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Pay off Balances or Spread it Around?

Low Credit Card Balance

The Credit Pros team and I attended a credit seminar last week, and an interesting topic was being hotly debated. The topic? “Is it better to have one credit card completely maxed out or is it better to spread the balance out across several credit cards?”  

To be clear, neither is good for your client’s credit scores. Having one maxed out credit card is bad, but so is a limit across all cards. But which is worse? We will get to that.

The super-important “balance-to-limit” ratio is the same for both scenarios. The higher the ratio, the lower the scores. Spreading out the balance over a number of cards keeps the same ratio intact.

So, why is one scenario worse than the other? Definitely spreading the debt across multiple cards. Here’s why: There is a FICO point loss for “too many accounts with balances” There is also a FICO point loss for “too many revolving accounts with balances”.  And no, adding new credit cards will NOT solve the problem. Here’s why: Credit card inquiries are quite damaging. By adding new credit, you lower the overall age of the credit file (15% of your FICO score).

So, if you have a client faced with having to pay off credit card debt to increase scores quickly, have them pay off as many cards to $0 as possible, and be sure to keep ALL cards under their limit.

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