Credit scores are like temperamental toddlers. It can be difficult to know what they want from you. One wrong move and you might be in melt down city, despite your best intentions. Just like you can learn to anticipate a toddler’s needs, you can figure out the best moves you can make when paying off debt to raise your credit score. If you’re wondering what debt you should pay off first to raise your credit score, you’re in the right place.
Being strategic about what debt you pay off first to raise your credit score is really important if you are trying to improve it. The order that you pay off debt matters when it comes to improving your score. You should start by paying off certain kinds of revolving debt first. After that, there is some wiggle room for what to pay off next.
Revolving debt, such as credit card debt, should be paid off first because it will have a higher impact on your credit score than installment debt (like personal loans or student loans). That’s because revolving accounts have a credit limit that you can continue to borrow against. This has a strong impact on your credit utilization ratio. Your credit utilization ratio matters a lot when it comes to calculating your credit score. While you want a high credit score, you actually want a low credit utilization ratio. Meaning, it’s good to have a high credit limit extended to you with low balances on those limits. And if you are sitting there wondering what on earth credit utilization ratio means, don’t worry. We’ll cover that in more detail next.
WHICH CREDIT CARDS TO PAY FIRST TO RAISE YOUR CREDIT SCORE:
When it comes to raising your credit score, the best credit card to pay off first will be either (1) your card with the highest credit utilization ratio, or (2) your credit card with the smallest balance.
To calculate your cards credit utilization ratio, you simply take the amount you currently have borrowed and divide it by your credit limit. In other words, it’s how much you owe divided by your credit limit.
Example: John has a credit card with a limit of $10,000. He owes $5,000. $5,000/$10.000 = 0.5 (or 50%). His current credit utilization ratio on that card is 50%.
His second credit card has a credit utilization ratio of 25%.
To raise his credit score, John should pay off his card with 50% use first because credit utilization is one of the most important factors used in credit scoring.
Along those lines, if you have a credit card with a small balance, you can pay that off first as well because this will decrease how many of your accounts have an outstanding balance, which will improve your credit score. If you have multiple credit cards with small balances, that is the approach you should take first.
Note that neither of these methods will necessarily save you the most money. The goal for either of these methods is to raise your credit score. If you are looking to save the most money possible on your credit, you should pay off the highest interest debt first or use a personal loan to pay off the balance. You can read more on how to save money on your debt here.
HOW TO PAY OFF CREDIT CARD DEBT TO RAISE CREDIT SCORE
Once you’ve decided which credit card to pay off first, your next step is to figure out how to pay it off. There are a few different debt repayment methods you can choose but since we’re discussing what debt to pay off first to raise your credit score, you should start by making extra payments on your credit cards with the highest utilization ratio.
You can make extra payments by first tracking your expenses. Once you know your expenses, work on reducing them down to the essentials as well as increasing income to free up the money you need to make those extra payments. Continue making payments on your debt with the highest credit utilization ratio. Once you’re done with the first debt, move on to the second highest, and so on. You can pin this cheat sheet for later:
TRACK YOUR PROGRESS WHEN PAYING OFF DEBT TO RAISE YOUR CREDIT SCORE.
Another important aspect of paying off debt to raise your credit score is to track your progress. Tracking your progress will give you the motivation you need to keep going. Research shows that tracking your debt will help you pay it off faster. One easy way to keep track of your debt is in the Paidback app, where you can manually enter in your debt and payments, or simply link your debt accounts so you can see everything in one easy to see place. You can download Paidback here:
WHEN PAYING OFF DEBT MAY HARM YOUR CREDIT SCORE:
While paying off debt is obviously a good thing, there are situations in which paying off debt can actually harm your credit score. Paying off debt can harm your credit score when you close your debt accounts after you’ve paid off the balance. That’s why when you pay off installment loans, like student loans or auto loans, you may actually see a little dip in your credit score.
If you pay off your credit card debt and close out your accounts, you’ll similarly see a dip in your score. If you want to raise your credit score while paying off debt, keep the accounts you’ve paid off open rather than closing them out as they are paid off.
WILL PAYING OFF ALL DEBT INCREASE CREDIT SCORE?
Paying off all debt can increase your credit score when you leave your credit lines open. If you have debt in the form of installment loans, like student loans or auto loans, it can actually slightly harm your score when you pay them off.
If you are trying to improve your credit score, keeping lines of credit (credit cards) open after you’ve paid them off will help improve your score. That’s because it impacts your credit utilization. The more credit you have available to you and the smaller your balances are on that credit, the higher your score will be.
DOES INCREASING CREDIT LIMIT AFFECT CREDIT SCORE?
The short answer as to whether increasing your credit limit will affect your credit score, is that it depends. Typically, increasing your credit limit will not affect your credit score. It could affect your credit score if you also simultaneously increase your spending or if you fail to make payments on time.
Another instance it could negatively impact your credit score is if you request a limit increase and the company you requested it from does a hard inquiry credit check. If you are going to request an increase to your credit limit, be sure to ask your credit card company if they’ll pull your score to make their decision.
Otherwise, if your credit card company increases your credit limit on its own, so long as you don’t increase spending and continue making timely payments, your credit score won’t be impacted.
HOW LONG DOES IT TAKE FOR CREDIT SCORE TO GO UP AFTER PAYING OFF DEBT?
It usually takes one to two months to raise your credit score after paying off credit card debt. This is because it will take a few billing cycles for your credit card company to report your new balance(s) and share with credits scoring entities. As soon as that process is complete, you’ll likely see your credit score improve.
Paying off debt to raise your credit score can feel overwhelming at first. Simply start by paying off your smallest balance first OR your card with the highest utilization ratio, and you can improve your score almost as quickly as you can pay off debt.
If you are ready to get started paying off you credit card debt to improve your credit score, grab our free guide– the Debt Payoff Starter Kit.
PIN THIS FOR LATER!