Being in debt is stressful. Paying off your debts early can save you money in interest payments, help improve your credit score, and give you financial peace of mind.

If you have multiple debts, you’ll want to focus on repaying the debts that help you raise your credit score sooner, decrease your debt faster, and possibly save you money. There also are circumstances when paying ahead of schedule may not help your credit score as much as you think.

When trying to pay off debts ahead of schedule, it’s critical to keep making your regular payments on all your accounts and loans first. Otherwise, you’ll end up paying late fees and may harm your credit score if your account isn’t current.

Prioritizing which debts to repay first can be challenging. However, taking the time to make a strategic plan can help you raise your credit score faster.

Check out our blog post for 7 strategies to improve your credit score in 3o days

Having a good credit score helps your financial situation and makes it easier to get a loan, rent an apartment, buy a house, and more. If you have questions or need help raising your credit score, call the free Credit Score Improvement Helpline at (888) 537-4633 to speak with an expert who can help you.

3 Types of Debt to Pay Off Early that May Improve Your Credit Score

It can be tempting to repay debts based on emotional factors, like prioritizing paying off student loans, so you feel like you’ve fully completed that chapter of your life. However, some types of debt have a greater impact on your credit score than others. Additionally, paying off some debts early can save you more money than other debts.

Here are three types of debt you want to focus on repaying early to improve your credit score.


1. Repay Your High-Interest Credit Card Debts First

One of the main reasons to repay debt early is to save money on interest payments. While interest helps you spread out payments into more affordable chunks, you will pay more than if you paid in full. Therefore, the quicker you repay the debt, the less money you’ll spend.

For most people, credit cards are often their highest-interest debts, and the interest can add up quickly. Additionally, credit card debt usually has the most significant impact on your credit score. Approximately one-third of your FICO score is comprised of how much you owe creditors with revolving credit card balances weighted against you more than other types of debt.

Paying off the balance on your credit cards each month should be the primary focus for most people if they have extra money to put toward paying a debt.

Paying off your credit card debt first also positively impacts your credit utilization rate, or percentage of your total credit that you’re using. Having a low credit utilization rate helps improve your credit score.

2. Repay Other High-Interest Rate Debts Next

To determine which debt you should focus on repaying next, identify the ones costing you the most in interest. Most revolving debts tend to have a higher interest rate than installment loans, though you’ll need to check your specific situation.

Repaying high-interest rate debts first will save you money and free up more money faster, which you can apply to other debt or save. This strategy can also help you improve your credit utilization score.

3. Pay Off Long-Term Automobile Loans

While car loans may not have the highest interest rate, these loans can be long. According to Experian, many car loans are lasting six years on average.

The loan’s length could be problematic if your warranty period expires before your loan and something happens to your car. You could find yourself trying to pay for a car repair while still paying off your car loan.

However, paying off your car loan early may or may not be the right choice for you. If you have a low-interest rate (below 5 percent), you may be better off focusing on paying other high-interest rate debt first or saving for an emergency fund.

Debts You May Not Want to Repay Early

While eliminating debt can be freeing, not all debts impact your credit score significantly. Depending on the debt and interest rate, sometimes you can make more money by investing or saving your extra money instead of paying off the debt early.

Here are some things to consider when trying to decide whether to pay off a debt early.

1. Check whether there is a penalty for paying off the installment debt early

Some mortgages, car loans, and personal loans come with a prepayment penalty or have a limit on how much you can prepay each year. Talk with your lender to see if your loan has any prepayment penalties. If so, determine whether you’d save more in interest by making early payments compared to the penalty to help you decide if you want to prepay.

2. Determine whether paying off a lower interest rate loan will save you money compared to investing or setting up an emergency fund

When you’re near the end of paying off a large debt, it can be tempting to repay it early. Sometimes this makes sense and can improve your debt-to-income ratio, which can help your credit score.

However, if you don’t have any high-interest debts, you may want to consider whether investing your extra money or setting up an emergency fund may help you more financially at that point. With the right investments, sometimes it’s possible to earn more than what you’d save in interest from paying off a low-interest rate debt.

Alternatively, it can make financial sense to put that money toward an emergency fund if you don’t already have one established. An emergency fund can help prevent future unexpected debts that might hurt your credit score or put a strain on your financial situation.

3. Keep Possible Tax Breaks in Mind Before Paying Off Debts Early

You sometimes can claim a tax deduction on the interest you pay for some loans like certain student loans. If this loan is a low-interest rate loan, you’ll want to make sure you’ll benefit more by paying it off early. Calculate whether you’d save more money by paying it off versus the money saved from the tax deduction plus investing the money instead of paying off the loan.

Developing a Plan to Repay Debt Can Help Improve Your Credit Score

Eliminating some debts early can help you increase your credit score and even save you money. Focusing on paying off high-interest credit card debt first can raise your credit score.  With that said, repaying some debts early won’t impact your credit score as much as other debts.

When determining your strategy for repaying your debts, you’ll want to make the calculations to help you decide which debts are best to pay off early. You’ll need to consider the advantages and disadvantages of paying early, especially for lower interest rate loans that may have penalties if you pay early or offer tax breaks.

Determining which debts to repay first can be challenging. If you want help identifying which debts to focus on or developing a plan that fits your needs, call the free Credit Score Improvement Helpline at (888) 537-4633 to speak with an expert who can help you.

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