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.
- 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.
- 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.