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22% of millennials used their stimulus check to pay off credit card debt—here's how that could improve your credit score

22% of millennials used their stimulus check to pay off credit card debt. CNBC Select takes a look at how that could improve your credit score.

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According to a recent Covid-19 & Finances Survey conducted online by The Harris Poll on behalf of TD Ameritrade, 22% of millennials ages 24 to 38 who received a stimulus check already spent it, or are planning to spend it, on paying off credit card debt.

With the average millennial carrying $4,712 in credit card debt, this is a smart move. If you don't need your stimulus check to afford your basic necessities, putting it toward your debt will save you from the high interest that accrues when you carry a balance month to month. Paying off debt also lowers your credit utilization rate, which helps boost your credit score. 

Below, CNBC Select takes a look at how paying off credit card debt can improve your credit score.

How paying your credit card debt helps your credit score

When consumers pay down their debt, their credit utilization rate (CUR) decreases. Your credit utilization rate, also referred to as your debt-to-credit ratio, is a measure of how much credit you are using compared to how much credit you have available. 

The amount your utilization rate decreases depends on just how much of your credit card debt you pay off.

Let's take a hypothetical example where two people with the same credit utilization use different amounts of the $1,200 stimulus check to pay off their credit card debt.

In our scenario, Julie and John both carry the same credit card balance of $2,000 and have the same credit limit of $5,000; thus, they share the same credit utilization rate of 40% ($2,000 / $5,000 = 0.4 x 100 = 40%).

Julie wants to use her whole $1,200 stimulus check to pay off her credit card debt, while John wants to use only $600 of his and save the other half. Julie's utilization rate would decrease to 16%, while John's would only decrease to 28%. 

Julie John
Current balance$2,000$2,000
Current credit limit$5,000$5,000
Current CUR40%40%
Balance after stimulus payment$800$1,400
Credit limit after stimulus payment$5,000$5,000
CUR after stimulus payment16%28%
Total CUR drop24 percentage points12 percentage points

The lower your utilization rate, the better your credit score. Your goal as a cardholder is to aim for a high credit limit and a low balance across all your credit cards. Experts recommend maintaining a utilization rate below 30%, with some even suggesting trying for a single-digit utilization rate (under 10%) to get the best credit score.

In the scenario above, John's new utilization rate would be just below 30% while Julie's would be closer to 10%. How exactly this transfers to their individual credit scores depends on their overall credit profiles. Credit utilization makes up 30%, or one-third, of a credit score on the FICO model. However, both John and Julie would both see a noticeable increase in their scores.

Credit cards that ease the burden of debt 

If you don't want to use your stimulus check to pay off debt, but you do have a lingering balance, consider a 0% APR credit card. If you qualify, an balance transfer credit card lets you pay off your existing balance without being charged APR, over six months or longer. 

The Citi Simplicity® Card offers an introductory 0% APR period for the first 18 months on balance transfers and purchases (after, 14.74% to 24.74% variable APR). For a long zero-interest period on both balance transfers and new purchases, the U.S. Bank Visa® Platinum Card offers 0% for the first 20 billing cycles on both (after, 14.49% - 24.49% variable APR).

For anyone looking for a card with both a 0% APR period and rewards on everyday spending, the Amex EveryDay® Credit Card comes with 0% interest for the first 15 months on purchases (after, 12.99% to 23.99% variable APR) and 2X Membership Rewards® points at U.S. supermarkets on up to $6,000 per year in purchases (then 1X), 1X Membership Rewards® points per dollar spent on all other purchases.

With the Wells Fargo Cash Wise Visa® card, cardholders can take advantage of 0% interest for the first 15 months on purchases and qualifying balance transfers (after, 14.49% to 24.99% variable APR) while earning 1.5% cash rewards on every purchase they make.

Keep in mind that applying for new credit is harder than it was before the coronavirus pandemic. With issuers tightening their restrictions amid the economic fallout, you'll want to plan ahead by gathering documents to prove your income (one of the biggest changes since the pandemic) and checking your preapproval before you apply. The best 0% APR credit cards require having good or excellent credit to qualify.

For rates and fees of the Amex EveryDay® Credit Card, click here.

Information about the Wells Fargo Cash Wise Visa® card, Citi Simplicity® Card, Amex EveryDay® Credit Card has been collected independently by Select and has not been reviewed or provided by the issuer of the card prior to publication.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.