If you carry a credit card balance or balances, you could be hurting your credit score and your chances of getting a mortgage approval. Your credit card balances, how you pay your credit cards, and even the number of cards you carry can hurt your credit score.

But paying your credit card debt down can help and anyone can do it. Here’s what you must know.


How Does Credit Card Debt Affect your Credit Score?

Credit card debt is the second largest part of your credit score. The first is your payment history.

The credit bureaus calculate your credit utilization rate or the amount of credit card debt you have outstanding compared to your total credit lines. They look at credit card lines individually and as a whole.

Ideally, you shouldn’t have a utilization rate over 30% or it hurts your credit score. This means for every $1,000 credit line, you shouldn’t have more than $300 outstanding. Of course, it’s always best to pay your balance in full, but if you can’t, keep the 30% threshold in mind.

If your credit utilization rate is over 30%, it can hurt your credit score significantly. If you combine it with late payments (payments made more than 30 days late), you could damage your credit score quite a bit.


Does Carrying a Balance Hurt your Score?

Carrying a credit card balance doesn’t automatically hurt your credit score. It depends on the balance. Like we said above, if you carry a balance that’s over 30% of your total credit line, it can hurt your score. If it’s less, it may not hurt your score as long as you make your payments on time.

That doesn’t mean it’s a good idea to carry a balance, though. Every time you carry a balance, you pay interest on those charges. This increases the total cost of your purchase and makes it harder to pay the debt off in full.

How Fast Does Paying off Credit Card Debt Help your Credit Score?

Any changes you make to your credit takes time – your credit score won’t change overnight. But, paying off your credit card debt consistently will definitely help boost it. If you pay the balance off completely, your score might change in as little as 30 days.

If you take a more methodical approach, it may take more time, but every bit helps. Even if your credit score only improves a point or two at a time, over time it will accumulate to a much bigger and more effective change.

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How Much Does Paying off Credit Card Debt Help your Credit Score?

Paying off your credit card debt helps increase your credit score, but how much it helps differs. Each situation has a different outcome. There are typically 3 ways to pay off your credit card debt.

Pay the Full Balance

Paying your credit card balances in full will have the largest effect on your credit score. You’ll take your credit utilization rate down to 0%, which will help your credit score increase dramatically.

You won’t see the change instantly because it takes time for the new balance (or lack of a balance) to get reported to the credit bureaus.

To have the best effect on your credit score, don’t close your accounts after paying off the balance. Keep them open but refrain from using them.

Pay Monthly, But Methodically

If you don’t have the money to pay the balance off in full, pay the balance monthly, but consistently. Budget a specific amount of money for your debt and pay it each month. The consistent payments will bring the balance down, lowering your credit utilization rate and increasing your credit score.

The change in your credit score will be slower than if you paid the balance in full, but it will increase each month as you pay the balance down and lower your credit utilization ratio.

Focus on One Card

If you’d rather focus on one card at a time, you can help your credit score, but the change will be less dramatic. The credit bureaus figure your credit utilization rate in two ways:

By each card individually

With your total credit utilization totaling up all credit cards

If you pay off one card at a time, you’ll decrease your credit utilization rate for that card, which will have a small effect on your credit score. It’s not until you hit all the credit cards and pay them off that you’ll see the most change.

How to Pay off Credit Card Debt

It’s obvious at this point that you must pay off your credit card debt if you want to improve your credit score, so how do you do it?

While there’s no right or wrong way to pay off credit card debt, here are the two most popular methods.


Debt Snowball Method

The debt snowball method is a common method for those that need to see ‘quick wins’ to stay motivated to pay off their credit card debt. The debt snowball method works like this:

Order your credit cards from lowest to highest balance. Don’t pay attention to anything except the credit card’s balance. Ignore the APR, minimum payment, or anything else and focus only on the balance.

Work each credit card’s minimum payment into your budget. Always make the minimum payment for every credit card on time. This is non-negotiable and isn’t a part of your credit card debt payoff plan.

Figure out how much extra money you can pay toward the debt. Look at your budget and determine how much extra money you can pay toward a credit card after paying the minimum payments and your other required bills.

Pay the extra money toward the first credit card in line. This is the card with the lowest amount of debt. Keep paying the extra money you have budgeted plus the minimum payment to this card until it’s paid in full.

Once you pay off your first card, celebrate!

Take the money you paid toward the first card including the minimum payment and extra money paid toward the debt and add it to the minimum payment of the next card.

Keep repeating Step 6 until you are completely out of credit card debt.

This method works well for most people because you can see quick wins. Let’s say you have a $500, $1,500, and $3,000 credit card. You’ll work on the $500 credit card first. You’ll see how fast you can pay off that credit card, which will motivate you to keep going, paying off the higher balance credit cards too.


Debt Avalanche

If you’d rather focus on paying the least amount of interest possible rather than having ‘quick wins,’ try the debt avalanche method. This method focuses on a credit card’s APR and works like this:

Order your credit cards in order of APR, highest to lowest. You’ll focus on the credit card with the highest interest rate to create that avalanche versus a small snowball. It takes longer to see progress with this method, but you’ll save the most money.

Make each card’s minimum payment. This is non-negotiable and isn’t a part of the debt payoff plan. Make the payments on time so you avoid any late fees or accrued interest.

Budget so you have extra money to pay toward your credit card debt in addition to the minimum payments. You’ll focus this money on one credit card at a time.

Pay the extra money toward the first credit card in line. This is the card with the highest APR. Like we said earlier, you won’t see quick wins here, but it will decrease the total interest you pay.

Once you pay the first card, you have a big reason to celebrate. Your highest interest credit card is paid off in full!

Take the money you paid toward the first card and add it to the minimum payment of the next card or the card with the second-highest APR.

Keep repeating step 6 until you are completely out of credit card debt.

Tips for Credit Card Use After Paying off your Credit Card Debt

Once you pay off your credit cards, it’s important to know how to handle them so you don’t hurt your credit score again.


Don’t Close your Credit Cards

This is the most important tip. Don’t close your credit cards even when they have a zero balance. You need the ‘credit age.’ The longer the credit card is open, the older your credit age is, which helps your credit score.

Closing a credit card also increases your credit utilization. For example, if you still have a credit card with a balance, and you close a credit card with no balance, you decrease your total credit limit by the amount of the closed credit card. This increases your credit utilization rate and hurts your credit score.


Use Credit Cards only for Purchases you can Pay in Full

Using your credit cards methodically can help increase your credit score. The best way to use them is to charge the things you normally pay for each month and pay the balance in full.

For example, you buy groceries, pay utilities, and pay for insurance each month. If you charge them and then pay the balance off before the due date you’ll help your payment history, which is the largest part of your credit score.


Lock your Credit Cards up if you’ll Use Them

If you know you’ll be tempted by your credit cards but don’t want to close them, lock them up somewhere safe. A safe deposit box or a safe at home are good places. You could also give them to a trusted family member to lock up for you and to keep you accountable. You’ll get the credit age without worrying about racking up credit card debt and ruining your credit score.

Don’t Use your Credit Card as an Extension of your Income

Too many people use credit cards to buy things they can’t afford. This isn’t how they should be used. They aren’t an extension of your income, but rather a tool to help you build credit, protect your purchases, and make the most of your finances.


Final Thoughts

Paying off credit card debt is one of the best ways to help your credit score and to help improve your chances of mortgage approval.

Credit card debt that gets out of hand can be expensive and detrimental to any other financial goals you have. Put a plan in place to get out of credit card debt and then don’t use your credit cards as an extension of your income, but instead a personal finance tool that helps you build credit rather than ruin it.

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