If I Can Pay off My Debt, Is it Better for My Credit to Pay it off Slowly or All at Once?

I think I’m going to receive a large tax refund this year that could help me pay off my debts. If I’m able to pay off all of my debt, should I do it all at once or is it better for my credit to pay it off slowly over time?

Submitted by an anonymous SaverLife member

There are several factors that go into your credit score. A lot of the answer to this question depends on what is currently being reported. In general, if you can pay off all your debt, you should do it! There isn’t much better than being debt free and owing no one.

Now, before you pay off all your debt, if you don’t have a fully funded emergency fund, you should do that first. Have 3-6 months’ worth of expenses in a separate savings account for those rainy days that we all experience.

After this is done, then pay off your debt. If you are now unable to pay it all off, then you need to at least pay each credit line down to one third of its limit. For example, if you have a credit card with a $1,000 limit, pay it down to under $333. This will help your credit score. Do it for each card. How much you owe is the second highest contributing factor to your credit score.

Next, if you haven’t started this already, you have to make every remaining payment on time, each and every month. No exceptions. Your payment history is the biggest contributing factor to your credit score. The only way to change this is to start paying on time immediately. As the creditors begin to report your on-time payments, you will see an increase in your score, but again, this will take a while.

Now if you are lucky enough to be able to pay off all your debt and fund your emergency fund, then go ahead and do it. Lock up all but one of your cards in a lock box. The one you are keeping out, charge a monthly expense (such as gas or groceries) and then pay if off at the end of the month. This will keep your payment history building.