Using your credit card for a large purchase, such as paying off the home renovation with a credit card will certainly increase your utilization rate, which will at least initially ding your credit scores. Utilization is the second most important factor in credit scores and makes up thirty percent of your score, right behind payment history. But, there is more to consider.
Whether to use your new credit card to carry the balance or use available cash to pay it off now really depends on your current financial situation and credit goals. If you can do so comfortably, paying the debt in full now may be the simplest option, although there may be other considerations.
You didn’t say whether you currently have an outstanding loan for the renovation or if the balance is on another credit card, but you did indicate that you have the means to pay the debt off right away, rather than waiting.
If you took out a loan to pay for your home renovation, paying the loan off now will save you in interest fees, assuming there are no early repayment penalties. However, if the loan was opened recently and you are trying to build your credit history, continuing to pay on the loan for a while longer may be beneficial for your credit scores.
Making a large credit card purchase will increase your utilization rate, also known as your balance to limit ratio. Your utilization rate is calculated by adding up the total of all your balances on credit cards and dividing it by the total of all your credit card limits.
The general rule of thumb is that you should stay below a 10 percent utilization rate. The lower your utilization rate, the better for your credit scores.
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