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Should I pay my credit cards off completely, or keep a small balance?
February 21, 2013 6:54 PM   Subscribe

Due to a family thing, I have received a one-time windfall, and I would like to pay off my credit cards, improve my credit, and buy a new car (getting a loan for most of it). I just want to know if it's good to keep a small balance or pay them off completely.

I have checked all three credit reports via the free annualcreditreport.com thing, and there are no blemishes or mistakes on my reports, so nothing I need to dispute there. I had terrible credit in the past, then had a lull where I used no credit for a long time, then about three years ago I started rebuilding it. I have five credit cards now, with about $6700 in total balances. This amounts to something like 93% utilization. I found out my credit score, and it's 633, which I know is not good.

My question is: As far as improving my credit goes, is it better to leave a small balance on my credit cards (maybe $300 or so?) or pay them off completely?

I plan to get a car loan in the neighborhood of $10,000-$12,000 after I pay down / off my cards and my credit improves. I have enough for a good down payment, but not enough to buy the car outright without a loan. If I do keep a small balance, it would be on my credit union card which has the best interest rate of all of my cards. I will be using the credit union for the car loan as well.
posted by marble to Work & Money (20 answers total) 1 user marked this as a favorite
 
My understanding is that paying them off in one lump sum should not hurt your credit; the confusion comes from the fact that banks benefit from you continuing to pay interest by doing the slow payoff over time, and so they encourage it.

That said, it is good to continue using the cards for your usual monthly expenses as much as is reasonable and possible on your budget, to demonstrate your continued ability to make on-time payments.
posted by juliplease at 6:57 PM on February 21, 2013


Pay them off. The difference in your credit score won't even be in the same universe as not having that debt. And don't use them anymore (but keep them open).
posted by bensherman at 6:58 PM on February 21, 2013 [6 favorites]


I've never ever ever kept a balance on my credit card and I have +740 credit score.

How much are your finance charges per month?
posted by sandmanwv at 6:59 PM on February 21, 2013 [3 favorites]


Pay them off completely, but continue to use the cards without carrying over a balance each month.
posted by something something at 6:59 PM on February 21, 2013 [13 favorites]


Pay them off completely.
posted by mcwetboy at 6:59 PM on February 21, 2013 [1 favorite]


To the best of my knowledge, there is no credit score benefit for carrying a balance. As everyone above notes, keeping a card active does make a difference, but that does not mean you ever need to pay less than the full balance every month.
posted by restless_nomad at 7:01 PM on February 21, 2013 [2 favorites]


Pay them off.
posted by Tanizaki at 7:04 PM on February 21, 2013


Also, do not close any of the credit card accounts, even if you don't use them. That can cause a ding to your score, though I guess that ding is usually due to the fact that closing the card changes the debt:credit ratio in a way that is not beneficial to people who are in fact still carrying debt. Still, I understand it is good practice to keep the cards open.

Sometimes people want to close accounts because leaving them open seems tempting/risky. If this is a concern, my favorite trick is to take the cards you will not use, place them in a large plastic container, fill it with water, and store in your freezer.
posted by juliplease at 7:05 PM on February 21, 2013 [1 favorite]


Thanks for all the helpful answers, everyone. I will pay them off entirely. I appreciate the advice.
posted by marble at 7:10 PM on February 21, 2013


something something is advising the method I use, and I have a good credit rating.
posted by gudrun at 7:17 PM on February 21, 2013


Pay them off entirely. I don't think you should immediately put new expenses on them, as I believe the fine print says you must have no balance before they'll reinstate the 30 days grace period. Once you've let the dust settle on your old loans, you can put the living expenses you can afford onto the card, and pay the full balance on the due date (maybe a few days early, just to be safe). Typical card contracts will give you at least 30 days to pay the balance in full, with no interest or finance charges.

You do not need to carry a balance to achieve a high credit score; I've never carried a credit card balance and my score is somewhere in the 800 range.
posted by pwnguin at 7:55 PM on February 21, 2013


Pay off the cards, and pay them off every single month as much as possible --- yeah, sometimes you won't be able to (say if you hit a larger-than-usual car repair or something), but never just pay the minimum and never carry a balance just to BE carrying a balance.

Your credit rating is based on how much credit you have *available*, not how much of a balance you are carrying: say you have a card with a $3000 credit limit, but you carry a consistant monthly balance of around $2000..... that means you have $1000 available. Pay that card off and you have $3000 available, which means a higher credit rating. The reason banks prefer you would keep carrying that $2000 balance is the interest you're paying on it every month, and wouldn't you rather keep the money you pay in interest for yourself?!
posted by easily confused at 2:40 AM on February 22, 2013


Pay them off, and consider avoiding such a large car loan by getting a used car. Even a car that is just a few years old will cost much, much less. Having a better debt to income ratio will help keep your credit great.
posted by the young rope-rider at 4:09 AM on February 22, 2013 [2 favorites]


I agree with something something but make sure to not use them *too much*. Your statement balance is what is reported to the bureaus, and if your statement balance is too much of your available credit (even if you pay it in full every month), that will ding your score. Good luck!
posted by getawaysticks at 5:55 AM on February 22, 2013


I've never ever ever kept a balance on my credit card and I have +740 credit score.

Hmm, I've always kept a very small balance on my credit card, less than 10% of my total credit limit, and I also have a 740+ credit score at all 3 agencies.

I was told to do this by a friend of mine who had previously worked at Citi, which is based in my area. He said that once a month, a credit card balance is reported to credit agencies, and so if you pay off your credit cards every month, the balance reported will always be $0. The credit reporting companies are more likely to increase your credit score if you can demonstrate that you can hold a small balance over the course of several months, otherwise, it will just appear that you never use your card.

But looking at everyone else's results, I guess it doesn't make much difference, or makes very little difference, in the end.
posted by nikkorizz at 6:07 AM on February 22, 2013


It's pretty much agreed upon to (1) pay them all off, (2) do not close them and (3) use them a bit each month. It's somewhat disputed [and since the FICO calculations are a trade secret, no one really knows] whether or not it is better to (4) carry a small balance, but then pay it off once in a while or to just pay it off everything month entirely.
posted by Brian Puccio at 6:10 AM on February 22, 2013


He said that once a month, a credit card balance is reported to credit agencies, and so if you pay off your credit cards every month, the balance reported will always be $0

That's not necessarily true. By law, credit card companies are required to provide a 21 day grace period between when the billing statement is issued and when the payment is due. So if you always pay off your card every month on the due date, there will have been a 21 day period where you would be reported to the credit bureaus as having a balance, even though no actual interest is charged for that period. At least for me personally, that means in practice that my credit report shows some balance on my card at all times even though I have always paid off the card every month. The only ones that show as $0 are the ones that I don't actually use at all.
posted by burnmp3s at 7:37 AM on February 22, 2013


He said that once a month, a credit card balance is reported to credit agencies, and so if you pay off your credit cards every month, the balance reported will always be $0

This is not true at all. My credit score was 804 last time I checked. I have never had a mortgage, car loan, student loan, or any type of loan. All my credit history is from credit cards (and bank accounts, if that factors in). I have carried a balance for probably a total of one year of the 15+ years I've had credit cards, and that was due to working a low-paying job and putting grad school tuition on my 0% interest card. When I check my credit reports, the balance that they show is usually about my average payment for the month. To the OP -- pay 'em off!
posted by jabes at 8:11 AM on February 22, 2013


He said that once a month, a credit card balance is reported to credit agencies, and so if you pay off your credit cards every month, the balance reported will always be $0

This sounds like a story cooked up by credit card companies to keep you paying interest.
posted by looli at 9:18 AM on February 22, 2013


The payment histories recorded on credit reports do distinguish between on-time versus inactive.

One good way to keep a credit history going is to use a card for nothing except, say, an online subscription (Netflix or Hulu, for example), or a recurring automatic fee like a gym membership, and paying that off every month. Little $8 or $30 balances every month can still add up to nice looking credit histories with lots of on-time payments.
posted by gimonca at 12:35 PM on February 22, 2013


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