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Kgrims
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Credit Card

I currently have one credit card that I am paying off monthly. Would it benefit me to just pay the whole thing off since it is keeping my score low? Would paying it off completely in one payment improve my credit score? 

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2 Replies

Credit Card

Paying a balance on time is very helpful to your score but so is having lower overall debt.  Plus, If you can pay off the card, you stop paying interest.  If you can use it for small charges and pay in full each month you will probably have the biggest benefit to your score.

Credit Card

So, I'm going to tell you some stuff that is purely for your credit score. What I mean, is the following may not be beneficial to you financially, and some people would call some of these ideas financially irresponsible; however, you asked about your credit score, so here we go. I will put financial advice interjection in parenthesis, but I am not your financial advisor. 

 

To directly answer your question, it doesn't matter if you make your minimum payment every month, or if you pay a credit card off in full, or you do something in between. The way that gets reported is just "paid" or "not paid". Either way, you get a shiny green check in the box on that account. (Pay your account off in full every month. Never put more on your card than you can afford to pay off when the statement closes. Interest = bad).

 

On time/missed payments account for the largest portion of your score, but there are three more categories for your score that are worth mentioning when talking about credit cards.

 

1. Number of active accounts. An account is any line of credit: car loan, mortgage, credit card card, personal loan, etc. The total number of active, aka "not paid off", loans you have matters. To clarify, paying off a credit card every month does not make it inactive; the inactive bit refers to closed accounts, like if you pay off your car. There is a happy medium here, though. Too many or too few can negatively impact your credit. If you only have one credit card, it is very likely that you would benefit from opening more accounts. (Do not open more accounts than you need, or, at least, don't overspend because you have more credit lines. Your job is still to pay off everything when statements close. Many people use one or even zero credit cards because they don't have self control and would overspend. Better to take a hit to your score than go into a pile of debt that you can't handle. There are plenty of financially savvy people who don't use credit cards, and plenty more who have 10. I have 3. You do what works for you.)

 

2. Debt-to-income ratio. This is just what you owe against what you bring in. As you pay down long term debt, this gets better. Your credit cards also play a role here, though. Every credit card company reports your card balance every month and this affects your score. Most companies report your statement balance, but some do other weird things. I have Visa and Amex; they both report statement balance. A lower statement balance will raise your score for the following month. If your statement balance is $1000 and you pay it off in full, the reported amount is still $1000. The next month, it could be $2000, and, even though you pay it off in full again, you will see a score drop just because your reported debt is higher than it was. The next month is $1000 again, and your score will bounce back. Just saying, this is one of the things that causes month-to-month fluctuations.

 

3. Average age of credit. This is exactly what it sounds like. They take the age of all of your active lines of credit, and average them. Buy a new car? You get a zero thrown in there and a score drop with it, though that drop is more due to your new debt than the drop in your average age of credit. Every month all of your open credit lines get one month older, so this slowly improves on its own... kind of. Loans get completely removed from the equation when you pay them off. Like a 30 year mortgage. That will eventually be a really old line of credit that does wonders for your average, but at the 30 year mark while you are celebrating because you paid off your house, your credit score will drop. (Financially stupid to not pay things off early if you have the means just because you are worried about your average age of credit. You should virtually ignore this category.) Now, this is where credit cards really shine. Credit cards just keep ticking up as long as you don't close the accounts. I have a credit card that I haven't used in 4 years that I won't close because it boosts my credit score. (If you do something like that, you still have to check the balance every month. Credit theft/fraud is real.)

 

Anyway, I'm glad you're interested in your finances. Keep it up. Of all the finance things I know, however, credit score management is probably the least important. So keep learning. 

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