Unless you're planning to app for something, do what makes fiscal sense instead of worrying about your score.
@Anonymous wrote:Hi guys, I'm trying to improve my credit score by paying down my balances. I have a 3 year 10k personal loan that has 1 year and $3,700 balance left on it. The loan is at 15% I also carry a big balance across my credit cards. Averaging 17%. (3 cards with $7k balance and 10k limit each). I have $3,700 in cash and really wanna throw it at my loan just so I can be done with it.
But I recently read that paying off a loan completely doesn't give you as much of a credit score improvement as paying the same amount down on your cards. Some even said that paying off their loan completely actually reduced their score because it reduced the number of categories they are being scored on since it eliminated their installment category and only left them with revolving category.
i totally understand that it would be better to reduce the higher interest cards first before moving on to the lower categories, but throwing the 3.7k on the loan will finally make it go away. It's just really frustrating seeing that $327 has been auto debited from my checking account every 1st of the month, while the 3 $100 minimum payments on my cc's don't look as threatening/frustrating even though they add up to the same amount as the loan payment. Also reducing my credit cards by $1,200 each doesn't have the same effect and doesn't feel as motivating as killing the loan. More like a drop in the bucket.
Any thoughts on which payment would bring better score improvement?
And if it's all the same should I go with my brain and pay the cards or my gut and finish the loan?
Thank you all so much for your advice.
1. You don't say which scores you want to improve. FICO 8's and 9's, or mortgage scores? It makes a difference. For now I'll assume FICO 8.
2. You don't mention if this is your only loan. I.e., no mortgage, car loan, car lease, etc. I'll assume it's your only loan.
3. From a pure scoring perspective you'll get the single biggest bang in FICO 8 by paying the loan down to $900.
4. If you were talking mortgage scores, you'd get the biggest bang for your bucks by reducing the revolving balances.
All that being said, scoring isn't everything. It sounds to me like you would get a lot more satisfaction from removing the loan. That counts for something, too.
@Anonymous wrote:Hi guys, I'm trying to improve my credit score by paying down my balances. I have a 3 year 10k personal loan that has 1 year and $3,700 balance left on it. The loan is at 15% I also carry a big balance across my credit cards. Averaging 17%. (3 cards with $7k balance and 10k limit each). I have $3,700 in cash and really wanna throw it at my loan just so I can be done with it.
But I recently read that paying off a loan completely doesn't give you as much of a credit score improvement as paying the same amount down on your cards. Some even said that paying off their loan completely actually reduced their score because it reduced the number of categories they are being scored on since it eliminated their installment category and only left them with revolving category.
i totally understand that it would be better to reduce the higher interest cards first before moving on to the lower categories, but throwing the 3.7k on the loan will finally make it go away. It's just really frustrating seeing that $327 has been auto debited from my checking account every 1st of the month, while the 3 $100 minimum payments on my cc's don't look as threatening/frustrating even though they add up to the same amount as the loan payment. Also reducing my credit cards by $1,200 each doesn't have the same effect and doesn't feel as motivating as killing the loan. More like a drop in the bucket.
Any thoughts on which payment would bring better score improvement?
And if it's all the same should I go with my brain and pay the cards or my gut and finish the loan?
Thank you all so much for your advice.
@Anonymous wrote:Hi guys, I'm trying to improve my credit score by paying down my balances. I have a 3 year 10k personal loan that has 1 year and $3,700 balance left on it. The loan is at 15% I also carry a big balance across my credit cards. Averaging 17%. (3 cards with $7k balance and 10k limit each). I have $3,700 in cash and really wanna throw it at my loan just so I can be done with it.
But I recently read that paying off a loan completely doesn't give you as much of a credit score improvement as paying the same amount down on your cards. Some even said that paying off their loan completely actually reduced their score because it reduced the number of categories they are being scored on since it eliminated their installment category and only left them with revolving category.
i totally understand that it would be better to reduce the higher interest cards first before moving on to the lower categories, but throwing the 3.7k on the loan will finally make it go away. It's just really frustrating seeing that $327 has been auto debited from my checking account every 1st of the month, while the 3 $100 minimum payments on my cc's don't look as threatening/frustrating even though they add up to the same amount as the loan payment. Also reducing my credit cards by $1,200 each doesn't have the same effect and doesn't feel as motivating as killing the loan. More like a drop in the bucket.
Any thoughts on which payment would bring better score improvement?
And if it's all the same should I go with my brain and pay the cards or my gut and finish the loan?
Thank you all so much for your advice.
Hi OP,
It is great that you have a lump-sum of money to pay toward whichever debt you choose to pay off/down. I do want to say I agree with Brian_Earl_Spilner to not worry about scores but what makes fiscal sense.
So , let's break it down:
- the monthly interest you are paying on the loan is $46.25. So, $280.75 is gong toward principal (a huge plus)
- the monthly interest you are paying on each CC is $98. Making minimum monthly payments of $100 only allow $2 toward principal
So on three CCs that's $294 per month in interest payments only. YIKES!!!!
If it were me, I would gladly pay the $327/month for one more year.
IMO, I suggest taking the $3700 and putting it toward the CCs. So $1,233 on each card will leave a balance of $5,767. This way, the monthly interest payment on each card decreases from $98 to $80.74.
Just my 2cents anyway.
GL2U
Financially, the best idea would be the highest interest rate. But for your mental well-being as you mentioned, I'd say go ahead with the plan to get rid of the the personal loan then use whatever your minimum was there to more rapidly pay down the credit card debt.
At the very least, you'll have decreased your DTI and be in a better position should things worsen for you and won't have to make that extra payment every month.
At the very least, you'll have decreased your DTI and be in a better position should things worsen for you and won't have to make that extra payment every month.
as of 1/1/23
@Anonymous wrote:Hi guys, I'm trying to improve my credit score by paying down my balances. I have a 3 year 10k personal loan that has 1 year and $3,700 balance left on it. The loan is at 15% I also carry a big balance across my credit cards. Averaging 17%. (3 cards with $7k balance and 10k limit each).
i totally understand that it would be better to reduce the higher interest cards first before moving on to the lower categories, but throwing the 3.7k on the loan will finally make it go away. It's just really frustrating seeing that $327 has been auto debited from my checking account every 1st of the month, while the 3 $100 minimum payments on my cc's don't look as threatening/frustrating even though they add up to the same amount as the loan payment. Also reducing my credit cards by $1,200 each doesn't have the same effect and doesn't feel as motivating as killing the loan. More like a drop in the bucket.
One advantage of paying off the loan is that it reduces your monthy mininum due a lot more than putting that same amount towards credit cards. Ideally you'd then take the money you're paying on the loan and put it to cards, but if finances get tighter for some reason, you'd have more cushion.
@CreditInspired wrote:Hi OP,
It is great that you have a lump-sum of money to pay toward whichever debt you choose to pay off/down. I do want to say I agree with Brian_Earl_Spilner to not worry about scores but what makes fiscal sense.
So , let's break it down:
- the monthly interest you are paying on the loan is $46.25. So, $280.75 is gong toward principal (a huge plus)
- the monthly interest you are paying on each CC is $98. Making minimum monthly payments of $100 only allow $2 toward principal
It's scary that the CC companies can have min payments that barely pay the interest, I'd hate to see what the OP's statements say about how long it will take to pay off at mininum payments. Even so, I'd pay the loan, then take the money that is going to loan payments and apply that to the cards, starting with highest interest rate.
Hi SouthJamaica,
Sorry for the gaps in my story.
1) Yes, looking to improve Fico 8. I'm trying to apply for the (Chase) Amazon Prime Rewards so I can get 5% cash back on everything from Amazon.
2) This is the only unsecured personal loan i have. But I also have a 5 year car loan with 4K balance and I think 2 years left. (Originally 15k). I'm not worried about that one since it's only at 1.99%
3)Interesting idea to pay the loan down to $900. Can you please clarify how does that help the most?
4) House is paid off 
Thanks so much.
@Anonymous wrote:Hi SouthJamaica,
Sorry for the gaps in my story.
1) Yes, looking to improve Fico 8. I'm trying to apply for the (Chase) Amazon Prime Rewards so I can get 5% cash back on everything from Amazon.
2) This is the only unsecured personal loan i have. But I also have a 5 year car loan with 4K balance and I think 2 years left. (Originally 15k). I'm not worried about that one since it's only at 1.99%
3)Interesting idea to pay the loan down to $900. Can you please clarify how does that help the most?
4) House is paid off
Thanks so much.
If you also have an auto loan, then you won't lose points for paying off the personal loan, since you'll still have a loan on your CR, satisfying credit mix. Generally, you'll see a score boost once a loan is paid down to 8.9% or less.
With that said, you'll also see point gains when you get each card paid below certain thresholds. So 68.9%, 48.9%, 28.9%, and then 8.9%. Even so, I wouldn't apply for anything until each of those cards are at least under 30%.
