Using a $ 600 Stimulus Check to Pay Off Debt Could Increase Credit Score
Although many Americans say they plan to use the $ 600 stimulus payments to pay for immediate needs and household bills, those who can afford to pay off their credit card balances may see their credit score. credit increase.
For some, this bump can be significant. Credit Sesame ran simulations using data from over a million members and found that among those with a credit score between 300 and 500, 70% could see their score increase by 19 points in a month if they used the $ 600 stimulus payment to pay off their credit card debt .
What’s more, about 50% of people with bad credit could see a 24 point jump within one month of paying off their balance with the stimulus funds.
“There would be a quick impact and it would affect quite a few people as well,” said Jay Moon, general manager of credit operations at Credit Sesame. Moon adds that using stimulus funds to pay off credit card debt could have a “huge impact” for some Americans.
“An increase of 20 points could be very significant for people who help get a car loan with a lower interest rate or for people [trying to] qualify for an FHA loan to start the process of buying a home for their families, ”he says.
Not everyone has a low credit score. In fact, only around 7% of Credit Sesame members have what is considered bad credit score less than 500. About 22% currently have a score below 550. In fact, Previously noted sesame credit that the majority of their customers have excellent credit (720 to 850).
To put these scores in context, FICO and VantageScore each give credit over a range of 300 (lowest) to 850 (highest).
Credit Sesame found that even those with scores over 500 could see their scores increase slightly, although the benefits wear off as scores rise and gradually fade away for those with good and excellent scores.
About 50% of Credit Sesame members with scores between 500 and 550, which is still considered bad credit, would see a 17 point increase in a month if they used their stimulus payment to pay off card debt. credit. Yet those with a score between 651 and 700 (a fair to good credit score, according to Experian) only saw a 4 point increase.
It is worth noting that Experian estimates that 70% of US consumers’ FICO scores are above 651, which means most Americans wouldn’t see an immediate and significant increase in the use of their $ 600 stimulus checks to pay off their credit card debt.
For Americans who want to use their stimulus payment to pay off their credit card balance, Moon recommends making a lump sum payment, rather than contributing a little each month.
“Not only would this give you an immediate boost to your credit score by freeing up your credit usage, it can also help you save more money on interest,” he says. “The longer you let a balance linger, the more interest you pay.”
Credit Sesame’s analysis specifically focused on credit card debt, as it can have the greatest impact on your credit score. This is because credit cards tend to have high interest rates, which makes them more expensive in the long run than lower rate debt. Typically, paying off balances will immediately reduce your usage rate – the ratio of the money you have on your credit cards to the total amount of credit you have.
If you have multiple debts or credit card loans, it’s worth taking the time to figure out which one affects you the most, Moon says. Typically, this is the card with the highest interest rate and the highest balance. You should pay that one first.
Let’s say you have two credit cards: one with an interest rate of 25% and a balance of $ 200 and another with an interest of 18% and a balance of $ 2,000. In this situation, paying the one with the highest balance first can help you save more in the long run, Moon says. Considering the larger balance, you will end up paying more interest even though the interest rate itself is not as high.
Still, $ 600 doesn’t go any further. For many Americans, that’s just not enough to cover all of their unpaid expenses right now. In some cases, Americans may have to choose between using the $ 600 to pay off credit card debt, shop for groceries, or even make student loan repayments that will start again in February.
“People are going to have to make some very difficult choices in terms of using stimuli,” says Moon.