Let’s say you suddenly received a financial windfall like a salary bonus. Paying off credit card balances all at once may make sense. Especially considering that doing so may help improve your financial situation by getting rid of debt.
However, the alternative: paying off your credit card debt over time, can be, in most cases, the better choice for not only your finances but your credit as well.
What Happens When You Pay Off Credit Card Debt Immediately?
Freeing yourself from the clutches of credit card debt is a great accomplishment. It also does wonders for your credit, considering that credit card debt directly impacts one of the most important credit-scoring factors- credit utilization.
Credit utilization refers to the amount of available credit you’re using at a given time. For instance, if you have a $500 credit card debt on a $1,000 limit, your credit utilization rate is 50%.
People with excellent credit typically have credit utilization rates under 30%. Paying off credit card debt immediately may help improve your credit if it brings your utilization rate below that threshold- even more so if you reach the single digits.
What Happens When You Pay Off Credit Card Debt Over Time?
A low credit utilization rate will have a positive effect on your credit. But there are benefits to paying off credit card debt over time rather than immediately. For one, it allows you to build a long history of on-time payments.
Your payment history is the most important factor affecting your credit. In fact, for FICO scores, it’s the most important, accounting for 35% of it. Paying off your balance in full and on time, each month is a great way to build a positive payment history.
Paying off credit card debt all at once, regardless of the amount, only counts as one payment. Considering the fact that credit-scoring companies also look at the length of your credit history, the choice is clear.
What To Do With Your Windfall
You can’t go wrong with either paying off credit card debt immediately or over time. Both options can help improve your credit. That being said, the latter option may be the better choice in the long run.
Paying your credit card debt over time means you’ll have a portion of your windfall saved up. You can use this money to set up an emergency fund, which can give you a lifeline during financial emergencies.
Yes, removing credit card debt altogether is a good strategy- financial and credit-wise. However, there are ways to use a windfall more effectively, such as covering other financial obligations while paying down credit card debt.
The Bottom Line
Receiving a financial windfall is a great opportunity to become debt-free. It’s also a good way to maintain or improve your credit situation. The choice of paying off credit card debt immediately or over time ultimately depends on your circumstances.
Fortunately, you don’t have to make that decision on your own. Credit repair experts can help you figure out the best course of action to take for your credit. Call us at 888-799-7267 to schedule a Free Credit Consultation.
