Is It Better to Pay Off Credit Cards or Pay Them All Down to Under Half the Available Balance?

by Chris Brantley
Understanding how credit cards affect your credit score can raise your rating.

Many credit card holders have questions about the best way to manage credit card debt to improve credit scores. Mostly, they wonder if it's better to pay the debt off and close the accounts, or pay each credit card down to a certain level. Fortunately, credit-scoring companies, such as FICO, help consumers understand the impact of certain actions on credit scores. The key thing to know is having available, but unused, credit has a positive effect on your credit score. This accounts for 30 percent of your credit score, MyFICO.com notes.

Credit Utilization

Credit utilization is a fancy way for the credit bureaus to refer to the percentage of your available credit that you actually use. For example, if you have a $1,000 credit limit on a credit card, and you carry a $700 balance, you use, or utilize, 70 percent of your available credit.

Stay Below 20 Percent

Using up to 50 percent of your available credit usually doesn't cause your credit cards to have a negative impact on your credit score, but it's best to use 20 percent or less. Using less of your available credit shows creditors you can effectively handle your debt. In other words, paying all your cards down to a lower percentage beats paying off just one.

Keep Accounts Open

Here's the problem with paying off credit cards completely and closing the accounts. It takes away your available credit. If you pay it down and leave it open, the credit limit for each card still factors into your available credit and helps your credit score. If you have a few higher-interest cards, you can simply pay off the balance each month before the interest charges kick in. if you have cards that charge fees, you should consider closing those once you get your credit use to 10 to 20 percent of available credit. As a point of reference, consumers with the highest credit, 760 or above, utilize 7 percent of their available credit on average.

Timing Payments

It's also OK to use and carry a balance on your cards, if you pay them down to your target percentage by the time your account is reported to the credit bureaus. Reporting dates vary, but you should accomplish this if you pay each card down before the monthly payment due date. Also, even if you can't get below 20 percent, it's better to pay the cards down as low as possible to maximize your credit score.

About the Author

Chris Brantley began writing professionally for a financial analysis firm in 1997. From 2000 to 2004, he worked as a financial advisor, specializing in retirement planning and earned his Series 7, Series 66 and insurance licenses. Brantley started his full-time writing career in 2012 and has written for a variety of financial websites, including insurance, real estate, loan and investment sites. He holds a Bachelor of Arts in English from the University of Georgia.

Photo Credits

  • Comstock/Stockbyte/Getty Images