How to Pay Off Credit Cards Strategically

If you’ve been focused on tackling your credit card debt at the expense of building up your savings, it might be time for a fresh start.


Want to boost your credit score? Paying down your credit cards in full might not be the best approach.

If credit card debt has been looming over your head and draining your excess funds, the thought of quickly and aggressively demolishing it can sound like the best solution to improve your current financial standing. And yes, getting rid of consumer debt is usually a great plan to guide your financial decision making.

But, as counterintuitive as it sounds, aggressively paying down credit card debt today might not help your chances of being approved for that apartment for rent in Dallas, TX, or even boost your credit score. In fact, it might even hinder your ability to qualify.

Read these tips on how to pay off credit cards strategically before you embark on an all-out war against your credit card debt.

You may not see an improvement in your score in the desired time frame

Unfortunately, paying off your credit cards in full, or even paying off enough to make a large dent in the amount you owe, isn’t immediately reflected in your credit score. In fact, the account balance reported to the credit-reporting agencies is your last statement balance — an amount that could be higher than the current reality. Therefore, the amount of time it takes to see a change could be longer than your desired time frame — especially if you’re looking to borrow money for a new car or submit a rental application for a new apartment.

A zero balance doesn’t guarantee a lift in your credit score

While your end goal might be seeing a big “0” next to the amount owed, that’s not where the biggest payoff comes in terms of credit score improvement. Thirty percent of your credit score is determined by your credit utilization ratio, or the amount of credit you are currently using divided by the amount available to you. If your credit utilization shoots above 30%, your credit score will suffer.

On the flip side, paying down your debts to reach a 10% credit utilization ratio will give your score a boost. Anything beyond that — like getting that debt down to 5%, 3%, or 0% — most likely won’t improve your score.

Your money could be better spent elsewhere

If you’re faced with the dilemma of throwing your cash reserves toward your credit card debt or saving it for emergencies or even a big purchase down the road, consider this: Ready cash might be more helpful than you think. For starters, you might be more attractive to potential lenders if you’ve got cash at the ready. And having a higher balance in your bank account can mean the difference between being able to afford your dream car and being forced to settle for second (or third) best. Bonus: It gives you leverage at the negotiation table too, because as an attractive buyer or borrower, you don’t have to settle for a less-than-stellar offer.

Having some savings handy can also help you land a great apartment or give you the flexibility to leave if you can’t make things work with your landlord (or if disaster strikes and leaves your apartment uninhabitable). And if you’re ready to start thinking about buying your own place, a beefy savings account usually means a larger down payment and more flexibility to pay closing costs — making you a more attractive borrower too. And, as an extra bonus, having savings on standby can prevent you from racking up more debt if unexpected expenses pop up after you move in or if you get rear-ended in your new car.

It might not improve loan terms as much as you think

If your goal is to aggressively pay down credit card debt for the sake of improving your overall financial situation, that’s one thing — but if your intention is to help land better loan terms, you might not get the results you want.

While your debt-to-income ratio and credit score are important when it comes to determining your buying power and interest rates, your credit card debt is just one part of the bigger picture. If, for instance, your credit card debt is already minor compared with your available credit, and your financial picture already shows an ability to take care of this debt in the future, pouring energy into paying down credit card debt now might not improve the loan amount or interest rate offered to you.

If you do decide to pay down your credit card debt …

If, given all the nuances of your particular financial situation, paying down credit card debt appears to be the best path to take, make sure to do it in a way that won’t end up hurting your credit score.

Keep these two tips in mind:

  1. Don’t close your accounts after paying them off: This will raise your credit-utilization ratio by immediately lowering the amount of credit available to you and can negatively impact the length of your credit history (another vital component of your score).
  2. If you opt to consolidate, pay attention to your credit utilization: Rolling your balances into a card with a 0% interest rate can be a great move, but make sure your balance on that particular card won’t push you over the 30% credit utilization ratio once your total available credit is taken into consideration.

What’s your approach to credit card debt and savings? Share your tips in the comments below!