Use Debt Payoff To Get A Credit Increase
Many of us have some sort of debt looming over our heads. And with the future an unknown, the possibility of damaging your important FICO score seems to be a constant threat as well. The most common strategy for boosting your credit score is to pay off outstanding credit card debt. Logically then, paying off your mortgage or auto loan would be an even larger credit score booster, right? Unfortunately, this is not typically the case and can even, sometimes negatively, impact your score. Choosing the correct debt pay-off strategy to maximize both your financial wealth and the health of your FICO score can be a daunting task. So, which debt should you focus on first? With these few, simple facts, you will be well on your way to building, not breaking, your credit score.
Paying Off Your Mortgage Loan (To Get A Credit Increase)
Credit loans fall under two categories: revolving accounts and installment loans. Installment loans are those that are paid off in partial payments over an agreed-upon amount of time. Your mortgage is a prime example of an installment loan. Many of us spend half of our lives hustling to pay off that mortgage, often with the idea (thought) that this will boost our credit scores. In actuality, paying off your mortgage does very little to increase your credit score. Although you are reducing the amount of interest paid, if your intent is to increase your FICO credit score, paying off early is not the avenue you will want to take.
Paying Off Your Auto Loan (To Get A Credit Increase)
Auto loans are viewed in much the same manner as mortgages. Credit scoring models like to see a solid payment history of long-standing accounts, spread out over a variety of risks. With that knowledge in mind, it stands to reason that maintaining an on-time payment history through the life of a loan not only indicates financial responsibility, but will have a greater impact on your credit score than simply paying off and closing that account.
Paying Off Your Credit Cards (To Get A Credit Increase)
Your credit cards are revolving accounts, meaning your balance can be rolled over from month to month, based on whatever terms you have agreed to with the credit company. Since this type of loan is an unsecured debt, meaning there is no direct asset behind this debt, maintaining credit card balances tends to heavily weigh down your FICO score. While it is best to pay off your credit card debt for the obvious reasons, the positive impact of this pay-off for your credit scoring makes this option the most significant choice. When you pay off an installment loan, the balance is zero and the account is closed, falling off your credit report after 7 years. When you pay off your credit card accounts, the account stays open and simply maintains a zero balance. With the knowledge that long-standing account history is a major contributing factor to your score, be sure to leave those accounts open once they are paid off.
If you find yourself with a little extra money in your pocket, whether it’s in your monthly budget or in a lump sum, pay close attention to what your long-term financial goals are. If your wish is to have your mortgage or auto loan paid off, do so because it will provide additional monthly income and potentially reduce interest. Do not go into it with the expectations of boosting your credit score.
Do you have questions regarding how your credit score works, and how it is impacted by paying off your debt?
If you still have further questions about how credit scores work and how paying off your different debts affects this, please leave a comment, and we will reply back to you quickly. Also, if you have any great success stories related to this topic, please let us know. We’d love to hear how you were successful!