Should You Build Your Credit or Pay Off Debt First?

build your credit

In the race to achieve the best possible financial situation, the question of whether to build your credit or pay off debt first comes up a lot.

The good news? You actually don’t have to choose!

When it comes to paying off debt and building credit, these two goals can work very well together. Here’s how.

How does paying off debt help you build your credit?

Personally, I don’t see how building credit and paying off debt are considered opposing goals. Generally speaking, the things you do to better your finances can better your credit – unless you decide not to use credit at all.

In fact, paying off debt can greatly improve your credit thanks to your credit utilization ratio. Essentially the lower your revolving debt, the better your credit utilization ratio. And the better your credit utilization ratio, the better your credit score will be.

Here’s how it works. Say you have a credit card with a $5,000 balance and a $10,000 limit. Divide your balance by you limit, multiply by 100, and you’ll see that you’re using 50 percent of your available credit. Therefore, you have a 50 percent credit utilization ratio.

Now say you have four credit cards, each with a $2,500 limit. Credit card A has a $500 balance, credit card B a $1,000 balance, and credit cards C and D each have a $1,750 balance.

Add them all up and you’ll find that you have a $5,000 total balance and a $10,000 total credit limit. You’re using 50 percent of your available credit and thus have a 50 percent credit utilization ratio.

Here’s a visual example from Experian.

ways to pay off debt

And if you’re wondering why we’re spending all this time talking about credit utilization, just know that it makes up 30 percent of your FICO credit score. It’s also highly influential on your VantageScore.

FICO and VantageScore, the two most popular credit scoring models, both recommend keeping your credit utilization at 30 percent or less. This is yet another reason to pay off your debt as quickly as you can.

What are the best ways to pay off debt?

Now that it’s clear how important debt payoff is if you want to build your credit, let’s talk about the best ways to pay off debt.

Two popular ways to pay off debt

In the world of debt payoff, debt avalanche and debt snowball reign as the most popular methods. The debt avalanche method requires you to pay your highest interest rate accounts first. Debt snowball, however, requires you to pay your lowest balance accounts first. Based on which method you choose, you’re going to pay your debt off in a certain order.

Here’s how to figure out which method is right for you:

  1. Make two lists of your debt accounts (credit cards, student loans, mortgage etc.).
  2. One one list, write out the balance next to each (from lowest to highest). This is your debt snowball list.
  3. On the other list, write out the interest rate next to each (from highest to lowest). This is your debt avalanche list.

build your credit

Take a look at your two lists. If you’re in desperate need of motivation, the debt snowball can provide you small wins to keep you going from the beginning. But if you want to choose what makes more sense mathematically, the debt avalanche will get you out of debt faster.

No matter which method you choose, the first account on the list will be called your target account. Here’s what you’ll do next:

  1. Make minimum payments on all your accounts.
  2. If you have extra money available, apply that only to your target account.
  3. Once your target account is paid off, apply everything you were paying on that to your next target account – on top of the new target account’s minimum payment.
  4. Keep doing this – never lowering the monthly amount you pay – until you’re completely debt-free.

The most important thing is that you pick the method you’re most likely to stick with.

Lowering your interest rates

Besides targeting your debt payoff, there’s another useful method to paying debt off faster: lowering your interest rates.

One way to lower your interest rates is simply to ask. Believe it or not, you can call your credit card issuer and ask them to lower your interest rate.

This is more effective for those who have a long history with that card or issuer and who’ve never paid late. That’s because the credit card company wants to keep you as a customer and is more willing to lower your rate.

When you call, highlight any positive history you have with them. Don’t take the first no for an answer. Keep asking to speak to a supervisor until you either get a lower rate or get a final “no.”

You can also lower your rate by consolidating your credit card debt onto a balance transfer credit card. Balance transfer credit cards often come with a zero percent interest rate for a limited period of time and are specifically used to pay off other credit cards.

As long as you either pay off your balance transfer card before the introductory period is over or get another balance transfer card right before it ends, you can work on paying off debt without interest getting in the way.

And if you don’t want to deal with another credit card, you could also try to consolidate your debt with a debt consolidation loan. Just make sure the loan comes at a lower interest rate than your credit card.

If you’re curious to see how much consolidation might expedite your debt repayment, use this calculator to find out.

Credit Card Consolidation Calculator








By consolidating your credit cards with a total balance of at a weighted average interest rate of with a new loan at a interest rate, your new monthly payment would be . Your lifetime savings with your new loan would be compared to the total balance you’d pay on your credit cards.

Consolidate and pay off debt with personal loan rates as low as
% APR.







Principles to follow to build your credit

Whenever you’re trying to establish your financial priorities, remember that good financial habits can enable you to build your credit in a positive way.

And don’t think you can avoid credit altogether. Credit scores, after all, rely on you having some credit behaviors to measure.

The thing to remember when building credit is that the principles are simple. Pay all your accounts on time, keep your debt as low as possible, and only apply for credit only when you need it.

These behaviors will show creditors that you can manage credit responsibly. And for that, you’ll benefit from easier credit approval and lower interest rates. In other words, you can access credit when you need it and more of your money goes to the balance than interest.

Interested in a personal loan?

Here are the top personal loan lenders of 2018!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (
  2. Personal LoansFixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 4.98% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 21, 2017 and are subject to change without notice. Not all rates and amounts available in all states. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 4.98% APR assumes current 1-month LIBOR rate of 1.34% plus 3.89% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000
Check rate nowon SLH's secure site
4.98% - 14.24%1$5,000 - $100,000
Check rate nowon SLH's secure site
8.00% - 25.00%$5,000 - $35,000
Check rate nowon SLH's secure site
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
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