PhotoYou've received a big tax refund and have decided to pay off some debt. The question is what credit line to pay first.

If yours is a typical American household, you may have several credit card balances and a credit score that could use a boost. Can paying down debt improve your credit score?

The answer is yes, and paying off some debt will raise it faster than others. Kiplinger, the personal finance publication, has identified the debts whose elimination will deliver the most bang for the buck.

Debts you have a hard time paying on time

Paying bills on time is the number one thing you can do to improve a credit score. Paying off a balance each month looks good on your credit history because your scores is based, in large part, on how you use credit.

High interest rate accounts

If you have money to deploy against debt, it pays to pick the account with the highest interest rate, not necessarily the one with the largest balance. High interest rate accounts place you at greater risk of running up more debt. Getting rid of those balances will help your score.

Account with the lowest credit limit

The credit reporting agencies look at the amount of credit you have used, in relationship to your credit limit. Having a balance of $4,500 on a card with a $5,000 credit limit is much worse than having a $10,000 balance on a card with a $50,000 limit.

If you are close to maxing out a card, that's the one to pay off. Your credit utilization on an account should be no more than 30%.

Student loan

In many cases, but not all, it's good to pay off student loans. That's because you are reducing your debt-to-income ratio and because you can't get rid of student debt in bankruptcy. But if your student loan payments are manageable and made on time, maintaining this account might be more advantageous than paying it off, especially if there are high interest credit cards that need the attention more.

Small balances on a lot of cards

Having several open credit card balances, even if they are small, can be a drag on you credit card. If your refund will pay off two or more balances, that could be a very good use of the money, as far as your credit score is concerned.

Any balances that are overdue

In the final analysis, getting rid of debt that is chronically overdue will clear the way to raising your credit score. Just don't expect instant results. No longer having late payments will make you appear to be a better credit risk.

It will also tell potential creditors that you can and will repay your debts. Prioritize your past due bills and pay those off first.


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