score from the damage done by maxing out the cards.

Which card should you pay off first? Which card has the higher interest rate? Pay the minimum on the lower interest rate card and apply as much extra you can to the card with thei higher interest rate. You will pay less overall interest this way.

If you continue send just the minimum payments on that $1,300 on your two cards, you will pay around $750 in interest before you reach a $0 balance on both cards. The more money you can find to pay more than the minimums, the sooner you will be  out of debt and the less interest you will pay.

How to find the extra cash to wipe out your debt?

3. Rein in spending.

To keep from maxing out your cards once they are paid off, you need to create a spending plan.

  • Take into account all of your monthly income and expenses.
    If your income exceeds your expenses, that’s great. If not, look at your expenses with an eye toward any reductions you can make that will allow you to pay off your debts and improve your credit score.
  • Cut your expenses.
    Your first instinct may be that you can’t make any spending adjustments, but there are almost always places to cut back, especially when it comes to incidental expenses.
  • Track your spending for a month and account for every penny you spend.
    Monitoring your expenses is a great way to discover exactly where you are spending your money. This will help you to evaluate your spending to see what you can cut, at least until you can pay off your debts.

By reining in your spending, you likely will find you have more financial resources to put toward erasing your credit card debt sooner, which will help revive your credit score. 

Take care of your credit!

See related: Q&A: Closing maxed-out card won’t lower credit utilization, 8 legitimate ways to improve your credit score now

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Updated: 12-15-2017