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I was recently asked a few questions by another client about paying off credit cards. So today’s post will talk about my payoff guidelines for revolving credit that will help you max that portion of your FICO score. (Paying off installment loans will help your score, but I don’t recommend you do that, keeping the full term on an installment loan will benefit your score far more then paying off a loan before the end of it’s term)

Are there any techniques to paying off credit cards or can I just pay them all off?

Yes, there are several guidelines to paying those nasty cards down.

RULE #1 Never pay 100% of ALL your credit cards off, keep at least $50-150 on one card at all times. You can accomplish this by using a gas card each month or putting a recurring bill on auto-pay from one of your credit cards (but NEVER put utility bills or groceries on a credit card!)

RULE #2 If you are paying off a debt you’ve been carrying on a credit card, there will be additional interest due on the next statement that won’t be apparent by looking at your last online or paper statement, you must call the bank to get a full payoff, or manually calculate the additional unbilled interest due and include that amount in your payoff, I also, always recommend paying an additional amount on top of the balance + additional interest.

So, for example, if the balance is $1,000 and the additional interest is $10, I recommend adding 2x’s the additional interest for a payoff of $1,030.  This will create 2 changes for you:  

1. It will insure you get a fully paid off account on your bank’s next report to the credit bureau by forcing the bank to make that report. (I’ve seen situations where a bank won’t report the payoff to the credit bureaus for several months and could result in you not getting the desired score bump in time for your financing without doing a rapid re-score, but if there is a credit on the account, they will ALWAYS create one… I suspect it has something to do with accounting regulations)

2. Will generate a refund check from the Bank to you for the over payment. (I use this technique to get a “balance transfer interest rate, albeit delayed, for a cash advance” on credit cards by over paying a credit card using a balance transfer. Sneaky, isn’t it :)

…what if I find I don’t have enough money to pay them ALL off, are there any rules of thumb to know which ones to pay off to get me a better score bump?

RULE #3 Pay off at least one bank card to zero (Visa, MC, AMEX, Discover, etc.)<br>

RULE #4 Pay off at least one retail card to zero (Any other open-ended credit card not issued by a bank, a Target VISA card is NOT a retail card)

RULE #5 Pay off  all cards below 45% of their limit (don’t leave any one over 45%)

RULE #6 Pay off the aggregate debt to limit ratio below 18% (18% of the total credit limits vs total revolving balances)

#5 and 6 can also be achieved by increasing the credit limits of existing cards, or by getting additional credit cards, but there are many, MANY ways attempting this technique without professional help will end up creating a score decrease than the desired increase.

RULE #7 WAIT! for the banks to issue you a new statement before you look for the score increases, pull a free credit report (won’t cause a “hard inquiry” to confirm the balances got updated before you ask your lender to pull credit for the scores.

For your Health, Wealth and Liberty

Mark Ruiz