How People with Good Credit Paid Off Their Loans

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We all know someone with better-than-average credit. They always seem to have it together, they pay their bills on time, and they’ve even paid off a couple of loans early.

So, how do they do it? And how much can paying off a loan affect your credit score? Before we dive into the best tactics for paying off different loans, it’s important to understand that when it comes to credit scores, different types of loans have a different impact. For example, there’s a big difference between revolving accounts, such as credit cards, and installment loan accounts, including mortgages or student loans.

Paying off an installment loan vs. a revolving loan

Paying an installment loan off will help you to maintain your credit score, but paying it off early won’t earn you any additional points. In fact, keeping installment loans for their full term may actually be a better strategy if you’re looking to give your credit a boost.

An installment loan is one with a set number of scheduled payments spread over a certain time period. Once the loan has been paid off, the balance is zero and the account is closed. Because of that, installment loans don’t have as large of an impact on your credit score. That’s because the amount of debt on these types of accounts factors less into your overall credit score than credit utilization does.

Which brings us to credit card loans. Credit card loans are revolving accounts that allow you to carry a balance from month to month. Because of this, these types of loans are a better measure of your credit risk in the eyes of the three major credit bureaus. Even when credit card balances are paid in full, the account remains open. A credit card with a zero balance or a very low balance and a high credit limit is very good for your credit score.

Now, let’s take a look at how those people you know with good credit pay off their loans to give their credit scores the maximum boost:

They’re strategic

To make the most progress in paying off debts, it’s helpful to outline a strategic approach. Whether you decide to tackle debts with the highest interest rate first, or work your way from the smallest loan debts up to the largest, it’s important to have a plan and stick to it. Paying off high-interest debts first frees up the additional money you would have paid in interest to apply to other debts on your list. This approach, sometimes called the “avalanche method,” can mean slower progress at first, but ultimately the pace at which you’re paying off debts will increase as you get down to those smaller loan amounts.

Another approach that can be equally beneficial is to work from the bottom up, also known as the “snowball method.” If you know anyone that’s done this, they’ve probably told you that they started with their smallest loan and debt amounts and as those were paid off, applied those amounts to the next-largest debt. Doing this one debt at a time, while continuing to make the minimum payments on all debts, of course, can expedite the process of paying off loans and help you realize some real progress.

They stick to a spending budget

This is always a good idea, but you’ll find that the people that are actually able to boost their credit score stick to a budget to stop frivolous spending until the necessary loans get paid off. Sometimes this means a self-imposed spending freeze on all credit accounts. After all, you aren’t ever going to get a credit card paid off if you continue to run up the balance.

They pay attention to interest rates

The people that are able to pay off their loans effectively understand how to calculate the interest they’ll pay over the life of a loan. If you pay off your credit card balances monthly, for example, you’ll lower what you shell out even on those higher-interest accounts. This isn’t always feasible, however, particularly if you’ve only been eligible for loans for people with poor credit. But by paying off these types of loans as quickly as possible, you will ultimately see your credit score improve, and ideally, you’ll begin to qualify for lower-interest, better-quality loans in the future.

They use debt-consolidation loans and balance transfers wisely

Debt consolidation gives consumers the option to consolidate many debts or loan payments into a single payment. But beware. The people that benefit from this option are smart about how and what they consolidate, and you must be also.

For instance, if you can transfer a high-interest credit card balance to a card with a lower or zero balance, this can be very helpful. But these lower-interest-rate offers typically expire, and sometimes those zero-interest cards spike to an interest rate that’s higher than the original card. If you know you can’t pay off the full amount you’ve transferred by the time an introductory rate expires, then it may not be wise to transfer in the first place.

Home refinance loans or home equity lines of credit (HELOC) can offer an effective strategy for consolidating debts and loans. Often time these offer interest rates that average out to be lower than the combined debts overall. If you can qualify for an option like this, it can help you expedite paying off debt, and streamline your efforts into a single payment. Keep in mind as mentioned earlier, installment loans (like a mortgage or HELOC) have less of an impact on your overall credit score.

By implementing some of these tips, you can begin to get your debts back under control and soon you’ll be able to count yourself among those who have paid off loans to achieve a better credit score.

If you’re having trouble managing all of your loan debt, or have been unable to qualify for loans or credit because of a poor credit score, it may be time to seriously consider how to repair your credit. At we offer a free personalized credit consultation and credit report summary. Call us today to get started at 1-855-255-0238.

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