Paying Down Debt Before Opening New Credit Card

Reader Question: Should I first pay down all or most of my debts before opening a new credit card to help establish history on my credit report?

I'm a little confused by your question. So forgive me if I misinterpret it. Paying down your debt before opening a new credit account doesn't really affect your credit history. Also, some kinds of debt are better than others. So it's hard for me to offer advice one way or the other.

Will this be your first credit card, or do you already have one or more accounts open? If you already have existing credit cards, you'll already have a credit history as well. Having too many cards is generally not a good idea, because it sends the signal you can't manage your finances.

If this is going to be your very first credit card, I recommend keeping the balance low. It's okay to use the card, and in fact that will help you establish your credit history. But you don't want to use too much of it. One of the factors that contributes toward your credit score is something called "credit utilization ratio." Basically, this is the percentage of your available credit that you are currently using. People who max out their credit cards have an extremely high utilization ratio, because they are using too much of their available limit. This can drag down a credit score.

We have a credit score video in the real estate videos section of our website that explains credit utilization ratio and some other things relevant to this discussion. Check it out here.

If your debt is manageable, and you're doing a good job paying it down consistently (and not missing payments), then I wouldn't worry too much about it. If you have an unusually high amount of debt, as compared to your income, then it may be an issue when you apply for a mortgage loan down the road. If your debt-to-income ratio is too high, then it can hurt your chances of getting a home loan among other things. Here's more info on debt-to-income ratio.

So to sum up, if your debt is manageable and it's not too large (when compared to your income), it might not be a big deal. The best way to maintain a good credit history is by using credit cards sparingly, and keeping the balances low. Your oldest credit account is one of the most important, because it determines the length of your credit history.