Dear Liz: I know a high balance on a credit card hurts your credit score and that it’s best to keep balances low and pay them off each month. But does the same theory hold true for installment borrowing such as auto or student loans, which obviously have a higher balance in the beginning of the loan repayment period?
Answer: Paying down installment loans will help your credit score, but typically not as dramatically as paying down balances on revolving debt such as credit cards.
The leading FICO credit scoring formula is much more sensitive to balances on revolving accounts. The wider the gap between your available credit and the amount you’re using, the better.