Is It Better to Pay Off One Credit Card or Reduce the Balances on Two for Credit Score?


Reduce the Balances on Credit Cards

Managing a credit card comes with some benefits. There is only one card, so you know what to concentrate on when your payment due date approaches. But what happens when you have two or more cards, and they all have balances? In that case, you’ll be torn between paying off one credit card and spreading the payment across all credit cards. Which is ideal?

If you have multiple credit cards, it is recommended that you focus on paying off one credit card at a time. Doing so will ensure that you make more progress.

It is easier to manage a credit card than multiple credit cards with balances. While a credit card can be paid up with one lump sum payment, you’ll need to make a big decision when it comes to managing multiple credit cards. In the end, the decision you make will play a key role in how fast you settle your cash. Read on to find out more.

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Is It Better to Pay Off One Credit Card or Reduce the Balances on Two for Credit Score?

Are you new to the world of credit? If yes, you’ll probably have some questions about what credit card is and how it works. There are many things to learn when you receive your first credit card, and a lack of knowledge can eventually cost you money down the road. As we proceed, I’ll explain what credit cards are, how a credit card works, and other helpful information you’ll need to know regarding using credit cards. Of course, later on, we’ll look at the crux of this article.

What Is a Credit Card?

A credit card is a card that allows you to borrow money from a bank under the agreement that you will pay back what you owe when your bill becomes due or incur interest charges. The ability to buy now and pay later outclasses other forms of payment, like debit cards or cash, which both require you to have the money available for payment for the transaction to happen.

In addition to having more flexibility with payments, credit cards help you establish a credit score to qualify for other financial products, like loans and mortgages. There are also some monetary benefits to having a credit card, where cardholders can earn rewards on each purchase, which can be later cashed for travel, statement credits, and more. Some credit cards also offer interest-free intro periods.

How Does a Credit Card Work?

A credit card is connected to a credit account with a financial institution. When you use the card, you are borrowing money from the credit card issuer. You can use a credit card to buy goods or services with any merchant that accepts credit cards.

Some cards also let you get a cash advance, although this isn’t advised because of the high fees involved. The amount you owe on a credit card is regarded as the balance. So if you make a $200 purchase, for instance, your card’s balance would rise by $200. All credit cards have a credit limit, which is the max amount you can owe the bank at one time. For instance, if your card’s limit is $2,000, then the balance can’t supersede that amount.

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Common Credit Card Terms:

Credit cards come with several terms that determine what fees you can incur from using your card. Here is a list of some of the common terms:

Annual fee: The fee cardholders are charged yearly for holding a credit card

Balance transfer APR: The interest rate for balance transfers, which may be equal to or greater than the purchase APR

Balance transfer fee: Transferring debt from one card to another may cost you 3% to 5% for each transfer

Cash advance APR: The interest rate you incur if you take out a cash advance, which is always one of the highest APRs you can be charged.

Cash advance fee: The fee you are charged for each cash advance, usually 5%.

Foreign transaction fee: Purchases made outside the United States may attract a fee per transaction, usually 3%.

Late payment fee: When you pay your credit card bill late, you may incur a fee of up to $40.

Minimum payment: The smallest amount of money you have to pay every month to keep your account current.

Penalty APR: When you pay late, card issuers may penalize you with an interest rate higher than your typical APR.

Purchase APR: The interest rate you incur for new purchases that aren’t settled in full every billing cycle

credit score

What Is a Credit Score?

Many of us are conversant with the term credit score, but only a few of us understand what it is aside from being a score used to determine one’s creditworthiness.

So what is a credit score?

A credit score is a number between 300-850 that indicates a customer’s creditworthiness. The higher the score, the better the chances of an individual to secure a loan. A credit score is based on several factors, but one of the most common is credit history. Other factors are:

  • Number of open accounts
  • Total levels of debt
  • Repayment history, etc.

Lenders use credit scores to evaluate the probability that an individual will pay back loans promptly. The credit score model was made by the Fair Isaac Corporation, also regarded as FICO, and it is used by financial institutions. While other credit-scoring systems are available, the FICO score is the most commonly used.

Since a credit score is used to determine your creditworthiness and may sometimes be vital to getting a job or renting an apartment, you will want to try your best to boost it. Of course, there are several ways to do this, including repaying loans early and keeping debt low.

Having understood what a credit score is, let’s consider how it works.

How Does Credit Score Work?

A credit score can greatly affect your financial life. It plays a vital role in a lender’s decision to give you a loan. Individuals with a credit score below 640, for instance, are generally considered to be subprime borrowers.

Banks, credit unions, and other lending establishments always charge interest on subprime mortgages at a rate higher than a conventional mortgage to compensate themselves for doing business with such high-risk individuals. They may also need a shorter repayment term or a co-signer for borrowers with a low credit score.

On the other hand, a credit score of 700 or above is generally considered good. It may result in a borrower getting a lower interest rate, which leads to them paying less money in interest over the life of the loan. Scores greater than 800 are considered excellent. While every creditor has its ranges for credit scores, the average FICO score range is often used.

  • Excellent: 800 to 850
  • Very Good: 740 to 799
  • Good: 670 to 739
  • Fair: 580 to 669
  • Poor: 300 to 579

An individual’s credit score may also determine the size of an initial deposit needed to obtain a smartphone, cable service or utilities, or even rent an apartment. And lenders often review borrowers’ scores, particularly when deciding whether to change an interest rate or credit limit on a credit card.

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Should You Pay Off One Credit Card or Reduce the Balance on Two?

Do you have multiple credit cards? If yes, you may be confused about paying off the balances on all credit cards. Do you pay them off little or settle on one?

You see, it is more effective to focus on paying off one credit card at a time rather than spreading payments over all your cards. You’ll observe quick progress and results when you pay a lump sum to one credit card every month. Even though you put most of your effort into paying off one credit card, you should keep making max payments on all your other credit cards to prevent late payment penalties and keep your accounts in good standing. The hard part is figuring out which credit card you should focus on settling first.

Basic Ways to Pay off Credit Cards:

There are two basic ways to settle credit cards: paying off the credit card with the biggest interest rate first or paying off the one with the lowest balance first. To decide which tactic is ideal for you, think about whether you would like to save money on interest or get rid of the whole credit card balances fast.

  1. Save Money on Interest

If you want to save money on interest, then pay your credit cards starting with the highest interest rate balance. Focusing on the highest interest rate balance first may take less time and allow you to save money on finance charges, particularly if your highest interest rate credit cards also have higher balances.

Draw up a list of your credit cards, ranking them in order from highest to lowest interest rate. Then, pay off the credit card with the highest interest rate first by making high lump-sum payments to that card every month. As soon as you pay off the credit card with the highest interest rate, move on to the card with the next highest interest rate. Rinse and repeat the process until all the credit cards have been settled.

  1. Pay Off an Account Faster:

If you want to get rid of the credit card balance fast, consider paying your credit cards beginning with the lowest balance first. When you settle the smaller balances first, you become motivated since you are taking out a whole credit card balance. This progress can propel you to pay off your accounts in no time.

For instance, if you have a $1,000 credit card balance and $2000 extra in a paycheck, bonus, or tax refund, you could settle a whole credit card and give one fewer account to consider.

Exceptions to the rule:

Depending on your credit cards, there may be certain exceptions. For instance, if you have opted out of an interest rate hike and you close or terminate your credit card account, you can be required to pay off the balance within five years. All things being equal, paying down the balance will avoid hurting your credit score. If you have balances with deferred interest, settle those balances to avoid being sanctioned with all the interest charges at the end of the promotional period. Worthy of note is that the interest rate can change, especially if you have a variable APR or get hit with the sanction APR.

Is the First Method Faster?

When it comes to the amount of time needed to settle your credit card balances, there isn’t a big difference between the two methods. Paying in order of interest rate will allow you to pay off your accounts a few months earlier than paying in order of balance, and you’ll pay less in interest charges. However, you don’t necessarily have to select either of those two methods. You can settle your credit cards in whatever order that makes you happy.

You can alphabetize them by the credit card issuer or get rid of the balances on cards you aren’t using anymore. The main goal is to pay off your credit card balances by making lump-sum payments to one credit card every month until the balance is repaid. In the meantime, ensure you make maximum payments on all your other credit cards.

How Long Will It Take To Pay Off My Credit Cards?

If you have multiple credit cards, you’ll probably be looking forward to when you’ll pay them off, and this might prompt questions like “How long will it take to settle my credit cards?”

Well, the thing is, there is no definite answer to that question. The time depends on how much you owe and how much money you have to settle them.

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