Debt Reduction Strategy : Is Improving Your Credit Score is a Priority or Reducing Your Debt Quickly
by Mr Credit CardWhen you are formulating a credit card debt reduction plan, you have to ask yourself whether you want to reduce your debt as quickly as possible (ie whether cash flow is a priority) or if improving your credit score is more important. That is because your decision will determine how you approach your plan.
If you want to reduce your credit card debt as soon as possible, then pay off the card with the highest interest first. Then work on those with the next highest rate and so forth.
However, if your goal is to get your credit scores up, then it is probably better to reduce debt on your card with the higher credit utilization. This is because credit utilization is one of the key factors in determining your credit score. Once you have reduced the utilization to about 25% to 30%, then move on to the card with the next highest utilization issue.
If improving your cash flow is a priority, then you may want to consider consolidating your debt into a 0% balance transfer card (but do it only once). But if improving your credit score is a priority, then consolidating your debt may not such a good idea because you will have a very high credit utilization on one card but very low utilization on the rest of your cards. The are distinct ‘gaps’ in the credit utilization ratios among your different cards.
But first a word of caution. If you want to do a 0% balance transfer on a credit card, then do it once only. Then get on a systematic plan to reduce your debt. Many people keep playing the zero percent balance transfer game and what it does is that it ends up possibly lowering your score because you end up utilizing too much of your credit on one particular card. This especially happens when you transfer debt from a high limit card to a lower limit card. BUt more importantly, playing the merry go round may blindside you from reducing your debt.
The decision to consolidate credit card debt and which card to pay off first depends on whether improving your credit score is more important or reducing your debt quickly. Think about this issue carefully before formulating your plan.
April 15th, 2007 at 06:03
Don’t you mean reducing the total utilization rate to 25-30 percent? Bringing utilization down to 25-30 percent per card wouldn’t help if – like most people – you have multiple cards. With the 0% balance transfer, the rate period needs to be long enough for the card holder to pay off the balance otherwise they will get hosed financially when the teaser rate ends.
April 16th, 2007 at 14:10
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Bringing utilization down to 25% on each card will help. The fine points of paying off the credit cards when the 0% runs off is different for everyone. If you have 4 cards that all have a 0% balance that runs out in 12 months you obviously you have a few options.
Max out each CC and utilize the full credit line possible, but knowing that this will reduce your credit scores as your utilization would be above 90%. You would pay off the CCs before the 12 months via your money market account/savings etc.
The other option would be to utilize 25% or so of each card, thus not hurting your score as much and allowing for future loans or lines of credit during that period.
If one the other hand you signed up for multiple cards at a staggered interval, then there wouldn’t be a need to worry about paying off the CC balances all at one time.
However you decide to do it, your score will be hurt, but it’s only temporary.
April 16th, 2007 at 15:50
Sorry about that. I clicked trackback by mistake. However, I do plan on posting about this article on my site shortly.