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Do All Debt Payments Help My Credit Score?

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Getting rid of your debt just makes good financial sense. By paying down debt you not only save money on interest fees, but it helps to improve your credit score, which is a win-win.

But before you rush to tackle the balances on your credit cards and loans, it’s important to note that all debt payments are not created equal when it comes to your credit score.

Credit card accounts have a somewhat more significant impact on credit scores than other kinds of debts you may owe, according to Rod Griffin, director of public education for Experian.

“With credit cards, you decide how much you’re going to charge each month and you decide how much you’re going to repay each month,” he said. “That freedom will gives lenders better insight into how you make borrowing and payment decisions.”

Griffin said it’s also good to know what kind of debt payments are — and aren’t — factored into your credit score. Below are four types of debt payments that may not affect your score as much as you think.

Installment loans

Installment loans, such as mortgages and auto loans, have a set amount you are required to pay every month. Paying them off helps improve your debt-to-income ratio, but they are typically paid back as agreed, according to the National Credit Federation, so your credit score won’t see a big improvement.

Of course, if you do default on an installment loan (or any other kind), it will have a very damaging effect on your credit score. That’s because a lot of what goes into your credit score is risk prediction; lenders want to know the likelihood you’re going to pay off your debts, and falling behind on one loan makes you a greater risk of future late payments and defaults in their eyes.

The mix of the types of debt you have is also a factor in determining your score. As a result, paying off an installment loan early can actually harm your credit, Griffin said, especially if it’s the only debt of its type on your credit report.

If they’re in good standing, keeping those debts open actually helps bolster your score a little. “And typically, in mortgages or car loans, for most people it has more competitive interest rates anyway,” he added. “So carrying that debt doesn’t cost you nearly as much as carrying the credit card debt.”

Bruce McClary, vice president of marketing at the National Foundation for Credit Counseling in Washington, D.C., said if you only have revolving accounts — like credit cards — and don’t have other types of debt represented on your credit report, “it’s not necessarily leading to a bad credit score. But it can hold you back from getting to the absolute top of the spectrum.”

Collection accounts

Accounts that get to the collection stage are considered seriously delinquent and will have a significant and negative impact on your credit report. However, paying off old debt on accounts that have been in collection won’t help improve your score much.

You can’t undo a collection notice on your report. Once the damage has been done, collections remain on your credit report for seven years. FICO said the best thing you can do in the meantime is to continually pay all your bills on time and be responsible with your credit.

Medical bills

Most medical bills won’t show up on your credit report unless and until they’re past due. And thanks to recent changes in credit score rules, medical accounts will no longer have a lingering negative effect after they’ve been paid off.

“A medical bill that is not past the due date should not be showing up on your credit report at all,” said McClary, who advises consumers regularly look at their credit report to check for such bills, and anything else that looks suspicious.

Rent and utility payments

Sometimes these payments can help your score, but historically speaking, they typically don’t. Nancy Bistritz-Balkan, Equifax’s vice president of communications and consumer education, said there are some debt payments, such as internet, cable, cellphone bills, etc., that may not be reflected on your credit report unless they are sent to collections.

However, with the push to help consumers with thin credit files or worthy borrowers with financial mishaps, that may be beginning to change. Griffin said Experian has been including positive rent payments for a few years and said consumers can request that those positive rent payments are reported.

“And you can see almost 100% of the time when a person has those positive rent payments reported it helps improve their credit scores,” he said. “It’s really a powerful tool for someone who’s beginning to build credit for the first time or recovering from having issues.”

The bottom line is it’s “absolutely critical” that consumers satisfy all their financial commitments, regardless of whether they immediately impact a credit score, said Bistritz-Balkan.


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