Dream Situation or Potential Mistake?

[Anonymous]

Hi!

This is my first time posting here and I'd appreciate any advice I'd receive  I've recently come into a situation where I'm able to completely pay off my credit card debt after carrying an overall high balance for a long time, but I'm hearing different stories on whether or not this is a great idea.  Here's some basic background information (some information is not exact but close enough to not change the outcome).

• 3 open credit card accounts (Oldest 9 Years, Youngest 7 Years)
• 1 closed credit card account (~5 years ago, no balance, paid as agreed, closed at my request)
• $10,000 total credit limit between all accounts
• 95% credit limit usage, steady for about 6 years (Ouch)
• Zero missed payments, always paying over minimum
• No derogatory information on my report (collection, late payment, over limit, etc)

No other accounts or trade lines are on any of my three reports.  My vantage score huddles around 710-720, and my creditXpert scores are in the same range +/- a few points, considering looking at my FICO after I make a decision on what to do here and everything has reported within a month.

All of that being said, I mentioned I'm now in a position to completely pay off the 3 open credit card accounts (we can pretend I won $10,000 on a game show) which would reduce me to zero reported debt.  I went ahead and paid off one of the accounts for about $3,800, so my debt to limit ratio would lower to about 62% if they were to report tomorrow.  I've heard that paying everything down to a zero balance would be an incredible help to my score, but at the same time I've heard equally good things about keeping an overall balance of 5% or so of my total limit.  

Would keeping a 1-5% or 5-10% overall usage be ultimately more beneficial to my score than 0%?  I'm not closing any accounts so they'll definitely be used again, but I'm trying to avoid a situation where my score doesn't raise as much as it could in a single payment action compared to doing the alternative, whether that be pay it completely or leave a balance.  I have some important things coming up in the forseeable future, so I'm trying to squeeze out every point I possibly can while being much more responsible with my credit - any advice that you can give would be fantastic!

Thank you!!

[StartingOver10]

If you read the threads here you will see that paying down to zero on two of your cards and leaving the third with less than 9% of the credit limit is your best course of action. As to the actual "sweet spot" for the best utilization, some report that the credit line that reports a balance should be in the 2.5% range, others report a slightly different number. Experiment a little. Pay down the two cards to zero and the third to say 9% or less of the line and then the following month let that line only report 5%, you ought to see an increase.

BTW, congrats on getting your debt under control. It must feel great!

[takeshi74]

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@Anonymous wrote:

Would keeping a 1-5% or 5-10% overall usage be ultimately more beneficial to my score than 0%?

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Yup.  Frequently mentioned in threads around here.

[Anonymous]

Thank you for the advice!

[Shogun]

Of course leaving anything on one of those CCs is if you need a boost to your score for an app, otherwise, just pay them all off, why pay interest on "anything" if you don't have to.

[gsxrgt]

I would definitely pay off everything to get rid of the interest charges. Then just pay in full every month to avoid any more interest charges. Your score will get a big boost just paying off everything and it looks like you have a pretty solid credit history. I wouldn't worry too much about the 1-10% thing unless you're planning on applying for something as this will just maximize your score. There's a difference between carrying a balance and paying interest on that balance and paying the balance in full by the due date. 

[RobertEG]

I agree that the 1-9% util as opposed to 0% is a monthly fine-tweaking issue that need not be pursued every month.  A lot of work for no real gain if you arent planning on apping for credit within the next couple of months.

% util has no historical memory, so last month's fine tweak is good to see what difference keeping a small balance will have vs a zero balance, but after doing it a month or two for the education, I would not become obsessive about it every month. 

Added into the mix is the offsetting fact that carrying even a small balance increases  the minor-weighted percent/number of cards reporting a balance, but most who have tweaked a couple of months report an overall increase. 

[TheConductor]

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@RobertEG wrote:

I agree that the 1-9% util as opposed to 0% is a monthly fine-tweaking issue that need not be pursued every month.  A lot of work for no real gain if you arent planning on apping for credit within the next couple of months.

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This this this.  

There is a significant difference between carrying a 5% balance that will continue to accrue interest, and simply strategically choosing to let a 5% balance report when you want to apply for something, then immediately paying it off.

Don't waste one cent of your windfall on interest you don't need to be paying.  Pay it all off, crack open a tasty beverage, and celebrate!!

[Anonymous]

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@TheConductor wrote:

There is a significant difference between carrying a 5% balance that will continue to accrue interest, and simply strategically choosing to let a 5% balance report when you want to apply for something, then immediately paying it off.

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I've been doing some more reading here over the past few days and I've read that there is sort of a trick (I guess you could call it 'gaming the system'?) to letting a balance report but paying it before interest accrues?  I'm still trying to make sense of everything, so any comments on that particular tidbit would be appreciated (mainly to only satisfy my curiosity).  

Say I carry a $50 balance and let it report, would it be possible to pay it to avoid the interest, then rinse and repeat monthly?  I would imagine there is a very small window of opportunity (if even) to pull this off though and it's probably more trouble than it's worth.  It would be fun to know though!

Thanks!

[AndySoCal]

Yes, I would completely pay off the credit cards. My basic premise is $$  saved beats points in this case interest on the debt.  The neach month use a card(s) where the total utilization is between 1 to 10% reported. Secondly, be sure it is an amount you can pya off in full each month.  I say this to help prevent getting in the same situation agian. For optimal scoring I would suggest have only one report a balance.