March 2014 – Credit Tip: Regarding paying positive accounts to maximize good credit…
First and foremost, always make sure that your minimum payments continue to be made on time on any current accounts. The worst thing that can happen is for one account to be paid at the expense of another becoming late. A new late payment on an otherwise current account can drop scores up to 100 points.
Beyond continuing minimum payments on time the next best place to attribute extra funds is toward revolving credit accounts such as credit card accounts. Keep in mind you don’t want to close these even if they are paid off in full. Also keep in mind that if paid in full and not used the creditor may close these without warning due to inactivity. They also benefit your credit less if not showing activity. So the two best scenarios are to 1. pay off revolving accounts in full every month but also be sure to use them at least for something small once every month or every other month to be sure they stay active or 2. keep the balances at or below 30% of the credit limit but continue the minimum payments on time monthly. Either option keeps activity current and keeps balances low. Remember that an account can report to the bureau any day of the month, so it can report the day of the month with the highest balance. It is usually best if coming up on a loan credit check date that you keep balances at or below 30% of the limit on revolving accounts all month long for about two months prior to the date of the credit check (if possible). This will ensure to maximize your credit score with all 3 credit bureaus (Equifax, Experian and TransUnion) with your good credit.
And… if you have all you minimum payments on time and your revolving account balances below 30% on each card… then you can consider paying down any installment loans (student loans, home loans, auto loans, etc). Remember that closing an account will be a change in account status which will drop your credit score with all 3 credit bureaus (Equifax, Experian and TransUnion). It also means that no future payments will be made so your good credit stops there. For that reason you don’t want to pay off a loan too early. To do so closes it, and in many cases there are penalties to paying off a loan early. The best way to manage these is to pay them down, but not off. Leave a reasonable amount so you can continue to keep the account for a while and still be making the minimum payments on time. (If you pay it too low then a few minimum payments might pay off and thus close the account.) If trying to decide which installment loan to pay down first… I usually suggest whichever one has the highest interest rates. That way paying down the loan will save you money in the long run and thus you’ll be able to pay down additional loans later on.