Is it Worse to Max Out Your Credit Cards or Pay Late?
A while back we were playing with a credit score simulator on CreditKarma.com and found some interesting things.
What Happens to My Credit Score if I Miss a Credit Card Payment?
First, we did a simulation of “if I were to pay EVERY account on my credit report late by 1 month” and the results are below:
Ouch…160 points lost in 1 single month. Honestly, not as bad as we were expecting. Don’t get me wrong, 160 points is a big drop, but we honestly expected to see worse results for being late on EVERY account on our credit report.
What Happens if I Max Out All My Credit Cards?
Now, we ran the simulator for a comparison to see what would happen if, instead of going late, we maxed out all our credit cards to 100% utilization….drum roll……
DOWN 271 POINTS!!!!!!!!! Obviously maxing out credit cards is far worse than paying late in terms of the negative results to your credit score. However, you must keep in mind that the late payments are going to negatively affect your credit score for several years, whereas the maxed-out cards, once paid down, will be like they never existed to the credit scoring model.
What Happens When you Carry a Balance on Your Credit Cards at Different Levels?
The reason for this experiment was really to see what maxing out cards can do to a score.
We decided to see what effect the utilization ratio has on the credit score at 10% intervals. We did 90%, 80, 70… all the way to 5% and the results are VERY interesting! Take a look:
- 90% = down 235 points… going from 100% to 90% increased the score 36 points:
- 80% = down 167 points…dropping it down to just 80% was 104 points difference versus 100% utilization:
- 70% = down 163 points…4 point gain
- 60% = down 160 points…3 point gain
- 50% = down 152 points…8 point gain
- 40% = down 93 points…turns out that dropping below 50% is a real big turning point.
- 30% = down 82 points
- 20% = down 69 points
- 10% = down 32 points
- 5% = down 7 points
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