Which Debts Should I Pay Off First to Improve My Credit?

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If you're focused on improving your credit scores, paying down your debts can be an effective way to do it. Starting with revolving debts, such as credit cards, should make the biggest impact on your scores. However, you still want to figure out which revolving accounts to pay down first, and see if there are any strategies that can save you money in the process.

Start By Paying Off Credit Card Debt

Your current balances on various types of debt accounts impact your credit differently. To start, it's important to understand how credit scoring models distinguish between the two broad types of credit: Installment accounts and revolving credit accounts.

  • Installment accounts typically have a fixed loan amount and repayment schedule. Mortgage, student, auto and personal loans are common examples.
  • Revolving accounts, such as a credit card or personal line of credit, have a credit limit that you can repeatedly borrow against.

The balances on either type of account play a role in your credit, but your revolving credit accounts factor more heavily into your credit scores. That's because they impact your credit utilization ratio, which is a major scoring factor in both the FICO® and VantageScore® scoring models. The remaining balances on your installment loans also impact your credit, but paying down those balances may not move your scores as much.

To calculate your credit utilization ratio, you'll compare your revolving account balances and limits. For example, if you have two credit cards with $5,000 credit limits ($10,000 total) and a combined balance of $2,500, your credit utilization ratio is 25%.

Your overall credit utilization and your credit utilization on individual revolving accounts both can impact your credit scores. In either case, a lower credit utilization rate is better. As you pay down your accounts, keep in mind that the balances and limits used in score calculations come from your credit report. Your creditors report account information to the credit bureaus every 30 days or so, which may cause the information in your credit report to differ from the amounts you see when logged in to your credit card account.

Decide Which Credit Cards to Pay Off First

If your goal is to lower your overall credit utilization rate, any additional credit card payments you make could help. However, other factors can also impact which card you want to pay down first:

  • Paying down the card with the highest interest rate first could help you save money.
  • Paying down the card with the highest utilization ratio could help your credit scores, as the individual account utilization is considered by credit scoring models.
  • Paying down the card with the lowest balance could help you decrease how many of your accounts have a balance, which may also improve your credit scores.

Consider your goals and then choose an account to start with—while still making at least the minimum payment on the rest of your credit cards.

How to Pay Off Credit Debt

You could pay off your credit card debt by paying down one card at a time (and making minimum payments on the other cards). Once the first is paid off, you take the freed-up funds and focus on the next card on your list.

Two ways you can create your debt payoff plan using this approach is to utilize the debt avalanche or debt snowball method. The debt avalanche method has you start with the highest-rate accounts first, which can help you save money. Alternatively, the debt snowball method focuses your efforts on the account with the lowest balance first. This strategy may be more motivating and easier to follow through with because it could allow you to pay off individual debts more quickly.

There are, however, additional strategies that might help you save money, improve your credit or get out of debt:

  • Balance transfer credit cards: Balance transfer cards often offer a promotional 0% intro APR (annual percentage rate) on debt you transfer to the card. You can then pay down the balance without accruing additional interest during the promotional period. Many balance transfer cards charge a balance transfer fee, and it's common for this fee to be 3% or 5% of the transferred amount.
  • Debt consolidation loans: You might be able to take out a personal loan and use the funds to pay off one or more of your credit cards. This strategy could lead to savings if you can qualify for a loan that has a lower interest rate than your cards do. Plus, moving the debt from a revolving credit card account to an installment loan will lower your credit utilization rate.
  • Debt management plans: If you can't seem to get a handle on your credit card debt, a credit counselor may be able to help you get set up with a debt management plan (DMP). A DMP can help lower your payments and set you on a path to paying off the debt, but it also often involves closing your credit cards.

Don't Forget About Installment Account Debt

While paying down credit card debt could lead to a larger credit score increase than paying down an installment loan, you don't want to neglect your installment accounts. Missing loan payments could lead to fees, and late payments can hurt your credit scores.

You may also want to use a single payoff strategy, such as the debt avalanche or debt snowball method, for all your credit cards and installment accounts. Even if it means focusing on a high-rate loan before a credit card, the extra savings could be worth taking a less credit-score-focused approach. This will depend on your situation and whether you hope to take out a loan in the near future. Paying down credit card debt tends to have a more immediate positive impact on your credit scores.

Monitor Your Progress

Reviewing your credit report can be a helpful first step, as you can see all your current debts, balances and credit limits. However, you'll also want to review your statements or online accounts to figure out the interest rate on each credit card or loan. Once you make a plan and start paying down your debts, you can also monitor your progress by signing up for a free credit score from Experian.

How Good Is Your Credit Score?

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