Ultimate Guide to What Debt to Pay off First to Raise a Credit Score
Debt is like weight gain. To many people, an extra treat here and a little splurge there don’t seem like real problems.
Over time, though, the bits and pieces add up and one day they wake up and say, “How’d that get there?”
The good news is that it’s never too late. Paying off debt 債務重組成功 and improving a credit score are two of the most common financial goals. For people who do it right, they can score wins in both goals at the same time.
Below are answers to the most common debt and credit questions, from expert tips to what debt to pay off first to raise a credit score.
How Paying Off Debt Improves a Credit Score
Large debts and poor credit often go hand in hand. That’s why it’s great to know that working toward one goal will help with the other one as well.
Improves the Utilization Ratio
One of the many factors that impact a credit score is the person’s credit utilization ratio. This is the percentage of revolving credit that they’re using.
Revolving credit is any credit a person can use over and over like credit cards. If a credit card has a $10,000 limit, someone can use the credit, pay it off, then use it again.
It’s different from a car loan, for instance. If someone gets a $20,000 car loan and they pay off $5,000 of it, they can’t later use that $5,000 for something else.
It’s easy for people to calculate their own credit utilization ratio.
First, they need to add up the credit limits for all their credit cards. Next, they add up the balances on all those cards. When they divide the balance total by the credit limit, that’s their credit utilization percentage.
The goal should be to get a utilization ratio below 30%. However, the lower the better. Every dollar of revolving credit a person pays off will improve their utilization ratio.
Establishes a Record
Another important part of a person’s credit score is their payment record. The reason people have poor credit when they first turn 18 is that lenders have no record to tell them if the teen will pay their bills on time.
In truth, this doesn’t affect a person’s credit score directly. However, one of the most common reasons people strive to pay off debt and raise their credit score is that they’re trying to buy a home. Their debt-to-income ratio plays a large role in their mortgage qualification.
As one would expect, a debt-to-income ratio calculates the percentage of a person’s monthly income that must go toward debt. It’s based on their minimum payments, not the amount they choose to pay.
What Debt to Pay Off First to Raise a Credit Score
It’s clear that paying off debt improves a person’s credit score in several ways. For most people, though, their debt involves several types of accounts. Here’s how to prioritize.
A credit score doesn’t just look at how much debt a person has but at the types of debt they have too. They can categorize the accounts into “good debt” and “bad debt.”
Good debt includes a mortgage and student loans. Investing in a home or a degree 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, doesn’t have the ability