One of the most common questions about how to improve your credit score is what would be the best thing to pay off to improve their FICO score?. Take the FICO quiz to check your credit score knowledge.
Which of the following would improve your score the most?
- Paying off a $2000 collection.
- Paying off a $30,000 auto loan.
- Paying off a $300,000 mortgage loan.
- Paying off a $7000 credit card.
Before you answer there are a few ground rules to this quiz. First, the starting score is 620. This is important, because this score needs improvement. Second, the payoffs of the accounts are a payment in FULL not a short sale or settlement and everything else on the credit report remains the same.
Your FICO score is more concerned with the INCIDENT when it comes to collections NOT the balance. People get the idea that if they pay off their collection accounts that it is going to magically improve their score. The reality is doing this has only a slight positive to neutral effect on your score. A mortgage loan is just another installment loan! Pay off your mortgage to save money on the interest but don’t get caught up in the idea it’s a credit building tool. If you picked #4, your are right. Credit card debt is considered more risky than installment debt because usually installment debts are secured by some asset. This is the reason that revolving accounts (credit cards) play a much bigger role in the score.
Contact me for more information about the role credit cards and installment loans affect your FICO.