Speaking of Credit

Tips for getting a big score boost when paying maxed-out cards


Paying down cards always helps, but doing it strategically helps more

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Dear Speaking of Credit,
Hello! I have a question that I’ve searched for an answer, but I cannot get clear direction. I have four cards that are all maxed out: Discover ($200), Amazon ($730), Bank of America ($1,000) and Capital One ($500). I have one installment loan with $725 of $1,000 remaining. My FICO is at 649, and I am trying to get to 670 for top tier rate at a credit union for auto purchase.

Today I paid off three of four cards, so at statement time they will show $0. I will also do the same for the installment loan and remaining card. Therefore, cards and installments will all show $0. My question is will this be effective for a decent boost this month? Or should I leave small balances on them to show activity?

I have read I should use them and pay them off in small amounts, but I also understand that the trigger is what’s reported to the bureau at statement closing each month. So I am not certain whether the $0 balance has a greater impact for a score boost or do I need to charge $20 or so on the cards before statement closing? Thanks. – Jeff


Dear Jeff,
What’s best: a $0 or small balance left on that last remaining unpaid card? Regardless of how you apply those last payments, which we will discuss, going from 100 percent credit utilization to 0 percent or so on those cards, your score should easily see that 21-point boost you’re looking for. And you should see it within the 30 days or so it takes for new balances to report to the credit bureaus.

Yet, as much of a slam-dunk as it may seem, your plans for that top tier rate auto loan could be derailed if you allow yourself to fall into a couple of pitfalls that could have your score falling short of 670.

Zero balance versus small balance

First, what makes the question of a paydown versus a payoff a good one is that when calculating the utilization percentages affected by card balances and credit limits, a credit score is essentially measuring two things:

  • Your use of available credit, with greater use leading to higher risk – and a lower score.
  • Your recent credit activity within the two major types of credit – revolving (cards) and installment (loans).

The first of these two measurements is well-known. The second one, recent activity, not so much. It is an underlying assumption used throughout credit scoring that a consumer who actively uses credit – both cards and loans – is more likely to see a lower risk of future financial problems than someone who doesn’t use credit as frequently.

There can be a problem with the way credit card activity is measured by the score, however. Whereas a loan in good standing can be considered active simply by a balance larger than $0 on the credit report, card usage history is less clear. This is why the scoring formula must use the currently reported card balance and make some not-always-accurate assumptions as to how recently the card account has been active.

Though the credit reporting of a card balance alone does not always indicate whether that amount was made up of recent or older charges, the score simply considers any card in good standing with a balance greater than $0 to have been recently active. And conversely, a $0 balance tells the score there’s been no recent activity – even if that $0 balance follows charges and payments made as recently as the prior month.

To answer your question about how much to pay, a single card – or multiple cards – left with 1 percent utilization will likely earn a few more points than will a $0 balance that results in 0 percent utilization.

No recent revolving balances

While the difference between 0 and 1 percent on an individual card tends to be worth only a few points, additional points can be lost when all open cards on the credit report show $0 balances. When that occurs, you might see “No recent revolving balances” as one of the top reason codes accompanying your credit score.

Consider this potential for more lost points as another reason to leave a small balance yielding 1 percent utilization on that fourth card.

No recent installment accounts

Something you may have overlooked or are not aware of at all concerns the scoring effect of paying off your installment loan. Unlike revolving credit in which utilization makes up almost a third of your score, installment loan utilization only plays a very minor role. Therefore, don’t expect any help to your score from paying off that loan.

In fact, not only won’t it help, but paying off that loan entirely could actually hurt your score. Just as the score likes to see at least one credit card balance above $0, as a show of recent revolving activity, it similarly likes to see at least one open installment account – mortgage, auto, student or personal loan – to demonstrate recent installment activity.

If this is your one and only loan, hold off on closing it out just yet, as doing so could lead to fewer points and the reason code, “No recent installment accounts.” Then, once you have that new auto loan contributing to your score, pay the installment loan in full.

A simple solution

Despite wanting to keep such credit payoff strategies simple, the rather-obscure credit scoring quirks just discussed tend to appear when least expected and at the worst possible times. So, let’s stay on the safe side by:

  • Paying that fourth card down to slightly above $0, leaving about 1 percent utilization. This will leave your credit report with three cards at $0 balance, and one showing 1 percent utilization.
  • Protecting your score by leaving that installment loan open if it’s currently your only open loan. Once you’ve obtained the new auto loan, pay the older loan off entirely, as the new one will now satisfy that recent installment loan scoring requirement.

See related:Credit mix: Your variety of loans can impact your score

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Credit Card Rate Report Updated: September 16th, 2020
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