Dear Let's Talk Credit,

I have a credit card with a $4,000 limit. I'm a few hundred dollars away from maxing that card out. I have about $1,500 cash in my savings account. Should I put my cash on the card to lower the balance and only use it when I need to and continue to pay the monthly payments? Or should I just leave the cash in my savings account? Does putting the money on the card even make a difference if I'm still making the monthly payments? 

- Jay

Dear Jay,

You need to think about your financial goals. If you want to improve your credit score, then paying down the balance, with your cash on hand, would help to reach that goal. Your credit utilization ratio -- the amount of credit you have available compared to the amount that you have used -- is considered when calculating your credit score. The lower the ratio, the better it is for your score.

Your current credit available to credit used ratio on this account is close to 100 percent. Paying down the balance by $1,500 would bring the ratio down to approximately 63 percent. To optimize your credit score, your goal should be to bring the ratio as low as you can, but certainly less than 30 percent.

However, paying down the balance with your cash on hand could put you in a situation where you won't have money for financial emergencies or unexpected expenses. If that is the case, it may be better to bring down the balance by adjusting your monthly spending, to pay as much as possible each month on your credit card balance.

Consider using a credit card payoff calculator to see how long it would take to pay off the card with a particular payment each month. Knowing how quickly you could pay it off may give you the incentive to keep up with the monthly payments until the goal is reached.

As long as the account is not past due, making on time and as agreed monthly payments on your credit card account will assure that the account is a positive addition to your credit report. So, even if you make a one-time payment of $1500 and then continue to make smaller monthly payments, the account will remain in good standing.

Let's keep talking!
 

See related: Pay debt all at once? Or in bits?