How to Lower Credit Card Debt without Hurting Your Credit Score

Whether your credit card debt is $5,000 or $50,000, paying it off safely is possible as long as you strategize carefully. There are many ways to go about lowering your credit card debt, however, one common fear is that doing so will damage your credit score. 

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While this is possible, it’s also true that lowering your credit card debt could help to repair your credit.  In this post, we’ll discuss how credit card debt affects your credit score and what steps you can take to pay it off safely. 

How credit card debt affects your credit score

To understand how your credit card debt is affecting your credit score, you will first have to become familiar with the term utilization ratio, or utilization rate. This ratio accounts for approximately 30% of your FICO score calculation. 

Your credit utilization ratio is the percentage of available credit that you, the borrower, is actually using. This is typically based off of the total revolving credit—credit that automatically renews once debts are repaidthat you have been approved for. 

For example, let’s say that these are your three credit cards, each with a different balance:

  • Credit Card 1: $5,000 credit limit, $3,000 balance.
  • Credit Card 2: $4,000 credit limit, $400 balance. 
  • Credit Card 3: $10,000 credit limit, $2,000 balance. 

Your total revolving credit is going to be the sum of your combined credit limits:

 $5,000+ $4,000 + $10,000= $19,000. 

The amount of credit used will be the sum of each balance:

$3,000 + $400 + $2,000= $5,400

Therefore, your utilization ratio will be $5,400/$19,000 which is 28.4%

Having a high utilization ratio is bad for your credit score. Most experts will advise that you should shoot for 30% utilization or lower. However, when it comes to having multiple credit cards, things can get tricky. 

Let’s say you have the same three credit cards open, but were only using one:

  • Credit card 1: $5,000 credit limit, $0 balance.
  • Credit card 2: $4,000 credit limit, $0 balance.
  • Credit card 3: $10,000 credit limit, $5,400 balance.

As you can see, the balance is the same, but the account on Credit card 3 has a utilization ratio of 54%, which is considered fairly high. 

Your credit utilization ratio will fluctuate over time as you use your credit to make purchases  but the important thing to remember is that a small balance is better than no balance at all.  

How to increase your credit score by lowering credit card debt

The topic of credit cards is a sensitive one for many Americans, but it doesn’t have to be. When used responsibly, you can actually increase your credit score. 

Here are some tips for improving your credit score by lowering your credit card debt:

  • Pay your bills on time:  It goes without saying that being late on your credit card payments isn’t going to help your credit score. Your ability to pay on time accounts for about 35% of your overall FICO score. If simply remembering to pay is an issue, try setting reminders for yourself or ask about signing up for automatic payments. If the issue is that you’re barely scraping by, the best thing to do is to talk to your creditors and/or a credit counselor and see if something can be worked out. Your credit score won’t be immediately increase, but it will eventually once you are able to make payments on time.
  • Keep your credit card balances low: Do your best to keep your utilization rate as low as possible. Since utilization ratio accounts for about 30% of your FICO score, high balances are not healthy for your credit score.
  • Resist the urge to close unused credit cards in an effort to raise your scores: If you are in the midst of a panic about your credit score, it might be tempting to close all of the credit cards that you aren’t using. Be careful with this, as doing so could lower your available credit, and therefore cause your utilization ratio to increase. 
  • Don’t open new accounts all at once: Once you start your credit repair journey, it’s important to only open accounts when necessary. Opening new accounts in a short amount of time will not only reduce your account’s overall age, it could also look dicey, especially if you are a new credit user. 

Safest ways to lower credit card debt without affecting credit score 

Now that we’ve discussed utilization ratios and tips for using credit card debt to your advantage, let’s delve into some of the safest ways to lower your credit card debt without hurting your credit score. 

Debt Management Programs 

Debt management plans are debt repayment programs, typically through a nonprofit credit counseling agency, that will get you back on track between three to five years. This payoff strategy combines multiple debts into a single monthly payment at a reduced interest rate. 

This is a choice to consider if:

  • Your credit card debt is 15% to 39% of your annual income. 
  • You are confident that you will be able to pay down your debt within a five-year timeframe. 
  • You have a steady income. 
  • You are okay with not being able to use credit cards or open new lines of credit throughout the duration of the program. 

Debt management programs do have an effect on your credit history, it doesn’t negatively impact your credit score. While there may be a temporary halt in your available credit—which could potentially have an effect on your credit score—the pause on your credit is lifted once you are finished with your debt management program. 

It’s important to keep in mind that debt management programs will usually automatically take money out every month. Not being able to make these payments can negatively impact your credit history, resulting in a lower credit score. 

Consolidating Loans

Credit card debt consolidation can be another safe method of getting rid of credit card debt while lowering your credit, if it’s done correctly. With this debt payoff method, you would apply for a large loan to pay off your credit card balances is one single monthly payment. There isn’t just one route to credit card debt consolidation and the right way to go about it is going to depend on:

  • The amount of debt you are in.
  • Your credit score and credit history.
  • Whether or not you have equity in a home or invest in a 401(k) account.

This isn’t always a safe method if you aren’t careful, so make sure you shop around and do your research before making your selection. Take a look at our guide to credit card debt consolidation for more details.

Make careful decisions

When it comes to your credit score, you can never be too careful. While it might be tempting to make a hasty decision in an effort to take care of your credit card debt, it’s important to think about how your actions will affect your credit score. 

Here are some things to keep in mind:

  • Try to avoid opening new lines of credit: Don’t get tricked into thinking that obtaining more credit will automatically help your situation. This is a huge mistake and will only make the problem worse in the long run. The only exception to this is if you are consolidating your loans. 
  • Weigh your options before attempting debt settlement: Debt settlement is when you ask your creditors to agree to accept an amount that is lower than what you really owe. Sure, this sounds great in theory, but it’s not that simple. When you agree to debt settlement, you stop making payments in order to save enough money to pay the full, agreed-upon amount, in one lump sum. No matter what way you dice it, not making payments is never good for your credit score and can be especially risky if your plans to pay in full fall through. 
  • Filing for bankruptcy can remain on your credit report for 7 to 10 years: When you file for bankruptcy, your credit card debt gets erased, but at the expense of your credit report taking a hit. Bankruptcy can stay on your report for 7 to 10 years, although it’s common for credit scores to climb again months after filing.  

How lowering credit card debt can impact credit score

It’s always in your best interest to pay off your credit card debt, no matter what. The impact it has on your credit score, however, may vary. 

It’s a common misconception to believe that holding on to a credit card balance is good for your credit score. Some people think that if you’re trying to raise your credit score, you shouldn’t repay your full balance, which is simply untrue. 

The best thing you can do for your credit score is pay all of your balances on time and to the best of your abilities. Paying down your credit card debt will lower your utilization ratio, which plays a big role in your FICO score. Should you need to carry a balance, make sure that you keep your utilization rate 30% or under. 

So just how much does a paid-off credit card boost your credit score? That depends on how close you were to your credit limit. The closer you were, the more it will increase. 

If you have paid down your credit card debt and noticed that your credit score has dropped, there could be other reasons to consider such as:

  • Whether or not you’ve recently paid off an installment loan such as a car or a student loan (but only because your total number of accounts will be reduced). 
  • Closing your credit cards, which lowers the age of your account and minimizes the amount of available credit hiking up your utilization. 

Perhaps there is an error on your credit report. If you think there is an error on your report, don’t hesitate to dispute it. It could either be the result of a mix-up or even worse, identity theft.