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Credit Card Debt, Credit Score, and Credit Utilization Ratio

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When it comes to credit card debt and credit score, it’s important to keep in mind credit utilization ratio. Credit utilization ratio is the amount of revolving credit (credit cards and lines of credit) currently used divided by the total amount of revolving credit available (see example below). While a good rule of thumb is to keep the rate below 30% to avoid hurting the credit score, experts suggest keeping the ratio under 7% is best.

Below are three ways to pay off credit cards and how they affect the credit score:
  • Paying off the full balance. If paying off the debt drops the credit utilization significantly, there will be an improvement in score once it is reported to the three major credit bureaus (see below regarding balance reporting).
  • Paying it off slowly and methodically. This approach slowly increases the credit score.
  • Paying off one card, but having balance on the others. This strategy will help improve the per-card utilization and overall utilization. This eliminates one balance but keeps utilization high.
The credit utilization will be reported to the credit bureaus typically every 30 days at the end of the billing cycle. Once the monthly credit card bill is paid, there may not be a change in credit score for a couple of weeks, the bureaus update the balance information with the credit reporting agencies.
Below are some good credit habits that will also help increase the score (courtesy of Nerdwallet):
  • Pay bills on time, every time. Payment history is the other major factor in scores, along with utilization. And the higher the score, the more a late payment can damage it.
  • Keep the 30% rule in mind. Don’t use more than 30% of available credit on any card at any time during the month.
  • Apply only for credit you actually need.
  • Check free credit reports at least once per year for accuracy. If you spot an error, take steps to have it corrected.
Below is a quick guild from Nerdwallet on what is considered bad, fair, good, and excellent credit.

Sources:

Credit Score Ranges & How to Improve, Nerdwallet
I Just Paid Off My Credit Card. Will My Credit Score Go Up? Nerdwallet
Experian Credit Education – Utilization Rate 
Should I Pay Off My Credit Card Debt Immediately or Over Time? Experian