A Roadmap Out of Bankruptcy

How to Pay Down Credit Cards to Boost Your Credit Score

Say goodbye to your maxed-out cards with this debt payment plan.

A Roadmap Out of Bankruptcy

Moving a balance to a 0 percent APR transfer card could be a good strategy for paying down your pile of debt.

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If you know anything about credit scores, you know carrying high credit card balances is a big no-no. In fact, your debt-to-credit ratio (how much you owe versus your total available credit) makes up about 30 percent of your overall credit score. And revolving debt – like credit cards – weighs heavier than other outstanding debts – like your mortgage or car loan. So if you’re carrying a bunch of maxed-out credit cards, your credit score is likely in the tank.

The most straightforward way to improve your debt-to-credit ratio is to simply pay down those balances. But chances are if you’re in a lot of debt, you can’t pay off all the balances right away. (That’s how you got here in the first place, right?)

Here’s the good news: You don’t have to pay your credit cards off to boost your credit score. But to get the most credit score traction out of every extra payment, you do need to come up with a plan for paying down your credit cards in a certain way.

The snowball method

The snowball method is excellent for paying off debt quickly and efficiently. Basically, you throw extra money at one debt, and when it’s paid off, put the extra plus the old debt’s minimum payment toward the next debt. Repeat this until you’re debt-free. 

This is an excellent way to get out of debt, if just getting out of debt is your goal. But what if your goal is to get out of debt while also boosting your credit score as quickly as possible? Maybe you’re hoping to apply for a mortgage soon, or a car loan?

In this case, the snowball method probably isn’t how you want to start. Eventually, you might switch to that, but you may want to begin by evening out your credit card balances.

Lowering your debt-to-credit ratio

When FICO calculates your credit score, it looks at not only your overall debt-to-credit ratio, but also the individual debt-to-credit ratios of your various credit cards and other revolving debt accounts.

Here’s an example:

Card 1: $5,000 balance/$10,000 limit = 50 percent debt-to-credit ratio

Card 2: $4,500 balance/$5,000 limit = 90 percent debt-to-credit ratio

Card 3: $500 balance/$1,500 limit = 33 percent debt-to-credit ratio

Overall: $10,000 balance/$16,500 = 60 percent debt-to-credit ratio

In this case, your overall 60 percent debt-to-credit ratio will ding your credit score pretty severely. A “good” debt-to-credit ratio is around 30 percent, and you’re nearly doubling that.

But since your score also accounts for individual credit cards, you can see that Card 2 is hurting you the worst – it’s nearly maxed out, which is not good. Card 3 is posing the smallest problem, since it is nearly in that “good” range.

In a situation like this, you’ll boost your credit score if you focus on paying down Card 2 first. Depending on the interest rates of each of these cards, you might choose to pay that card down all the way.

Or if it’s a card with a lower APR, consider throwing money at its balance until it’s at or near $1,500 to reach the 30 percent debt-to-credit ratio. Then move on to Card 1 or whichever card has the highest interest rate.

Now, this strategy isn’t guaranteed to add hundreds of points to your credit score. But because you’re improving individual debt-to-credit ratios for each of your credit cards, you will make progress more quickly than if you just snowballed your debt.

Still, you need to marry this with some aspects of the debt snowball, including the intensity with which you pay down your debt. After all, the only way to try to achieve credit score perfection is to pay your credit cards off completely, and refuse to carry a balance again.

Why not just spread it around?

Maybe you’re reading this thinking, “Why not just transfer some of the balance from Card 2 to Card 3? Or get another credit card to transfer some of that balance?”

You could. In fact, moving balances to 0 percent APR balance transfer cards can be a good strategy for both boosting your credit score and getting out of debt. But just shifting your balances around isn’t going to help much here, partially because the credit limit on Card 3 is so low to begin with.

What if you do have a $0 balance card in the mix? In this case, you still don’t want to transfer another card’s balance. This is because one part of your credit utilization mix is the number of accounts that carry a balance. So having three accounts carrying a balance and one with no balance is better than having four accounts carrying a balance – even if that move improves one card’s debt-to-credit ratio.

You can’t game the system

The bottom line here is that credit scoring models are so sophisticated these days that you can’t really “game the system” by shifting debt from one card to another. In the long run, you just need to focus on getting those credit card balances paid off.

In the meantime, bringing cards below a 30 percent (or even 50 percent) debt-to-credit ratio may boost your credit score more quickly than simply snowballing your debt. This is especially true if your debt snowball would leave a maxed-out credit card in the mix for months to come.