Wednesday, August 6, 2014

To improve credit score, pay car loan or home equity LOC first?

I am planning on buying a vacation house in the next six months and want to improve my mediocre credit score (current FICO 711, according to Experian) so I can qualify for the best loan rates. I have a $12,000 cash windfall and want to pay down my existing debt. Here are the candidates:

1) Car/installment loan: $12,000 5 yrs/3.75% with 4 years remaining on it.
2) Line of Credit: $75,000 balance on a $100,000 home equity LOC (3.49% interest-only on the revolving balance)

Some have advised paying off the car loan because wiping a loan off the books is good for credit, and the interest on a car loan is not tax deductible. Others have said that I have too high a credit utilization % and a revolving loan is considered "bad" debt while an installment loan is considered "better" debt, so I should pay down the line of credit balance. Who's right? Which will improve my credit score more, paying off the car loan or paying down the home equity LOC revolving loan?

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