Are you trying to raise your credit score fast? Paying off debt is one of many strategies you can use to boost your score fast, but the question is: what debt to pay off first to raise your credit score the fastest? Knowing the right sequence to tackle your debts can make a world of difference in your credit score. In this article, I will show you the debt you can pay off to raise your score in as little as 30 days. I will also provide you with helpful guidance on how to properly pay off your debts.
To know what debt to pay off to raise your credit score fast, you first need to understand how each debt you pay off affects factors on your credit score. For example, once paid off, revolving credit debt has the fastest impact on your credit score compared to installment loans due to a direct impact on your credit utilization without affecting your credit mix. You also need to tackle high-interest loans to prevent your debt from getting out of control due to compounding interest and high-interest charges.
This article will go into detail about how paying off different types of debts affect your credit score and what debt to pay off first to increase your credit score fast.
The debt to pay off first to raise your credit score is one with the highest impact on your credit utilization and less impact on your credit mix
The debt to pay off first to raise your credit score should be the one that will have a big impact on your credit rating the fastest. Since the top factors on your FICO and Vantage scores are payment history, credit utilization, age of your credit, credit mix, hard inquiries, and available credit; any debt you pay off first should have the most impact on these factors.
Assuming that you pay your bills on time and you have open credit accounts, you don’t have to worry about your payment history and the age of your credit. These two factors will continuously improve your credit score as you use your credit accounts and pay off your bills on time. If you are not borrowing excessively, you should not worry about hard inquiries since they appear on your credit reports when your lender reviews your credit profile. What is left is your credit utilization and credit mix.
The question is what debt can you pay off first to have the highest impact on your credit utilization without affecting your credit mix?
Only revolving credit accounts such as credit card debt and personal lines of credit match these criteria. That is paying off revolving credit first automatically improves your credit utilization without hurting your credit mix. All it takes is for your lender to report your improved utilization rate to major credit bureaus (Equifax, TransUnion, and Experian) to raise your credit score which takes about 30 to 45 days. You should also concentrate more effort on high-interest credit cards to keep your balances manageable and low.
For example, if you have credit card debts, paying them off will automatically free some of your credit limits and improve your credit utilization. Since your credit limit gets renewed automatically, the account will stay open. As a result, paying off this debt will not affect your credit mix. For this reason, you should pay off your credit card debt and personal lines of credit first to raise your credit score fast.
A big mistake people make is to pay off their installment debts first which yields little result on their credit score. Yes, paying off your debts will have a long-term impact on your credit rating. But, paying off installment loans might have a negative impact on your credit score. This is because, these debts have little impact on your credit utilization and once your debt is paid off, the account gets closed. Closing the account might affect your credit mix and can lower your credit score in short term.
Revolving credit is the best debt to pay off first to raise your credit score
If you are interested in knowing what debt to pay off first to raise your credit score fast, pay off revolving credit debt first. This is because revolving credit has the most impact on your credit score. That is, revolving credit affects many factors on your credit score.
A good example of revolving credit debt is credit card debt. If you have accumulated a lot of credit card debt, these debts should be paid off first. This is because your credit card debt affects your credit utilization which is a major factor in your credit score. Both FICO and VantageScore models give more weight to your credit utilization.
Credit utilization affects 30% of your FICO score and 20% of your Vantage score. By paying off your credit card debt first and similar debts, you automatically improve your credit utilization which boosts your credit score in as little as 30 days. In addition, paying off your credit card debt improves your debt-to-income(DTI) ratio which improves your credit profile and helps in increasing your credit score.
Furthermore, your credit card accounts and similar accounts stay open and can be renewed even after paying them off. This means that paying off revolving debt does not affect your credit mix.
What is credit utilization?
Credit utilization is the percentage of how much you have spent compared to your available line of credit. For example, if you have a credit card limit of $1,000 and you have spent $500, your credit utilization will be 50%. The more you spend on your credit cards, the higher your utilization gets. A higher utilization automatically lowers your credit score.
Most lenders suggest that you keep your credit utilization under 30%. But, if you want to raise your credit score fast, pay off your credit card balance in full or at least keep your utilization rate under 6%. Besides raising your credit score, a low balance on your credit cards means that you don’t pay a lot of interest charges which is good for keeping your credit account and finances healthy.
Paying off your credit card first, automatically increase your credit score. As soon as your payments are reported to major credit reporting agencies(Equifax, TransUnion, and Experian), your credit score goes up. This is because paying off your credit card debt first improves your credit utilization and does not affect your credit mix. As a result, your credit score goes up right after your payments appear on your credit reports.
Having a low utilization rate is best when you want to raise your credit score fast
If you want to raise your credit score fast, keep your focus on your utilization ratio. 30% of your FICO and 20% of your Vantage score is based on your utilization ratio. As long as you pay your bills on time, the next thing to pay attention to is your utilization ratio. How much you spent compared to your available credit limit is crucial in improving your credit score.
Why should you worry about credit utilization when you want to raise your credit score fast?
Because your payment history and credit utilization alone affect 65% of your FICO score and 60% of your Vantage score. By keeping your credit utilization low and paying off your bills on time, you will be on the right path to improving your credit score. The age of your credit also plays an important role in your credit score calculation. But you don’t have to do anything to improve the age of your credit.
80% of your FICO score is based on your payment history, credit utilization, and age of your credit
How much does the age of your credit affect your credit score? 15% of your FICO score and 21% (credit mix and age of your credit) affect your Vantage score. You can clearly see that 80% of your FICO score is based on your utilization rate, payment history, and the age of your credit.
Among these factors, you don’t have to do anything about the age of your credit. Also, paying off your bills on time(which you should do if you are responsible) helps boost your credit score. The only factor that is left is your utilization rate. A lot of people get this factor wrong. So, they maxed out their credit cards without knowing that they are wrecking their credit scores.
Paying off Installment debt first won’t help you raise your credit score fast
If you want to raise your credit score fast, installments should not be the ones to start with. Having a definite amount to pay and scheduled payments, means that once an installment loan is paid off, the account will also be closed. Closing an installment loan might lower your credit score due to weakening your credit mix. Matter of fact, keeping an installment loan on your credit report helps you build a good credit score.
In addition, installment loans have no impact on your credit utilization which is one of the biggest factors in your credit score calculations. Yes, your debt-to-income (DTI) ratio will improve from paying off an installment loan. But, this cannot increase your credit score faster than the impact of revolving credit accounts on your credit score.
What credit card should you pay off first?
Paying off credit card debt to raise your credit score requires some form of strategy. If you only have one credit card debt, you don’t have to worry much. But, if you have multiple credit card debts, it is crucial to allocate your payments to credit cards in a way that improves your credit utilization the most.
A big mistake many people make is to randomly allocate payments to their credit cards. This strategy helps them pay off some of their debts but has little effect on boosting their credit scores.
If you want to pay off your credit card debts to raise your credit score, use the following strategy.
- Pay off the credit card with the highest interest rate. Credit cards come with some of the highest APRs in the lending industry. According to LendingTree, the average credit card APR for new accounts in February 2023 is 23.55%. In addition, most credit card interests are compounding interest. Meaning that if you keep paying the minimum monthly payments, your debt will keep growing due to paying interest on interest. For this reason, you should not ignore credit cards with higher interest rates. Focusing on the higher-interest debt will allow you to keep your credit card balances manageable and ensure the health of your credit.
- Boost your credit utilization by putting more payments on credit cards with higher balances. Since your main goal is to increase your credit score fast, putting more money on credit cards with higher balances is important. Keep your focus on credit cards that are keeping your credit utilization higher and pay them off first. By boosting your credit utilization, your credit score will increase once low balances are reported on your credit report.
How to pay off credit card debt?
There are two effective strategies you can use the pay off your credit card debt.
- Pay off the smallest debts first. This strategy is known as Debt Snow Ball Method and it allows you to pay off your credit card debts starting with the smallest balance first. That is you meet the minimum requirements on every debt and add extra cash on the smallest debt. Once the smallest debt is paid off, you move to the next smallest debt. You then repeat this process until all your debts are fully paid off. Debt snowball gives you small wins but it is not a fast way to tackle your debts.
- Pay off the highest-interest debt first. This strategy is known as Debt Avalanche Method. This method is the most effective since credit cards come with higher APRs. The Debt Avalanche Method allows you to pay off your credit credit card debts starting with the credit card with the highest APR first while meeting minimum requirements on other debts. To use this strategy, organize your credit card debts starting with the highest interest to the lowest APR. Then, pay off the first debt on the list while meeting the minimum required payments on other debts. Once the first debt is paid off, move to the next debt. Repeat this process until all your credit card debts are paid off.
Besides these two debt payment strategies, you can also rely on other ways to make your debt easier to pay off and manageable. The following two strategies can help you manage and pay off your credit card debts faster.
- Debt consolidation loans. An effective strategy to pay off credit card debt is to use a debt consolidation loan. Although it sounds a little crazy to pay off a loan with another loan, sometimes it makes sense to do so. A debt consolidation loan allows you to combine multiple credit card debts into a single loan. This strategy can help you manage your debts and raise your credit score fast.
- Balance transfer. If you have a credit card debt with a higher APR, you can easily transfer that balance to another credit card with a lower APR. Having your interest rate reduced will allow you to pay off your credit card debt fast.
Related: 6 effective ways to pay off credit card debt
Pay off installments loans last
Even if installment loans such as car loans, student loans, and mortgages cannot help you raise your credit score fast; you don’t want to miss a payment on these loans. Having a late payment on your credit report will drop your credit score by as much as 180 points. The point here is that you must at least meet the minimum payments on each loan while putting more focus on revolving credit debt.
The other reason you should pay off revolving credit first is that paying off installment debt could drop your credit score. This is because paying off your installment debt such as a car loan can weaken your credit mix which is an important factor in your credit score calculation.
Related: Why does your credit score go down when you pay off a loan?
How does paying off installment loans lower your credit score?
Credit mix is a factor that contributes to your credit score. A good credit mix is made of revolving credit accounts such as credit cards, personal lines of credit such as HELOC, and Installment loans such as student loans, mortgages, and car loans. Your credit mix shows that you can handle all types of loans which makes you a less risky borrower.
When an installment loan is paid off, the account also gets closed. That is your car loan account will not stay open when there is no balance left on the car. Closing the account automatically affects the number of active credit accounts on your credit reports which might weaken your credit mix and lower your credit score.
The good news is that having less debt improves your debt-to-income(DTI) ratio which has a positive long-term impact on your credit score. It is also easy to qualify for loans when you have a good DTI ratio.
If you don’t have other revolving credit accounts, your credit mix becomes weak which directly lowers your credit score. Both FICO and VantageScore credit scoring models allocate different weights on your credit mix. Your credit mix affects 10% of your FICO score and 21% (together with the age of your credit) of your Vantage score.
For these reasons, paying off installment loans might not be a good idea when you want to increase your credit score fast.
What are other ways to raise your credit score fast?
- Become an authorized user of a credit card account. One of the fastest ways to boost your credit score is to become authorized for a credit card account. After being added to an account with established credit history and good credit score, you automatically get a boost once account activities are reflected on your credit reports.
- Clean your credit reports. You can easily boost your credit score by cleaning up your credit reports. Cleaning up your credit reports helps you get rid of errors, inaccurate information, or have removable negative items deleted from your credit reports. This automatically boosts your credit score once updates are made to your credit reports.
- Keep your credit accounts open. Closing your credit card can directly impact your credit utilization in case you carry balances on your credit cards. Your credit mix can also be impacted when you cancel a credit card account. Both of these events might lower your credit score. So, keep your accounts open even if you are not using your credit cards.
- Pay your bills on time. Payment history is the biggest factor on both your FICO score and Vantage score with 35% and 40% respectively. So, as you pay your bills on time, your credit score increases to reflect your activities.
- Avoid excessive borrowing. Every time you apply for credit, your lender runs a hard pull on your credit profile. This results in a hard inquiry on your credit reports and lowers your credit score by 5 to 6 points. To boost your credit score fast, avoid excessive borrowing.
- Watch your utilization ratio. The second biggest factor in your credit score calculation is your credit utilization. So, by keeping your utilization low, you automatically keep your credit score healthy. If you carry a large balance on your credit cards, you can simply boost your credit score by paying off your balances. It will only take between 30 to 45 days to have your payments reflected on your credit reports and see changes in your credit score.
The bottom line
The decision of what debt to pay off first to raise your credit score can be a daunting one. But, prioritizing the revolving credit first is key to increasing your credit score. Among revolving credit debts such as credit cards, focus on debts with the highest utilization rate. Furthermore, tackle high-interest revolving debts to prevent your debts from growing exponentially.
Not only does this help you save money in the long run, but it reflects positively on your credit score.
Remember, it’s not the amount of debt you owe, but how you manage it that has the most significant impact on your credit score. Whether you’re just getting started on your debt repayment journey or working to raise an already-good score, prioritizing revolving credit and high-interest debt is a key step in the process.
