In Q1 of 2020 alone, US consumers accumulated credit card debts worth $893 billion, according to the New York Fed Reserve. But are consumers making any efforts to clear off these balances?
Any attempts to reduce this growing hill of debt is a win-win for cardholders and credit card companies, but many debtors won’t pay off balances because of myths and misinformation.
The majority believe that clearing your debt in full could negatively impact your credit score, a rumor that experts seek have so far discredited.
Can Clearing Credit Card Balances in Full Affect Your Score?
No, it can’t, according to experts. In truth, settling all credit card debts can even improve your credit score and offer many other benefits as we’re yet to see.
As Nami Baral, CEO of Harvest, says, “It not only impacts your credit score positively but also shapes your overall financial health.”
Harvest is a personal finance agency that advises consumers on money matters. According to the CEO, clearing balances is essential in lowering your credit utilization ratio.
As its name suggests, it refers to the amount of credit present for use and is factor number 2 in credit scores after payment habits.
“Based on other types of debt one may have on their credit record, a full repayment could boost the credit score significantly, says Baral.
In a nutshell, settling credit card balances improves credit based on how it impacts overall credit utilization.
Almost all credit card companies check the following when giving scores;
- Payment record
- Credit utilization
- The age of active accounts
- Credit inquiries
- The different credit types
In light of that, Crafty Dollar Founder, Joel Klein, explains that settling only a small credit card debt won’t make a significant change in your score, especially if you have huge debts on other credit card accounts.
“Still, it is okay to clear off credit card balances if your primary goal is to boost your score,” says Klein. “Plus, a debt-free credit card account also means lenders won’t subject you to monthly high-interest rates.”
“This can also boost your credit cap and increase eligibility to lower interest rates on loans, which can add up to thousands for a mortgage,” says Jordan Parker, creator of ByJordanParker.com. “And finally, you have the psychological relief that you have finally settled your balances.”
Author Bio: Michael Hollis is a Detroit native who has helped hundreds of business owners with their high risk business loans. He’s experimented with various occupations: computer programming, dog-training, accounting… But his favorite is the one he’s now doing — providing business funding for hard-working business owners across the country.