Ultimate Guide on Which Debt to Pay Off First to Boost a 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.

Over time, though, the fragments add up, and one day they wake up and say, “How did that get there?”

The good news is that it is never too late. Paying off debt and improving your credit rating are two of the most common financial goals. For people who do well, they can score wins on both objectives at the same time.

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

How Paying Off Debts Improves Your Credit Score
Large debts 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 affect a credit score is a person’s credit utilization rate. This is the percentage of revolving credit that they are using.

Revolving credit is any credit that a person can use over and over again, such as 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 back $5,000, they can’t use that $5,000 for something else later.

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

First, they must add up the credit limits of all their credit cards. Then they add up the scales on all those cards. When you divide your total balance by your credit limit, that’s 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 record. The reason people have bad credit when they first turn 18 is because lenders don’t have a record of 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 additional two years of reliable payments on your record, which will improve your credit score.

Helps the debt-to-income ratio
In truth, this does not directly affect a person’s credit score. However, one of the most common reasons people struggle to pay off their 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 score.

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

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

What debt to pay off first to raise a credit score
It’s clear that paying down debt improves a person’s credit score in several ways. However, for most people, their debt involves several types of accounts. Here’s how to prioritize.

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 accounts into “good debt” and “bad debt.”

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

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

Taking care of the utilization rate
For someone who is trying to pay down their debt in a way that will help their credit score the most, you need to consider your utilization ratio. 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 to pay off debt and increase your credit score
Even when people know which debts to pay off first, it can be difficult to figure out the next steps. These tips can help.

Higher interest should be a higher priority
As mentioned above, it’s important to pay off credit card debt first. However, for people with multiple credit cards that carry balances, they should focus on the one with the highest interest rate first.

If all credit cards have the same or similar interest rates, it’s 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 larger, higher-interest debts first. However, some people find it 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 their accounts but put extra money toward their smallest debt. It’s easier to see progress and stay motivated this way.

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

That tactic is great if paying down debt is your only priority. However, it can damage the person’s credit score in the process. For one thing, adding a new credit card lowers 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 hurt your credit utilization ratio because the new card will likely have a lower credit limit.

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

For a more hands-on approach to credit improvement, our credit repair experts can help.