ne of the more frequent questions we receive here at Home Loans Assist is whether you should pay down your cards or pay them off. There are certainly benefits to both options and really all depends on what your current credit score is and what your short and long term goals are for you and your family.
The first thing we do is inform our clients about the impact your credit cards and their balances have on your credit score. To start, we explain your credit cards – known in the world of credit and your credit report as “Revolving Accounts” – account for 30% of your total credit score, a significant chunk.
Secondly, we go into some of the factors many consumers don’t understand or are even aware of when it comes to their credit score. Basically, the amount of points you are utilizing for your credit score is determined by the percentage of your balances vs. your credit limits on the credit cards. So, in order to maximize the amount of points you can receive from your revolving accounts (credit cards), your balance should stay below 30% of your credit limits. Most of the time, when people hear this they automatically think they should pay off their credit cards down to a zero balance every month. Unfortunately, however, having a $0 balance on your card month to month isn’t going to be beneficial. When your credit is pulled to receive approval on a loan or other lines of credit, the lending institutions who see your report want to see you’re using your credit every month and that you’re using it responsibly.
We suggest, as a good rule of thumb, having a minimum of 1% of your credit line report to the credit bureaus every month. By doing this, you will continue to generate ongoing payment history (which accounts for another 35% of your score). We DO NOT recommend that you keep a running balance on your card; feel free and encouraged to pay it off once you receive your statement in the mail. Just make sure you put another small purchase on the card in the next billing cycle to ensure that 1% is reporting to the credit bureaus. Make sense? We know this kind of information can be confusing. We try to put it into the simplest terms we can so everyone can understand, but we also get very few people spend their lives researching credit reports and credit scores. This is why we highly encourage you to contact us with any and all questions so we can answer them thoroughly for you.
Our Credit Specialists are here to help you understand the complexities and nuances of your credit report and help you make sense of your credit score. Contact us today at (888) 795-9088.