Americans’ total debt hit a new high of $13 trillion last year, and about 80% of Americans are in debt. Many of the 80% of Americans with debt are working to pay it off, but in the meantime, carrying debt can have a significant impact on their credit scores. A good credit score saves you tons of money, so any improvements you make while paying down your debt could make a big difference. When you’re creating a plan to pay down debt, you should consider what debt to pay down first to increase your credit score.
Credit score calculations
Not all debt is created equal, in terms of how it affects your credit score. First, you need to know how your credit card score is actually calculated. One of the of the most popular credit scores, your FICO score, is made up of five categories with different weights. The categories are payment history (35% of your score), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%). Not sure what those are? We’ve got your back.
- Payment history: have you paid your past credit accounts on time?
- Amounts owed: are you using most of your available credit? How much total debt do you have?
- Length of credit history: how long have you been using credit (longer is better!)?
- New credit: have you opened a bunch of new lines of credit in a short time?
- Credit mix: do you have a mix of different types of debt (more of a mix is preferred)?
What debt to pay off first to increase your credit score
When deciding what debt to pay off first to increase your credit score, you’re targeting the payment history and amounts owed parts of your credit score. Together, those make up 65% of your credit score. To work on your payment history, always make payments on time, whether that be for your credit card, your mortgage, or your student loans. The amounts owed portion of your credit score has the biggest influence on which debts you should start with.
First Priority: credit card debt
If you have lots of credit card debt and are using a high percentage of your credit limit, your credit score is taking a hit. Credit card interest rates are usually higher too, so you’re likely spending more on that debt than anywhere else. Credit card debt isn’t considered “good debt” by credit bureaus, unlike a mortgage or student loans, so we recommend starting with your credit card debt. Create a plan for paying it down as quickly as you can, and adjust your budget to stay out of credit card debt once you’ve paid it all down.
Have debt on multiple credit cards? Make a list of all of your debt (and the associated interest rates), and start paying down your smallest balance first. Once you’ve knocked out one, keep moving on to the next largest until you’ve met your goal. Want more details? Check out our founder’s thoughts on paying off debt in Forbes.
Next up: other debt
Once you’ve made a plan for your credit cards, it’s time to take a look at the rest of your debt. Credit scoring models don’t focus as much on other debt as they do on credit card debt. So, you won’t see much of a credit score boost when paying off other debts. Even if your credit score won’t skyrocket, there are still benefits to paying off your other debts. The sooner your debts are paid down, the less interest you’ll have to pay. You can follow the same “snowball” strategy as with your credit cards: pay down your smallest debts first, and move on from there.
Focus on credit card debt for what debt to pay off first to increase your credit score. After you’ve assessed all of your debts and followed these strategies, get ready to watch your credit score increase. You’ll also see your bank account balance rise with savings from the interest payments you’re no longer making. Any stories about your journey towards living debt-free? Let us know in the comments!