Here's What Happens to Your Credit Score When You Pay Down 25% of Your Credit Card Balance

Some people never come close to maxing out their credit cards. Others commonly max theirs out. And many consumers fall somewhere in the middle.

It's okay to charge expenses on your credit cards because that's what they're there for. And if you pay your balances in full every month, then using those cards works to your benefit. That way, you're not racking up interest on your purchases, and you get to enjoy perks like cash back and rewards.

On the other hand, maxing out your credit cards puts you in a bad spot. It means you're likely to rack up a lot of interest on your balances, and it also puts you in a position where you have no leeway to charge additional expenses as they arise.

But what if you're somewhere in the middle? Let's say your total credit limit across your various cards is $10,000, and you're carrying a $5,000 balance. 

That's not ideal, because you're losing money to interest charges. But you're also nowhere close to having your cards maxed out. 

But what you may not realize is that your $5,000 balance could be having a negative impact on your credit score. And so if you're in a position to pay down some of your existing credit card balance, it could help your credit score improve. 

Your credit utilization matters

There are different factors that go into calculating your credit score, like your payment history and the average length of time you've had your loan and credit card accounts open. Another important factor is your credit utilization ratio, which measures how much of your available credit you're using at once. In the above example, you'd be looking at a ratio of 50% for owing $5,000 on a $10,000 credit limit.

Once your credit utilization ratio surpasses the 30% mark, it has the potential to cause damage to your credit score. And as you might imagine, the higher that ratio, the more damage that might ensue. 

FICO reports that maxing out your credit cards could cause up to a 95-point hit to your credit score if you're starting out with a score of 710. That's because your credit utilization ratio would be at 100% at that point.

A ratio that's above 30% but not as extreme as 100% might result in a smaller drop -- but a drop nonetheless. So if you're able to pay off some of your credit card debt, your score might improve rather quickly as a result. 

In fact, FICO says that for someone with a credit score of 710, paying off 25% of their credit card balance could result in a 20-point increase. So if you owe $5,000 on your cards, getting that total down to $3,750 could give your score a nice boost. 

Of course, in this example, a balance of $3,750 is still beyond that ideal utilization ratio of 30% or less. But it's an improvement over $5,000. 

Paying down your balance could help your finances on a whole

The higher your credit score, the more borrowing options you tend to have -- and the more likely you are to snag a competitive interest rate when you do seek to borrow. So for that reason alone, paying off some of your existing credit card debt makes sense.

But also, the less of a balance you continue to carry, the less interest you'll have to pay. So even if your credit score is in decent shape despite your existing balance and you're not so concerned about getting a modest boost, whittling down your debt by 25% could still help a lot from a financial standpoint.

Of course, finding the money to pay down debt is easier said than done. There may be some expenses you can cut back on, but those may be minimal if you're already living pretty frugally. 

But one reasonable option may be to turn to the gig economy. There are so many side hustles you can do at your own pace these days, and taking one on could make it possible to chip away at your debt nicely. 

If you manage to find a lucrative gig that you're efficient at, sticking with it might eventually help you get your credit card balance down to $0. That could not only work wonders for your credit score, but your financial picture on a whole.