So you have a few extra bucks in your pocket and you’ve decided to pay off one of your debts early. You know that credit scores are extremely important so your goal is to pay off the debt that will yield the most credit score improvement. The “FICO ROI” (return on investment) question is one that I receive almost daily. So, in the interest of saving myself 15 minutes a day in perpetuity:

Which of the following will improve your FICO scores the most?

A) Paying off a $250,000 mortgage

B) Paying off a $35,000 auto loan

C) Paying off a $5,000 credit card

D) Paying off a $1,000 collection

Before you answer I have to set the ground rules for our little exercise. First, the starting score is 630, which is important because that’s the type of score you’d want to improve. And, secondly, the mortgage payoff is accomplished by selling your home and fully covering a $250,000 loan. Everything else on the credit report remained unchanged.

Using a scoring tool built by FICO (yes, they really built it) I estimated the aforementioned four changes to the credit report and the results were as follows…

Paying off a mortgage loan of $250,000 improved the 630 to a 635

This illustrates what I’ve been trying to tell people for years, which is that installment debt doesn’t really have that much impact on your scores and struggling to pay it off early won’t do your scores much good. And, just to silence those of you who are screaming “foul” because this is just a simulation…I sold a house last year and paid off a $249,000 mortgage and my FICO scores went up a whopping four points.

Paying off an auto loan of $35,000 improved the 630 to a 635

Same song, second verse. An auto loan is another installment loan so the impact of paying it off early doesn’t yield much to your scores. In fact, it’s not even that you’re getting out of debt that awarded you those 5 points. It’s the fact that you eliminated one of your accounts that had a balance greater than $0.

Paying off a credit card balance of $5,000 improved the 630 to a 665

We have a winner. As many of you already know, credit card debt is almost always unsecured. This makes it a much riskier type of credit than installment debt, which is almost always secured by some asset. It’s because of this fact that even modest credit card debt can be a drag on your scores. By paying off this $5,000 debt we eliminated one account with a balance and lowered our “utilization” percentage to less than 10 percent, both of which are FICO score winners.

Paying off a collection balance of $1,000 dropped the 630 to a 595

Unfortunately this is an all too common occurrence as any of you with collections have probably experienced. There’s a deficiency in the credit reporting system that shows recent activity on a collection account, if you were to make a payment. This recent activity makes the collection look younger and can result in a score drop. In my simulation the “recency” of the collection went from “greater than three years old” to less than 12 months. When you make a payment on a collection the collection agency will report the new balance to the credit reporting agencies. The “date reported” on the collection account will be the then current date, which can lead to the score drop.

These results, while simulated, are a very accurate reflection of what will likely happen to your scores if you pay off one of these items. So, if you want to pay off a car loan or a mortgage loan early, do so because it’ll save you money in interest. Don’t think that your scores are going to shoot through the roof.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.

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