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Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.
This week’s episode starts with a discussion of impulse shopping, and how pandemic-related anxiety can cause us to overspend as we try to comfort ourselves and assert control.
Then we pivot to this week’s question from Corey, who asks, "What is a better method of paying off credit card debt and raising your credit scores? Should I reduce my credit utilization on all my cards or pay off one card with the highest rate?"
Check out this episode on any of these platforms:
People love to argue about the “best” approach to paying off credit card debt. Is it the (paying off debts by size, from the smallest to the largest)? The (paying the highest rate debt first)? The (paying off the debt that enrages you the most)?
Each method has its pros and cons. What matters most, though, is picking an approach that will motivate you to continue paying down the debt. Paying your highest balance first may save you a bit more in interest, but many people find that targeting their smallest or most hated debt gives them the psychological victory they need to keep going.
If your primary goal in paying down debt is to build or rebuild your credit scores, it can help to understand how credit scoring formulas view your debt. The formulas look at how much you owe relative to your credit limits on individual accounts as well as across the board. Ideally you would have large gaps between those balances and your limits. The scores also take into account how many accounts have balances. You can pay down your accounts simultaneously or target the account closest to its limit, but you’ll likely get a bigger change faster by eliminating smaller balances first.
It’s also important not to close credit cards if your goal is to improve your credit. Shuttering accounts typically won’t help your scores and likely will hurt them.
If you don’t have many accounts or you’re trying to rebuild damaged credit, you also could consider asking someone who’s responsible with credit to add you as to a credit card.
Don’t obsess. There are many ways to pay down debt. What matters is that you’re paying it down.
Keep credit cards open. It can be tempting to close one once you finally pay it off, but that can actually damage your credit.
Consider borrowing credit mojo. Becoming an authorized user on someone else's card can help increase your credit age and reduce overall credit utilization.
More about paying down debt and improving credit on NerdWallet:
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