Does Paying Down My Installment Credit Help My Credit Score?

Your credit score affects whether you are approved for new credit accounts and what interest rates you pay, so having the highest score possible is important, especially if you plan to apply for credit soon. You have several ways to improve your credit score, one of which is paying down the balances on your existing debts.

Installment Vs. Revolving

Most of your debts fall into two major categories: installment credit and revolving credit. With installment credit, you borrow a large sum all at once and pay it back over a set period of time. Your monthly payments are usually fixed unless they adjust periodically with a variable interest rate. With revolving credit, you have a credit line from which you can borrow money whenever you want up to the credit limit your lender sets. You usually have to pay a specific percent of your balance every month. Your credit score handles these two types of accounts differently.

Credit Scoring Basics

Approximately 30 percent of your credit score factors in the amounts you owe on all of the accounts that appear on your credit report. This part of your score looks at how many accounts you have with balances, the total amount you owe, the proportion of your installment loans that you still owe and the proportion of your credit limits that you owe on revolving accounts.

Reduce Installment Debt

Reducing the amount you owe on installment loans will help your credit score some because it not only reduces your overall debt but also decreases the proportion of the amount you borrowed that you still owe. If you have lots of small installment loans, paying off some of these can also reduce the number of accounts you have with balances, which will also improve your credit score.

Pay Revolving Credit First

The percentage of your revolving credit that you are using affects your credit score significantly more than the balances on your installment loans do. Therefore, if you have credit cards with balances, put your extra money toward paying down those balances first. Generally, reducing your credit card balance by $100 will help your score more than reducing your installment loan balance by $100. Liz Weston of MSN Money recommends reducing balances on revolving credit accounts to 30 percent of their limit, or, even better, to 10 percent of their limit so that you can start working on paying down installment loans.