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What debt should I pay off first to raise my credit score?

Paying off your debts is a crucial step in improving your credit score. However, knowing which debts to prioritise is not always obvious, and it can be easy to become confused about where to get started.

The information below will help you understand which debts you need to focus on paying down to improve your credit score in the most efficient way possible.

How credit scores are calculated?

Your credit score is quantified by an algorithm that examines the details of your credit history, as well as any other information considered relevant to your ability to repay debt. The most crucial factor is your repayment history, which indicates how reliable you are with meeting your debt obligations.

Your credit report, from which your credit score is derived, will also list any information that may cause a lender to see you as a high-risk borrower. Applying for lots of loans or credit cards in a short amount of time, having a questionable employment history, or having court judgements against you are all examples of high-risk factors.

While some aspects of your credit report will be impossible for you to change (such as evidence of a past default), paying off existing debts is the best thing you can do to turn things around and improve your credit score.

Which type of debt has the biggest impact on credit score?

Your revolving credit debts have a more significant impact on your credit score because credit scoring algorithms pay close attention to your credit utilisation ratio. Your credit utilisation ratio measures your card balance against the account limit.

If your credit card balances are close to exceeding their limits, this has a negative impact on your credit score. When you start to pay off the balances on your credit cards, your credit utilisation ratio will decrease and, as a consequence, your credit score will improve.

Having an instalment loan that you are paying off (such as a mortgage on your home, student loan, or car loan) is less of a risk factor to lenders than using a high percentage of your credit allowance. Therefore, paying off credit card debt is (in most cases) more of a priority when trying to improve your credit score.

Paying off credit cards

If you have multiple credit cards to pay off, then you should focus on the one with the highest interest rate and go from there. The debt avalanche method is a reliable, efficient way to pay off your credit card debt, and it goes as follows:

  • Make sure that you meet the minimum monthly payment for all your credit cards.
  • Put extra money into the card with the highest interest rate until it is paid off.
  • Repeat the process with the next highest interest rate card until all your credit card debt is paid off.

This method will maximise the money you save since you are eliminating the highest interest debts first.

How do I pay off debt with balance transfers

You can pay off credit card debt with a balance transfer where your balance is transferred to a new card with an initial lower interest rate. You can then take advantage of the lower interest rate to pay off your debt faster.

This lower interest rate (sometimes 0%) is available for a limited time before a potentially higher interest rate is applied. If you are going to use a balance transfer as a means of paying down your credit card debt, you need to make sure you have a plan to take full advantage of the low-interest period, otherwise you could end up in a worse situation than when you started.

Depending on the credit limit offered, you may not be able to transfer the full balance onto the new card. You may need to apply for multiple balance transfers to spread out the debt.

Your approval for a balance transfer will also take your credit score into account. If your credit score is very low, it may not be possible for you to get a balance transfer and you will need to examine other methods of managing your debt.

In summary, balance transfers can be effective as a means of paying off your credit card debt faster, but only if you plan ahead.

How do I pay off credit card debt with a personal loan?

You can take out a personal loan to pay off all your credit card debt at once, leaving you with a single debt to manage at a lower interest rate. This is known as debt consolidation since you are consolidating multiple debts into one.

Because personal loans generally have lower interest rates than the average credit card, debt consolidation can help you save more money and get out of debt faster. After you pay off all your credit card debt with a personal loan, you may see an improvement in your credit score.

However, you need to keep in mind that a personal loan is still another form of debt that you will need to be diligent in repaying. You also need to make sure that you do not accrue new credit card debt while paying off your personal loan.

Personal Loans with Cash Train

Cash Train personal loans allow you to borrow between $2,001 to $10,000 and are commonly used for debt consolidation purposes. Repayment terms for Cash Train personal loans extend from 20 to 24 months, with repayments being made either weekly, fortnightly, or monthly.

Customers with adverse credit ratings can still apply for and get approved for personal loans, making Cash Train a viable alternative if balance transfers are unavailable.