Will Paying Off Debt Instantly Improve My Credit?

Written By:

paying - off - debt - Quizzle

Unhappy with your current credit score? Or maybe it’s your preferred lender that doesn’t think it’s all that hot. Either way you’re probably hoping to improve it and improve it fast.

If you’re like most folks that means paying off some debt.

Many folks with a less than stellar credit scores suffer from too much debt, resulting in poor payment history or high credit utilization. However, simply paying off any old debt might not boost your credit score. And in all cases it will take a little time for your credit score to adjust.

Here are few things to consider when you’re picking what debt to pay off first.

Paying off outstanding debt is always good

Paying your bills on time is the best way improve and maintain good credit. That’s why your first priority is always pay utility bills, credit cards, auto loans, mortgages, or other monthly bills on time, every time.

If you have a little extra cash, it doesn’t hurt to pay a little extra. Your ultimate goal might even be to pay some debt off completely.

Paying off the right outstanding debt can boost the effect

Assuming you do have a little extra cash, the next question is what debt do I pay first? Believe it or not, as it relates to your credit score, they’re not all equal.

Without going into all the complexity of credit scoring, your goal is to pay-down debt that will give you credit for multiple credit scoring factors. Credit card debt is often the best target to get fast results.

Paying down credit card debt is typically rewarded more because you are paying down riskier (unsecured) debt and lowering your credit utilization. Pay a whole credit card off or at least get it under 10% and you will really see some impact.

Build Better Credit

Sign up for our email newsletter, as building credit starts with understanding how credit works and how it affects your personal finances.
  • This field is for validation purposes and should be left unchanged.

Paying off certain overdue or charged-off debt can hurt

Now for the dangerous stuff…

We certainly encourage you to pay back all of your debts, but some categories of delinquent debt can hit you with a credit score whammy!

Paying off a credit account that’s overdue and shows an outstanding debt is going to help your credit score. However, paying off an account that is in collections or charged-off is most likely going to lower your credit score. The reason for this is that it is going to reset the recency of that bad debt account. This will make your debt problems and poor payment history look like a recent trend–scary to any creditor.

At the end of the day, getting your debt under control can have the biggest impact on your long-term credit health. So make a plan and attack the right debt first.