Revolving Debt vs Installment Debt, What to pay first?
If you want to improve your credit score should you pay off Revolving Debt vs Installment Debt?
Hi everybody Dave Sullivan here for The Credit Guy TV. I had a loan officer call me the other day with an interesting questions. She was working with a borrower who had some money set aside and was wondering whether they should pay out the revolving credit cards or their installment loans. I can tell you that the FICO(r) scoring model is much more concerned with your balances on revolving accounts than they are installment.
The FICO scoring model knows that installment loans are paid back over time so once you have the installment loan, as long as you’re not late, you continue to make those scheduled payments is actually a good thing to have on your credit report.
Revolving is handled quite a bit differently, and i have covered that a number times, you can watched the video here to find out more about revolving balances and where you should pay them down too. Borrowers get larger benefits by paying down the revolving balances than you would from paying installment loans. So if you do have some money to work with. What I told her was to have the borrower pay down the revolving balances to five to nine percent.
If they have money left over they can pay down installment debt. Now they will actually benefit by getting ahead a little bit the payment schedule of installment loan. The FICO scoring model takes into account If you made additional payments. You will benefit a little bit, but the most bang for your buck is always going to be revolving balances, pay those down as close to zero as you can, you’ll be much better off.
So installment verses revolving debt always pay off revolving then go after the installment.
Dave Sullivan here for the Credit Guy TV so you with a little bit me we’re going to change the credit industry, thank you.
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