Your credit score can be a baffling thing. Your score goes up, it goes down, and it's not always clear what is responsible for the movement.
If you have a FICO credit score that is too low, there are some ways to improve your score by tackling your debts head on. But it helps to have a plan, as not all debt payoffs will help you. In fact, credit bureaus like to see people who have some revolving debt but are still capable of paying their bills.
So how can you give your credit score a boost? Here are the kinds of payoffs that will be helpful.
1. Anything That's on Time
Nothing helps your credit score more than your ability to make payments on time. If you can pay off your credit card balance in full each month, that helps. If you make your monthly mortgage payment every month without delay, that's huge. In fact, these types of payments are viewed more positively by credit bureaus than any other factor.
2. Debt With the Highest Interest Rates
Cards with the highest interest rates are the ones that place you at the most risk of racking up more debt, thus hurting your credit score. By paying these cards off first, you are reducing your debt risk and ultimately will see your score rise. (See also: Credit Cards with the Best APRs)
3. Credit Cards With the Lowest Credit Limits
Credit card bureaus will not only analyze your total debt, but the amount of debt relative to your total limit. If your debt is low relative to what you are allowed to borrow, that's good. But if you're close to maxing out a credit card with a low limit, pay that one off first. This way, if you choose to close the credit card, your debt load is reduced but your limit doesn't shrink as much.
4. Anything That Gets Your Credit Utilization Under 30%
Just because credit card companies let you borrow up to a certain amount doesn't mean you should always charge up to the limit. Even if you pay credit cards on time, your credit score can be negatively impacted if you have high revolving balance. Generally speaking, if you are using more than 30% of your available credit, that's a problem. So even if you can't get your balance down to zero, work to make sure you're borrowing less than a third of what you are allowed. You will continue to see improvement until your credit utilization is down to 10% or less.
5. Your Student Loans (But Not Always)
Paying off your student loans is usually a good thing, because you're reducing your debt-to-income ratio. And because student debt is not dischargeable in bankruptcy, your wages could be garnished if you don't pay up. The fact that you have a long history of making your loan payments on time will continue to help your score, even after the debt is paid. But it's worth noting a debt payoff in this case could result in a change to your debt mix, thus impacting your score negatively. Student loans are considered installment loans, because you pay a fixed amount each month, while credit cards are a vehicle for revolving debt. Credit bureaus like to see both types in your file.
6. Small Balances on Numerous Credit Cards
You may think your credit score should be fine if you have only small debts. But if those small debts are on multiple credit cards, your score may be suffering. One of the things that FICO looks at when evaluating credit is how many credit cards have balances. So if you have debt on more than one card — even if it's a small amount — it's best to get those card balances down to zero.
7. Any Past-Due Bills
If you have debts that are very late, it's best to still pay back what you owe. This may not ultimately boost your credit score significantly right away, according to FICO, but new lenders will still want to see that you paid back what was owed. Prioritize the most recent past-due bills first.
This article first appeared in Wise Bread.