Vision Credit Education, Inc.

Letting your credit card balances rise to the point that you have used all of your available credit can severely impact your credit score. Even if you do not exceed your credit limits, your credit score can suffer.

Rapidly approaching your credit limits can send a signal that you are experiencing financial troubles. Credit scoring formulas take into account such consumer behavior.

Credit Utilization Rate

One of the inputs in the credit scoring formula is a measure of how much you are relying on your credit to meet short-term financial needs. This is known as your credit utilization rate, which is measured as a percentage of total revolving credit balances that you have used.

Even if you have only used a little over 10% of your total available credit, your credit scores can drop slightly. As your balances get closer to your credit limits, your credit score drops even faster. Exceed one of your credit limits and your credit score will plummet.

This can be measured on an individual revolving credit account as well as collectively across all of your credit cards. For this reason, transferring balances to a single credit card account could actually reduce your credit score as it takes you closer to your credit limit on that one account.

Additionally, this can affect you if you close active credit accounts. Fair Isaac Corporation spokesperson Craig Watts confirms that closing a credit account cannot improve your credit score, and it likely will cause it to drop. This is due to a reduction in your available credit that causes your credit utilization rate to increase.

The best bet is to work diligently to reduce your credit card balances. Focusing on one card at a time can help you achieve your goals piecemeal.

Once you have eliminated one balance, then focus on your next card. Higher APR cards should be the initial focus, although there may be other considerations also.

Using balance transfers can be used to reduce interest rates to the point that you can reduce the balances faster. However, you must consider balance transfer fees as they can offset some of the interest savings.

As you rapidly repay one credit account, that creditor as well as other creditors will likely notice that your financial strenght is improving. As such, they may be open to interest rate reductions. This is due to your slowly increasing credit score.

Paying off credit card balances does more than just save you money. It also increases your credit score, which could save you money on your other credit card balances.