Which debt to pay off first: Credit card, cash advance or personal loan?

Focus on paying down the balance with the highest interest rate, or any credit card you have that’s close to being maxed out


There are two approaches you can take to paying off different types of debt. You can pay off your highest interest balance, or focus on a card that’s close to being maxed out. The latter could have a bigger impact on your credit score, but any delay in paying off a high interest balance can be costly.

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Dear Keeping Score,

If I have high interest cash advance loans, high interest personal loans and several credit cards, which do I focus on paying back first in order to raise my credit score faster? –Victoria

Dear Victoria,

All things being equal, I suggest that while keeping up the minimum payments on all your debt, you focus all excess income on one of two approaches.

  • First, pay down the debt with the highest interest rate. Once that debt is retired, move on to the next highest interest debt and repeat until done. This can help you save more in the near term on interest charges.
  • Or, pay down the debt that is closest to your credit max. If your highest interest rate is associated with the debt closest to its max credit limit, then you get a twofer.

Let me explain how your situation is reflected in your credit scores.

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There are five main components to a FICO credit score. In order of importance, these are payment history, credit utilization, length of credit history, new credit and credit mix.

  • Payment history is most important, making up 35% of the total score. This is why it is so important to keep paying all bills, on time, every time even if it’s only the minimum payment.
  • Credit utilization, which is how much of your debt you are using in relation to your credit limit, is the second largest influencer, making up about 30% of the score.
  • In third place is the age of the oldest credit account (measured by length of credit history) and is 15% of the score.
  • Number four is new credit, which looks at hard inquiries to your credit score that ultimately lead to a new account or a turndown by a creditor. This is worth 10% of your score.
  • The final piece is credit mix (the types of accounts you own, like credit cards, mortgages and installment loans) and is worth 10% as well.

VantageScore, an up and coming competitor with FICO, looks at five main factors also. In order of importance, they are credit usage, balance and available credit, credit mix and experience, payment history, age of credit history and new accounts.

The rate of interest you are paying on your loans does not factor into your credit score. Depending on where you got your personal loan, it may or may not be reported to the bureaus. I’d check your credit report to be sure which loans are or are not reported before including the loan in your score-raising scheme.

The amount of debt you have in relation to your total credit available and each individual reported card or line of credit does count. Any lines of credit that are over 50% of your limit can take a real toll on your score.

Here’s an example. You can have a $5,000 balance on your credit card, but your limit on that card is $50,000. This means you will have only used 10% of your available credit. This low debt-to-credit ratio will gain you scoring points, not lose them.

But if you’ve racked up that same amount on a card with a limit of $10,000 or less, that could have a negative effect on your score.

See related:  Debt payoff debate: Pay smallest balance first? Or highest rate?

Stop using your card if you’re carrying a balance

If you feel the need to raise your credit score, my guess is that you are maxing out your cards and not paying down the principal on your other loans.

To lower your card balances, it is important to not use any cards on which you are carrying a balance. New purchases accrue interest from the minute you make them if you are using a card with a balance. So continuing to pile on high interest debt will make it much more difficult to get your debt down and your score up.

Since you seem to be concerned about your score (as well you should be), please don’t lose sight of what is most important here. That is your payment history. So just remember that as you focus on a strategy, you must be sure to pay at least the minimum on all of your other accounts and pay them on time.

Making payments on time and as agreed is going to have the most impact on your score. I suggest that you set a goal of a date by which you can reasonably be expected to pay off your debts.

This works much better than just trying to do the best you can from paycheck to paycheck. Then divide up the payment so it reduces the highest interest debt faster, while at the same time allowing you to keep up some payments on the others.

See related:  What happens when you miss a credit card payment?

Make a plan for paying down debt, and stick to it

As you pay down your debts and decrease your credit utilization rate, your score will improve. With lots of debt and high interest rates, it sounds like this will take some time. So please be patient. I would strongly suggest that you set that goal, make a plan and stick to it. If you do that, I can assure you that you will be rewarded in time with the higher score you are seeking.

Remember to keep track of your score!

See related: How to pay off credit card debt

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