Credit scores recover quickly from short-term debt

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,
OK, so this question is pretty long and confusing. It has to do with which option would be best for my credit. My credit card balance right now is about $700 with an available balance of $1,300. I have some items that I need to buy: scrubs and a computer. I need to buy my scrubs now, which cost $250, and I need to buy my computer later, which costs $1,500. I have been saving for my computer. So far, I have about $1,300 saved for this purchase.

Which would affect my credit the best?

1. Charge my scrubs to my credit card to make my balance go from $700 to $950. Then, buy my computer out-of-pocket, while making minimum monthly payments on the rest of my credit card balance.

2. Charge my scrubs to my credit card to make my balance go from $700 to $950. Then, pay off this $950 balance my next due date. Then, charge my credit card for the computer to make my balance go from $0 to $1,500. After this, I will make a payment of my remaining savings $500 to make my balance go from $1,500 to $1,000. After this, I will make minimum monthly payments.

Neither option is ideal, as they will be increasing my debt on my credit card. However, I wasn't sure if going down to a $0 balance on my credit card for a brief period of time would help my credit score. This is very confusing, so any advice would be greatly appreciated! Thank you! -- Melissa

Answer for the expert

Dear Melissa,
Now that my head has stopped spinning after reading and re-reading your very thoughtful question, I commend you on some creative thinking and a serious desire to minimize negative on your credit score from short-term debt. You're also being realistic by acknowledging that either option will increase the amount of credit card debt, raise your credit card's utilization percentage  (revolving debt-to-credit limit ratio) and most likely reduce your credit score. 

But that's OK. Scrubs and a computer are essentials for your livelihood and, as I'll explain, any damage to your score won't have to last long.

My reason for saying not to worry about your credit score's utilization and the likelihood of a lower score is that when it comes to managing your credit score, it's important to clearly understand which negative scoring impacts can be overcome relatively quickly without any long-term damage, and which are likely to affect your score well into the future. 

By far, the two biggest ways to inflict credit scoring damage are by 1) paying late, and 2) raising your credit utilization percentage. Together, the two scoring categories affected by such actions -- payment history and amounts owed -- make up almost two-thirds of your score (65 percent), with each having the ability to take a high score down to a low score literally overnight. Yet, each of these weapons of mass destruction comes with drastically different long term versus short term scoring implications.

Paying late. Whether a 30-day delinquency, charge-off or somewhere in between, late payments and most late-payment-related credit reporting items remain on your credit file for seven years. And since payment history makes up more than one-third of your score (35 percent), you'll never want to miss even one payment. While many lost points can be recovered with the increased passage of time since the last late payment, it can be many years before your score fully recovers from just one ding to your payment history.

Increasing credit card debt. Unlike payment missteps that stay with your credit history for what can seem like an eternity, the credit scoring formula only sees a card's most recently reported balance and credit limit when calculating credit utilization. This means that a high balance -- or low balance -- from a previous month has no impact whatsoever on today's score. Of course, this can be a good or bad thing, depending on current and past balances, limits and scores. But when rebuilding a credit score, it's always good when you can let bygones be bygones. 

With this short-term card utilization impact in mind, my response to your comment wondering whether a brief balance of $0 will help your score is that, yes, most likely it will. However, it will only help for as long as that $0 remains on your credit report, which, if you quickly turn around and charge on the card again, will not be very long. Once that $0 balance is replaced the following month with an updated balance, the effect to your score will be as if that $0 never happened.

All things considered, and if I'm understanding your question correctly, my suggestion would be to go with option No. 1, which will allow you to keep life simple by putting the $250 scrub purchase on the card and, if you can wait a little bit longer, paying cash for the computer once you've saved up the additional $200 to reach the $1,500 purchase price. 

This plan will not only save you the trouble of first paying off the card, then charging the computer, and then quickly paying the computer balance down, but, more importantly, you'll minimize any increased utilization percentage and keep your score as high as possible. Not to mention, you'll save a few dollars in credit card interest by putting $50 less on the card than with option No. 2.

Then, just continue faithfully making those minimum payments on time. Before long you'll see that utilization percentage coming down and your score going back up a little each month, and your short-term debt will cause no long-term damage. Good thinking and good luck!

See related: To boost score, let credit utilization guide your debt payoff

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Updated: 01-16-2018