Does Overpaying Credit Cards Help Your Credit?

Regular card use and low balances typically provide the best credit benefits.

Regular card use and low balances typically provide the best credit benefits.

Credit card statements typically arrive with a due date and a minimum payment amount. The minimum payment is normally a small percentage of the total balance. Part of your payment goes toward the principal balance, but another part covers interest accrued on the loan. Paying extra not only affects your credit; it also helps you save money in interest and pay down the debt more quickly.

FICO Factors

To understand the effects of overpaying on your credit card, you need to know the primary factors that lead to your FICO score (also known just as your "credit score"). Payment history accounts for 35 percent of your score; amounts owed is 30 percent; length of credit history is 15 percent, and new credit and types of credit account for 10 percent each. When you pay extra on your card, it directly affects the amounts-owed section, which has the second greatest impact.

Credit Utilization

The ratio of your credit in use to available credit makes up most of the amounts-owed credit-scoring factor. If you have a card with an available limit of $10,000 and you have a current balance of $6,500, your utilization, or debt-to-limit, ratio is 65 percent. This is fairly high. The ideal is as close to zero as possible, but FICO spokesman Craig Watts indicated in early 2011 that people with excellent credit generally have a ratio below 10 percent. When you pay extra each month, you more quickly reduce your ratio.

Revolving Debt

Debt-to-limit ratios on revolving debt, like credit cards, is especially problematic, according to MyFICO. Thus, having high ratios on credit cards is worse than having high percentage of use on personal loans and other types of installment loans. Some people opt to get new credit cards and transfer balances to spread out their debt. This can reduce your debt-to-limit on individual cards, but it also means more credit inquiries in a short period of time, which affects your length of credit, new credit and type-of-credit factors.

Alternative Approaches

Along with overpaying on credit-card statements, you can consolidate debt to improve your credit. This means getting a home equity loan or line of credit to pay off high-interest credit cards. This does mean a new credit inquiry and a short-term history on a new loan, but if it pays off your existing credit card balances, it may make sense. You also save a lot of money in interest. The risks are getting another loan with your home as collateral and freeing up more credit to use, which gets undisciplined borrowers into more trouble.


About the Author

Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.

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