I’m wondering — If my goal is to improve my damaged credit score and I get down to the last $300 or so dollars owed on a credit card I’ve previously gone rogue on, is it better to just pay off the remaining balance, or continue to make on-time payments? –Lindsay
It can be confusing to figure out the best way to pay off credit card debt, especially if you’re juggling multiple cards.
There’s more than one way to manage your debt. But if maintaining a healthy credit score is your top priority, follow these tips:
1. Always pay your minimums
The first thing you should prioritize is paying off the monthly minimum on each of your credit cards. If you don’t pay your minimum, you’ll start getting hit with late fees — which can add up fast. And if you fall far enough behind, your credit will suffer.
FICO calculates your credit score based on your performance in five categories: Amounts owed, new credit, length of credit history, credit mix and payment history. The latter, which can be hit by missing minimum payments, accounts for 35% of your overall score.
If you’re deciding between paying off a balance and paying minimums on other cards, you should always pay off your minimums first, said Malik Lee, certified financial planner and associate at Henssler Financial. “You want to rebuild your credit without going further in debt,” he said.
A good way to make sure you don’t fall behind on minimums is to set up automatic payments through your bank.
2. Keep your balance below 30% of your credit line
If you’re strictly focused on building up credit and can’t avoid a balance on your card, at least make sure to keep your balance below 30% of your total credit line. If it crosses that threshold, you might start to see your credit score drop.
Jared Paul, a certified financial planner and founder of Capable Wealth, explained that borrowers who keep their balance below 30% aren’t seen as a risk or a threat by creditors — so a balance of less than one-third of your credit line won’t hurt your score.
Paul added that keeping a small balance can actually help build credit. “It might not be a bad idea to pay the minimums for a while so [you’re] showing a longer history of on-time payments,” he said. “If you just have a credit that’s forever with zero balance — it’s not a bad thing, but it’s not a way to show that you’re paying on time.”
3. Find a method that works for you
If you’ve got balances across multiple cards, it makes the most sense to tackle the card with the highest-interest rate first. But if that balance is especially big, it might be more motivating to eliminate balances from smallest to largest. “By focusing on the card with the lowest balance, you can more quickly achieve a ‘win’ by paying it off in full,” Paul said. “Then, move on to the next lowest balance.”
These wins can help borrowers feel like they’re making good progress, Paul said. “If that can help someone get out of debt faster, that’s the long-term best play.”
4. Pay off your balance
If you’re focused strictly on eliminating debt without taking on extra costs, pay off outstanding credit card balances. That debt collects interest, so paying it off quickly will save you money in the long run.
But once you’ve eliminated your balance, don’t get rid of your card. The “length of credit history” component of your credit score makes up 15% of your overall score, so it makes sense to keep your cards open and continue paying off their minimum balance once you’ve brought your balance down to zero.
Got a money question for Broke No More? Ask us here to be included in a future column.
