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Two Credit Card Payment Strategies

Is it more credit damaging to have five small collections or one large collection on your credit report?

I am trying to improve my credit score and figure out which method is more effective. Is it more credit damaging to have 5 small collections or one large collection on your credit report i.e., five $1000 collections or one $5000 collection? Just trying to determine if I should pay the big one first, or pay the smaller ones to have less things in collections and then do the big one.

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Bill's Answer
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There are two tactics you can employ when paying off your current credit cards. Which you use depends on your goals. I will discuss accounts in collections later in my reply.

1) Least Expense Method

Pay off the highest interest credit card first. By paying as much as possible on the highest interest card -– and at least the minimum monthly payments on the remaining cards -– you limit your exposure to expensive interest payments that do nothing to lower your principle balance. After paying off the highest interest rate credit card, apply that payment to the card with next highest rate. Continue in this manner until all of the cards are paid.

Obviously, this method minimizes the interest expense you pay. If you do not foresee making a large purchase in the near-future that will require you to have a high credit score then this tactic is the best for you.

2) Credit Score Maximization

If all of your accounts are maxed out, you will be considered a poor credit risk, because it appears that you are struggling to pay off the debt you have already incurred. Therefore, you should pay down the cards that are closest to their credit limits until they are below 75% of their credit limits. Next, pay off the card with the smallest balance. When that card is at $0, then go to the card with the smallest balance and pay that off until it is at $0. Continue in this manner until all of the cards are paid.

Some people are tempted to close an account when they finally get the balance to zero. Resist that urge with your oldest accounts, since account longevity is a positive influence on your score. (Longevity accounts for 15% of your score.)

However, having too much available credit, whether you have used it or not, could hurt your credit score, as statistical studies show that people with excessive amounts of available credit are a higher credit risk. Unfortunately, the credit reporting bureaus do not define exactly what they consider excessive, so best tip is to use credit conservatively and to keep your debt-to-credit limit ratio low. (Total debt and total available credit counts for about 30% of your credit score.)

Accounts In Collections

Payment history, which counts for approximately 35% of your score, is the most heavily weighted factor used in calculating your credit score. Consistently paying your bills on time has a positive influence on your score, while late or missed payments will hurt you in this area. If you have delinquent payments, the older the delinquency the less the negative impact on your score will be. Collection accounts and bankruptcy filings are also taken into consideration when analyzing your payment history.

Accordingly, you should pay off the most recent delinquent account first regardless of the amount or the interest rate. Then move to the next youngest delinquent accounts, and pay the oldest delinquent account last.

I hope this information helps you Find. Learn & Save.



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