A detailed guide on how to pay off debt and improve your credit score in the process

The Ultimate Guide to Which Debt to Pay First to Increase Your Credit Score

Debt is like weight gain. For many people, an extra gift here and a little splurge there don’t seem like a real problem.

However, over time, things add up and one day they wake up and say, “How did it get there?”

The good news is that it is never too late. Paying down debt and improving your credit score are two of the most common financial goals. People who do well can score wins on both goals at the same time.

Here are answers to the most common questions about debt and credit, from expert advice to which debt to pay off first to increase your credit score.

How paying off debt improves your credit rating

Big debt and bad credit often go hand in hand. That’s why it’s good to know that working toward one goal will also help the other.

Improve utilization rate

One of the many factors that influence a credit score is a person’s credit utilization rate. This is the percentage of revolving credit they are using.

Revolving credit is any credit that a person can use over and over again, like credit cards. If a credit card has a limit of $ 10,000, someone can use the credit, pay it off, and then use it again.

It is different from a car loan, for example. If someone gets a $ 20,000 car loan and pays $ 5,000, they won’t be able to use that $ 5,000 for anything else.

It is easy for people to calculate their own credit utilization ratio.

First, they must add up the credit limits of all their credit cards. They then add up the balances on all those cards. When you divide the total balance by the credit limit, that is your credit utilization percentage.

The goal should be to achieve a utilization rate below 30%. However, the lower the better. Every dollar of revolving credit that a person pays will improve their utilization rate.

Set a record

Another important part of a person’s credit score is their payment history. The reason people have bad credit when they turn 18 is that lenders have no history to tell them whether the teen will pay their bills on time.

Let’s say it takes someone two years to pay off their debt. That’s an extra two years of reliable payments on your history, which will improve your credit score.

Debt-to-income ratio help

In truth, this does not directly affect a person’s credit score. However, one of the most common reasons people live to pay off debt and increase their credit score is that they are trying to buy a home. Your debt-to-income ratio plays a big role in your mortgage rating.

Unsurprisingly, a debt-to-income ratio calculates the percentage of a person’s monthly income that should go toward debt. It is based on your minimum payments, not the amount you choose to pay.

With certain debts, such as credit card debt, the minimum payment decreases as the balance decreases. The result is a better debt-to-income ratio.

Which debt to pay off first to increase your credit score?

It’s clear that paying off debt improves a person’s credit score in a number of ways. However, for most people, your debt involves several types of accounts. Here’s how to set priorities.

Bad debt

A credit score not only looks at how much debt a person has, but also the types of debt they have. They can classify the accounts into “good debt” and “bad debt.”

Good debt includes a mortgage and student loans. Investing in a home or title can improve a person’s financial situation in the future, making it possible for these debts to be productive.

Bad debts, on the other hand, do not have the ability to improve a person’s financial situation. That includes credit card debt and personal loans. To improve your credit score, a person should focus on bad debt over good debt.

Utilization rate care

For someone who is trying to pay off their debt in a way that helps their credit score the most, you need to consider their utilization rate. It is better to pay off your revolving credit before other debts.

For example, if someone has credit card debt in addition to a car loan, they must first pay off their credit card debt.

Tips for paying off debt and increasing your credit score

Even when people know which debt to pay first, it can be difficult to determine the next steps. These tips can help.

Higher interest should be a higher priority

As mentioned above, it is important to pay off credit card debt first. However, for people with multiple credit cards that have balances, they should focus first on the one with the highest interest rate.

If all credit cards have the same or similar interest rates, it is best to start with the one with the highest balance. In this way, the person will reduce their highest monthly interest charges from the beginning.

The snowball method can help with motivation

In general, it’s best to pay off the biggest debts with the highest interest first. For some people, however, it is discouraging that it takes so long to cross a debt off their list.

Those who need a little extra motivation can start with the snowball method.

In this method, they continue to make minimum payments on all of their accounts, but put extra money towards their smallest debt. It’s easier to see progress and stay motivated this way.

Thinking twice about a 0% interest card

There is a common trick to paying off high-interest credit card debt. It involves applying for and receiving a new credit card that has an introductory interest rate of 0%. The person transfers his debt to that card so that he does not pay interest while he is paying it off.

That tactic is great if paying off debt is your only priority. However, it can hurt a person’s credit score in the process. For one thing, adding a new credit card reduces the average age of your accounts, which can affect your credit score.

It is also common for people who do this to close the credit card that had the original debt. If they do this, it will likely affect your credit utilization rate because the new card will likely have a lower credit limit.

Achieve a better financial situation

Paying off debt and raising your credit score doesn’t just take money. It also requires a bit of research, like knowing which debt to pay off first to boost a credit score. The tips above can help anyone address their financial goals in no time.

For a more practical approach to improving credit, our credit repair experts can help.