There are two main types of credit accounts: revolving credit and installment credit. Your credit card falls into the revolving credit category, and things like your mortgage, car and student loans fall into the other.
Having a mixture of the two is important for your credit score, but making sure you pay off both kinds of debt is even more crucial for a healthy financial future.
While we recommend keeping up with payments on both, there is general guidance to follow when you're deciding which to prioritize paying off first.
Below, Select breaks down which debt is better to pay off first and what to look out for if you're having trouble keeping up with your balance.
What debt you should pay off first
Having both installment loans and revolving credit will help your credit score, as long as you pay the bills on time. Both types of credit illustrate to lenders that you are able to borrow varying amounts of money each month and consistently pay it back.
But if you're struggling to decide which to pay off first, focus on your credit card debt.
Experts generally agree that the most basic rule of thumb when developing a long-term debt pay-off plan is to ask yourself a simple question: Which debt is costing you more? If you carry a balance on your credit card from month to month, that ballooning balance is likely costing you much more than your installment debt.
This approach of paying off the balance with the highestAPRfirst and then working your way through all your debt from highest to lowest APR, is known as the "avalanche" method. With this method, you end up paying less overall in interest.
As an example, let's take a look at the current interest rates on credit cards (revolving credit) compared to student loans (installment credit).
The average credit card APR is 16.61%, according tothe Federal Reserve's most recent data. That's more than six times higher the 2.75%federal student loan interest rate for undergraduates for the 2020-21 school year. Even the federal rates for unsubsidized graduate student loans (4.30%) and parent loans (5.30%) don't come close to credit card interest rates.
Tackling your credit card debt first will also give you a better shot at improving your credit score. Revolving credit is highly influential in calculating your credit utilization rate, which is the second biggest factor (after payment history) that makes up your credit score.
Experts generally recommend using less than 30% of your credit limit. As you pay off your revolving balance, your credit score will go back up since you are freeing up more of your available credit.
What to do if you're having trouble keeping up with your revolving balance
Americans carry an average $6,194 credit card balance, so you're not alone if you have credit card debt.
But there are credit cards out there that help you avoid racking up interest when you do have a balance that goes unpaid.
Select ranked the best zero interest credit cards and many offer balance transfers. Here are a few of our top choices:
Most 0% introductory APR credit cards require having good or excellent credit to qualify, so make sure you check your credit score before applying.
Bottom line
When prioritizing paying off your debt, start with the balance that has the higher interest rate (likely your credit cards) and go from there. No matter what type of debt you'll be dealing with, though, the most important factor is that you pay your bills on time.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
FAQs
If you are aiming to improve your credit score by paying off credit, start with revolving credit card credit. Because credit cards have a heavier impact on your score than installment loans, you'll see more improvement in your score if you prioritize their payoff.
Is it better to pay off revolving debt vs. installment debt? ›
As you keep paying off your revolving balance on your credit card, your credit score will go up and you'll free up more of your available credit. Whereas with an installment loan, the amount you owe each month on the loan is the same, and the total balance isn't calculated into your credit utilization.
Which credit cards should I pay off first to improve my credit score? ›
Pay off high-interest credit cards first
Once you pay off the credit card with the highest APR, then you take that payment amount and add it to the minimum payment for the credit card with the second-highest APR, which can help you pay it down faster. Continue this method as you pay off each credit card account.
Does it matter which credit card you pay off first? ›
Paying off your credit card with the highest APR first, and then moving on to the one with the next highest APR, allows you to reduce the amount of interest you will pay throughout the life of your credit cards.
How to pay off credit card to best increase your credit score? ›
You want to make sure your balance is low when the card issuer reports it to the credit bureaus, because that's what is used in calculating your score. A simple way to do that is to pay down the balance before the billing cycle ends or to pay several times throughout the month to always keep your balance low.
Which debt to pay off first? ›
Start with the highest rate and work your way down to the lowest rate. Start chipping away at your highest-interest debt first. Use any extra money you can find to pay down your highest-interest debt. Every dollar counts.
Is it bad to pay off installment loans early? ›
In most cases, you can pay off a personal loan early. Your credit score might drop, but it will typically be minor and temporary. Paying off an installment loan entirely can affect your credit score because of factors like your total debt, credit mix and payment history.
How to increase credit score by 100 points in 30 days? ›
Steps you can take to raise your credit score quickly include:
- Lower your credit utilization rate.
- Ask for late payment forgiveness.
- Dispute inaccurate information on your credit reports.
- Add utility and phone payments to your credit report.
- Check and understand your credit score.
- The bottom line about building credit fast.
The snowball method is perfect for people who like the reinforcement of “l*ttle wins” along the journey. The strategy is to make the minimum payment on all of your credit card bills except the smallest one – you put as much money toward the bill with the lowest balance as possible.
How do I raise my credit score 40 points fast? ›
Here are six ways to quickly raise your credit score by 40 points:
- Check for errors on your credit report. ...
- Remove a late payment. ...
- Reduce your credit card debt. ...
- Become an authorized user on someone else's account. ...
- Pay twice a month. ...
- Build credit with a credit card.
If one card has a significantly higher interest rate, it may be more beneficial to focus on paying off that card first. By eliminating the high-interest debt, you can save money on interest payments in the long run.
When you have two credit cards which should you pay off first? ›
Target one debt at a time
Check the interest rate section of your statements to see which credit card charges the highest interest rate, and concentrate on paying off that debt first.
Should I pay off the highest interest or highest balance first? ›
You should first pay off debt with the highest interest rate if your goal is to save money. This approach is known as the debt avalanche method. As of the first quarter of 2024, the average annual percentage rate (APR) on credit cards was over 22%, according to the Federal Reserve.
What debt should I pay off first to raise my credit score? ›
Tackling your credit card debt first will also give you a better shot at improving your credit score. Revolving credit is highly influential in calculating your credit utilization rate, which is the second biggest factor (after payment history) that makes up your credit score.
Will my credit score go up if I pay off my credit card in full? ›
Paying off your credit card balance every month is one of the factors that can help you improve your scores. Companies use several factors to calculate your credit scores. One factor they look at is how much credit you are using compared to how much you have available.
How much will my credit score go up if I pay off a collection? ›
VantageScore® 3.0 and 4.0, the most recent versions of scoring software from the national credit bureaus' joint score-development venture, ignore all paid collections and all medical collections, whether paid or unpaid. As a result, those accounts will not affect your VantageScore.
Which method for paying off debt is better? ›
Paying off small debts quickly can feel rewarding. If you prefer to see progress quickly and work your way up, then the "snowball method" may be a better fit for your debt management goals.
Which debt repayment strategy would be best? ›
Prioritizing debt by interest rate.
The avalanche method can save you both money and time. Chipping away at your priciest debts first reduces what you'll pay in interest in the long run. In turn, you can use the savings to help pay down what you owe and speed up the repayment process.
Is it better to pay in installments or full? ›
Lump sum makes sense if you can comfortably afford it and want to save in the long term. On the other hand, you should pay in installment payments if you don't have enough money upfront and you're more comfortable with a consistent monthly payment.
Should I pay off my revolving credit? ›
Revolving credit can boost your credit score if you use it responsibly. To get the most out of revolving credit, make your minimum payments on time. Try to make more than the minimum payment or pay off your balances in full each month to avoid interest charges. And aim to keep your credit utilization ratio below 30%.
