A user recently asked me some credit card questions in relation to maximizing your credit score. Specifically, if you have money available to start paying down CC debt, which cards should you pay down first and why? Since I created a walk-through with some scenarios, I wanted to extend this to any Ants trying to decide the best way to tackle their credit card debt.
Quote:
Question #1:
Should I pay more on a credit card with a smaller limit and get really close to paying off the balance, or should I spread the even payment across three of my cards?
|
First and foremost:
You should always pay down cards to get them below 30% of the total balance, or at
least 50% of the total balance (below 10% is optimal). So to answer the question "Which card do I pay down?", it all depends on where you are on each card. Definitely do not just spread across evenly. But spread appropriately. For the future, when we refer to a card with a higher balance, we do not mean in total $$$, but in % of the max balance. (See below)
Example 1:
You have 3 cards all with $1,000 max limits. 2 of them have high % of their total balances. The dollar amounts themselves do not come into play, just how much you have available in cash to pay them down. In our example, we are going to say you have $1,000 at your disposal to pick and choose what you pay down.
Card 1 - $800 drawn out of $1000
Card 2 - $700 drawn out of $1000
Card 3 - $200 drawn out of $1000
In this example, I would first get all 3 cards under 30% i.e. under $300. So the simplest way to attack this scenario would be to pay $500 on Card 1, and $500 on Card 2. Results:
Card 1: $300 drawn out of $1000
Card 2: $200 drawn out of $1000
Card 3: $200 drawn out of $1000
Example 2:
This example may be more realistic. This time we will have $2,000 to divvy up.
Card 1: $1600 drawn out of $2000
Card 2: $1100 drawn out of $1500
Card 3: $950 drawn out of $1000
The first thing to do figure out the % drawn.
Card 1: 80%
Card 2: 73%
Card 3: 95%
This tells us that first and foremost, we MUST get that 95% card down. Since we have $3,650 in CC debt and can only pay down $2000, let's use 50% as our barrier we want to get below on all 3 cards.
So let's pay down like so:
Card 1: -$800
Card 2: -$600
Card 3: -$600
Final balance:
Card 1: $800 drawn out of $2000 (40%)
Card 1: $500 drawn out of $1500 (33%)
Card 1: $350 drawn out of $1000 (35%)
We've maximized our $2,000 to get us a much better credit score.
If we had instead chosen to pay the entire $1600 off in card 1, and $400 of card 2? The 95% on card 3 would still be killing your score, despite paying down the same amount of $'s.
*As a caveat, this advice is for credit score effect only so it doesn't consider interest rate APR. If you have $10,000 that is currently interest free, or $2,000 that is 30% interest, then for your own personal cash flow considerations, you should pay down the $2,000 first. However, if you are looking strictly at CB score improvement, use the above scenarios as a guide.