Credit card debt can lower your credit score
By: Staff

By sbup Staff
You make your payments on time and never max out your credit cards, but your balances may still be dragging down your credit score. And these days, credit scores matter for everything, from mortgage loans to credit cards.

Using more than 30% of your available credit could knock as much as 100 points off your credit score, and that can make a big difference when it comes time to take out a loan. Advice: Get your credit card balances below that 30% threshold.

One way to tackle your debt is to pay more than your minimum monthly payment. Most credit cards require monthly payments equaling 4% of your balance. At that rate, it would take 12 years and five months to pay off $5,000 on a card charging 18% interest. It would also cost $7,916 in total payments. Double your monthly payment to 8% and it takes only $6,140 and five years and eight months to pay it off. To see how increasing the payments would help in your situation, check out's Minimum Payment calculator.

Paying down credit card debt makes good financial sense, since high-interest debt can handicap your household finances. But even balances that you pay off each month can impact your score. The credit scoring system can't differentiate between balances that are carried over from month to month, and the purchases you've made since your last statement. So if you regularly charge a lot to your credit card, you could be over the 30% threshold when your lender checks your credit -- even if you pay your balance down to zero each month.

The solution: Pay down your balances before meeting with your lender, and try to limit your credit card use until after the application process is over.

And staying under that 30% threshold is definitely worth the effort. According to Fair Isaac Corp. (FIC), a 50-point drop in your FICO score (the most widely recognized credit score) could result in a 0.8 percentage point increase in your qualifying mortgage rate. On a $200,000 mortgage, that's more than $100 extra per month.

For residents of Massachusetts, that could mean qualifying for a 30-year fixed rate mortgage from Bank of American (BAC) at 6.1% APR instead of the 5.3% listed in their offer. Similarly, residents of New Jersey might have to settle for a 30-year fixed rate mortgage from Provident Bank (PFS) at 6.27% APR instead of the 5.47% APR available to those with better credit.

For more on making the most out of your credit score, check out this sbup article: "Six steps to better credit scores"

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