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by Jesse Campbell on January 27, 2016

Getting the best credit score bang for your debt repayment dollars

The following is presented for informational purposes only and is not intended as legal advice or credit repair.

Ask the Experts: Which debt should I pay off first?

Which debt should I pay off to increase my credit score the most: a credit card or a line of credit? And should I pay one card off 100 percent or a few cards down by 50 percent to better impact my score? –Tom

Hi Tom –

Standard disclaimer to start: there’s never any guarantee that any credit-related action you take will improve your credit score by any amount. We know in a very general sense what most major credit scoring models use as a basis of their calculation, but the actual formulas used are complex and proprietary. It takes a long time and a lot of hard work to build a great credit score. 

With that out of the way, let’s get to your question. Essentially, what you’re looking for is the best credit score value for your debt repayment dollar.

To begin, here’s a quick reminder of the major factors examined in the FICO scoring model, which is one of the more popular, widely used models:

  • Payment history (35 percent)
  • Amount owed to all creditors (30 percent)
  • Length of credit history (15 percent)
  • Amount of new credit (10 percent)
  • Types of credit in use (10 percent)

As you can see, how much you owe is the second most important factor in your score. As both of your questions deal with this category, let’s dive a little deeper.

Credit utilization ratio

Your credit score judges your “amount owed to creditors” level not as a measure of your overall debt, but as ratio of debt to available credit. If you used $5,000 of a $10,000 credit limit you would have the same credit utilization ratio (50 percent) as someone who used $500 of a $1,000 credit limit.

Generally speaking, the lower your credit utilization ratio is the better it is for your score. Most experts suggest trying to stay below 30 percent utilization, with your score likely to suffer once you go over 50 percent.

It’s important to note, however, that FICO factors credit utilization in two ways – on an account-by-account basis and as an overall reflection of your debts and limits. This means that if the utilization ratio is low on most of your cards, but one of your accounts is close to maxed out, that will likely have a negative impact on your score.

So to decide which cards to pay off, review your credit limits and debt totals. If you’ve got any accounts where you’re using more than 50 percent of the available limit, that may be where you want to start. If the utilization ratio is below 30 percent for all of your cards, I would suggest focusing on whichever account has the highest interest rate.

Lines of credit

Going back to your first question, lines of credit can be tricky to pin down when it comes to their impact on your score. Different scoring models use different rules and they can vary pretty wildly when it comes to lines of credit.

The confusion is in how you classify the line of credit – as revolving credit or as an installment loan. Only revolving credit accounts are factored into your credit utilization ratio. Installment loans are considered differently.

A regular line of credit, like a business line of credit, is usually considered to be revolving credit and would be treated exactly the same as a credit card.

A home equity line of credit (HELOC), however, may be considered revolving credit or an installment loan. In many cases it depends on the size of the available credit. A general rule of thumb is that a HELOC over $50,000 is usually factored as an installment loan, while anything below that is considered a revolving line of credit.

So which should you pay off first? Again, it’s difficult to know for sure. I would suggest that if your line of credit is on the smaller side, treat it the same as a credit card and use the rules listed above. If it’s a relatively large HELOC, it’s probably in your best interests to pay the credit card debt first.

Thanks for the question! Good luck!


Canada Loan Search says:
January 28, 2016

Bad debt includes anything that doesn’t improve your financial position and that you can’t pay for in full within a month or two, from a fancy meal at a lavish restaurant to a birthday gift for your spouse. Bad debt is usually in the form of credit card debt or a personal bank loan. You should tackle bad debt first.

Jordan says:
April 20, 2016

Some great points here. It's important that people understand how to improve their credit score like this. Thanks for sharing this!

Laurie Permenter says:
May 19, 2016

We are paying down our debt. Should we build our checkbook for immediate cash before building a savings account. We do have a savings account that we put money into monthly. But we are penalize when we make too many withdraws. When we get extra money we usually pay an extra amount on a credit card. However, should we just put it in our checking account for a cushion?

LindaC says:
January 28, 2016

Great piece and very honest. It is a quagmire, at best, to discover how each of the three large companies determine a credit score. I have two giving me in the mid-700's while one gives me below 699. Go figure. Each has the same exact information! It's so perplexing. I understand they are under a new piece of legislation which, in the future, requires them to use the same fair standards of creating a credit score for each of us. Let's hope this is more fair, clearly understandable, etc. It's a ways down the road before that legislation is enacted but it's a start!

Paulette Johnson says:
February 12, 2016

In 2014 my credit score was in the low 500. I came into a lump some of money and decided to pay all of my cards down by 50%. Those with small balances were paid off. Within 9 months my score was in the mid 600. It is now in the high 700. Oh, I also cut up 2 cards, but did not close the accounts. Pay off those cards!

Rajesh Kumar says:
May 31, 2016

This is very good information. In my view one should never have bad debt on his/her name. Change you lifestyle according to your earning instead of having debt :)

Tom Heels says:
January 30, 2016

Dave Ramsey has no credit score, because he doesn't use credit cards. And pay off the smallest one first to the biggest. tom

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