This Is the Worst Piece of Advice About Paying off Credit Card Debt

paying off credit card debt

What’s more important to you: paying off credit card debt or improving your credit score? A lot of financial advice makes it seem like you have to pick one, but you don’t. In fact, much of the advice you follow to pay off debt can also improve your credit score.

So why the trick question? Because it’s the type of thinking that you have to either pay off debt or improve your credit score (rather than being able to do both at the same time) that leads to one of the worst pieces of credit card advice you can get. Let’s dive in.

The worst credit card advice you can get

Paying off credit card debt is hard enough without being inundated with bad advice that only puts you deeper in the hole. The following piece of “advice” is one of the absolute worst offenders: telling people to carry a balance on their credit card from month to month to build their credit score.

At first glance, this seems logical. If a credit card company benefits from you using their card, then whoever dictates your score would want to see a balance on the card, right? Not necessarily. In fact, there are a few things wrong with this line of thinking.

Three reasons this advice doesn’t make sense

1. Credit card companies don’t determine your credit score

Credit card companies lend you money, plain and simple. Credit-scoring bureaus (such as Experian, Equifax, and TransUnion) are the ones that score your credit. These are two different types of businesses with two different goals.

2. Credit scores were developed to assess a consumer’s likelihood of repaying on credit

Your score is determined by the things that show whether or not you’re a responsible borrower (this is why it can be hard to get credit when you’ve never had it before). Carrying a balance from month to month shows you’re an active borrower, but it doesn’t necessarily show you’re a responsible borrower.

It’s worth noting that likelihood to repay doesn’t mean an ability to repay. Credit bureaus want to see habits that show you’ll always pay your bills and that you’ll pay them on time.

3. Carrying a balance from month to month is more likely to hurt your score, not help it

One of the most important factors in your credit score is called the credit utilization rate. This is the amount of money you owe versus the amount of credit available to you. Credit-scoring bureaus prefer to see a ratio of 30 percent or less—the lower, the better. Therefore, carrying a balance can actually hurt your score if that balance starts to climb above 30 percent of your total credit limit.

How this advice can prevent you from paying off debt

Besides the fact this piece of credit card advice is not correct, it can also keep you from paying off credit card debt. Here’s why:

Carrying a balance on a credit card from month to month costs you money. That money you pay just to maintain a balance on your card can either prevent you from paying off debt or send you down the path of debt if you’re not already there.

Here’s the deal: every time you still owe a balance after paying your credit card bill, you pay interest on that balance. This may seem like no big deal at first. But if you multiply credit card interest rates (which are currently averaging more than 16 percent) with a few months, suddenly you may have a balance that’s too high to pay off easily. And if you’re in the process of trying to pay off debt, working to maintain a balance will only lengthen your overall repayment time.

The best thing you can do for your credit card and your credit score is to use your credit card and pay it off on time every month. If you can’t pay it off, pay more than the minimum every month. That way you  show a positive payment history and the lowest possible credit utilization.

How to distinguish the good credit card advice from the bad

My least favorite part of financial advice that goes wrong is how easy it is to see the logic in bad advice. Luckily, there are ways to distinguish the good advice from the bad. Here’s how:

1. Understand that any financial advice that may lead to credit card debt is ultimately not good advice. Credit cards are a great tool, but only when they don’t cost more money than the benefits they provide are worth.

2. Remember the behaviors that improve your credit score are the same behaviors that indicate responsible borrowing, such as making all of your payments on time and keeping your credit utilization as low as possible.

3. Anything that sounds too good to be true or promises a quick and easy fix is more than likely false.

Finally, if your borrowing practices are stretching beyond what you can feasibly repay, it’s time for a change. Credit can be a slippery slope. If you’re only able to pay your monthly bills when everything that month goes perfectly, then you’re on the precipice. The best thing you can do is give yourself a buffer, both with an emergency fund and by only borrowing what you can easily repay.

Above all, trust your instincts. No one needs a business or math degree to balance a budget. Simply make sure your incoming funds are higher than your outgoing funds each month—which means working to pay off your balances (not maintain them) as quickly as possible. And if you hear advice that sends off a red flag in your mind, think twice before you follow it.

Looking for additional help and advice you can trust? Check out our credit building tools and see how you can build credit that won’t impede with your goal of paying off credit card debt.

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1 Includes AutoPay discount. Important Disclosures for SoFi.

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SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.29% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.29% APR assumes current 1-month LIBOR rate of 1.34% plus 4.20% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2017, the one-month LIBOR rate is 1.23%. Variable interest rates range from 6.02% – 15.97% (6.02% – 15.97% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with Citizens Bank at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, Citizens Bank checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000Visit Upstart
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