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Should you focus on paying off your credit card debt or building your credit score?
Why not both?
While it might seem hard to better your score while you’re paying down debt, multitasking here might be easier than you think. And a better score can open doors to credit products that help accelerate your debt payoff.
Tackle high credit utilization
Give your credit profile a boost by focusing on accounts with the highest credit utilization — the ones where you’re using the highest proportion of your credit limit. Utilization is one of the most important factors influencing your score, so while you’re washing away your debt, you’re also nurturing your credit.
Credit experts advise using no more than 30% of the limit on any card, and lower is better for your score. Figure out your utilization by dividing an account’s current balance by its limit, then multiplying by 100 to see it as a percentage. Or, sign up for a free credit score service that shows utilization. Many card issuers, banks and personal finance websites offer the information.
“Sometimes paying off the debt is the best way to improve your credit score,” says Tania Brown, a Georgia-based certified financial planner with SaverLife. “For every debt you pay, that is improving your utilization.”
Bettering your credit score can open doors to products that could help you wipe out debt faster and cheaper:
- Balance transfer credit cards: Many of these products offer 0% APR promotional periods; that lets all of your payment go to principal, not interest. You’ll likely need a good or excellent credit score to qualify for one. Make sure you can tackle your debt within the promotional period, before the interest rate kicks in, and figure in the costs of the transfer fee to confirm you’ll save overall. Note that moving several debt balances to a new card could run up a high utilization on the account. But if you plan to wipe out the debt, your score will quickly recover as you pay it down.
- Personal loans: These installment loans can help you consolidate credit card debt, and you don’t need an excellent credit score to qualify. Moving high-interest credit card debt to a lower-interest loan can make paying it off easier. Further, if you have only revolving accounts on your credit report, like credit cards, the addition of an installment loan can help your credit by diversifying your profile.
Is this debt payoff method for you?
The debt payoff method that’s right for you depends on your personality and money objectives.
“When considering payoff methods, it all starts with what’s your goal,” says Michelle Goeppner, director of credit product strategy at Alliant Credit Union. “Think about your whole financial portrait to think about the best possible method to get there. If your utilization is too high, that can hinder goals.”
Here are a couple of other debt payoff strategies — and the goals they can help you achieve:
- Debt snowball: With this method, you focus all your extra payoff money on your smallest debt while paying minimums on your other accounts. When you pay off that account, roll that payment into your next-smallest debt. If your goal is to stay motivated during your payoff, this gets you the quickest “win” of wiping out a debt.
- Debt avalanche: Focus on paying off debts with the highest interest rates first if your goal is to pay as little interest as possible. This is best for those who can stay motivated over the long haul, without the early wins offered by debt snowball.
More ways to improve your credit profile while crushing debt
No matter which payoff method you choose, you can layer on some simple tactics to help improve your credit profile while you wipe out debt:
- Make multiple credit card payments a month: This can help you manage your balances and keep overall utilization low throughout the billing cycle. Try treating your credit card like a debit card by covering charges once they post on your account.
- Make on-time payments: Payment history has the biggest influence on your credit score, so hitting payment deadlines is important. You can make this easier for yourself by automating payments or setting up reminders about due dates.
- Scrub your credit report: Errors in credit reports aren’t uncommon. Be sure to read through your credit reports at least annually to check for wrong or outdated information that may be dragging down your score. Dispute any errors you find.