Card Payoff Advice

[Zark419]

Hello everyone,

I’m new to the forums but have been a silent reader for a few years. I come seeking some advice about how to raise my credit score.

First off, let me preface this by saying I have an unfortunate habit of doing even though I know better. I am seeking some advice on how to improve my situation and I am fully aware I did not practice good spending habits – there is no need to reiterate that fact =/. I would consider myself fairly credit savvy, so no need to explain the basics =P. Again, I just made poor choices despite knowing full well what the consequences were.

Background & History:

I started with a few credit cards and expanded. Initially, I was very good about maintaining my credit limits, paying them off and ensuring that I had a low utilization percentage. School dragged on and my balances grew. I had anticipated being able to pay them off as I got internships, but alas, the economy crashed and finding employment became difficult for anyone. At this point, I needed to remain in school in order to keep my loans deferred and as such, my debt has continued to grow. I did manage to find a better job as the economy recovered and began to pay my balances off. But, because the other card utilization were high, my balances continued to be cut (this was in 08-09 when companies were slashing limits left and right) as I paid them off so every time my utilization would decrease it would drop even lower. After having two cards with no balances closed (I do understand why) I opted to stop paying them down for fear of having no limits (maybe not the best decision in hindsight).  I am now approaching graduation and am budgeting for the future.

Current Financial Profile:

• I have never missed a payment 
• Oldest account: 6 years
• Average account age of credit: 4 years
• My credit scores are in the low 600’s because of my high card utilization. I know as soon as I pay those balances down, my score will drastically increase. My balances/limits and APRs are as follows:
• 2 inquiries in the last two years (for student loans)

BoA – 4800/5600 ~ 12%

Citi 1 – 5000/6000 ~ 11% [Closed]

Citi 2 – 3500/ 3600 ~ 11%

Citi 3 – 1800/2000 ~ 12%

Chase – 1000/1500 ~ 15% [Closed]

Cap 1 – 450/500 ~ 11%

HSBC – 900/1000 ~ 20%

Discover – 700/750 ~ 20%

Blue – 1000/1500 ~ 11%

Store Cards - 0/2000 ~ Something ridiculous =P

Yes, they are precariously high – I know .

Significant amount of student loans as well - Average APR will be around 7.8% - looking to refinance soon - hence the lower credit score.

I have an offer for employment and will be starting in the next month or so.

My Question:

Which balances should I pay off first in order to maximize my credit score within a year? I will need to obtain an auto loan (relatively small, less than 8k) and would like to refinance my student loans. If I were just paying down balances without these constraints, I’d simply pay off the higher APRs first. However, because I would like to refinance my student loan before it comes out of its deferment period, I’m wondering if it would be better to pay of some cards with "luv" buttons to increase my limits and therefore bring down my utilization rather than going for a standard payoff (by APR). Go figure the cards with the lowest rates are the ones that have "luv" buttons... Also, any thoughts on my closed cards with balances? My understanding was that they would show as having a zero limit, which should put me over 100% utilization but that doesn’t seem to be the case (at least according to my most recent report) I will have a very strict budget and will probably shred all but one or two of my cards to ensure I don’t increase their balances.

Thanks!

edit: Balance errors and formatting 

[Anonymous]

Well, you're at about 75% util now, if you were to pay down the CC's with the luv buttons and were given the CLI's, it would surely help your util in two ways, by you paying the CC's down some and getting a CLI on those cards.

I don't think anyone here can tell you what kind of score increase you will see if you were even able to get your util down to 50%, I would imagine you would see a small increase, nothing substantial tho, but as you know if you could get your util down to around 30% you might see a much better increase.

As you said, paying the CC's with the lower APR's is not normally the way one would want to pay down debt, but in your situation, paying down the CC's with the luv buttons would most likely improve your chances at getting the CLI's from those cards, and would probably be the way to see the quickest score increases.

I'll leave it at that and let the MyFico Experts chime in, as I'm no expert by any means.

Best of Luck!!

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[haulingthescoreup]

lol, no one's going to scold you for any past "misdeeds." At least I hope not. Most of us got here due to some kind of false steps in the past, to put it kindly.

I gotta say, I don't think that you're going to get any CLI's. Unfortunately, credit is a lot like 7th grade popularity. If you already have it (good credit, that is), they're all over you. If you don't, you're stuffed into a locker or something.

That being said, there are several ways to attack CC debt, each with their own virtues.

Debt snowballing targeting lowest balances first: In this, you pay off the smallest balance first, while making minimum payments (at least) on all the others. Once that smallest balance is paid off, take the amount that you were paying and add it to the minimum that you were paying on the next-smallest balance. Note: you are now paying more every month than you were on the first card, because you're paying the minimum + what you were paying on the first card. Wash, rinse, and repeat. This is done without regard to APR's or individual card util. This has the advantage of reducing the maximum number of cards to $0 in the minimum amount of time, which helps both scores and morale. When you're trying to dig out, it can be important to get a good initial boost.

Debt snowballing targeting high APR first: Same idea as above, except that you target the highest APR card first. Same tactic in adding the payment that you made on the first card to the minimum on the next card, and so on and so on. Advantage: you save a bit more money this way by paying off high-interest cards first, although it can take longer to see much progress.

Hybrid snowball: Go with the smallest-balance tactic for the first 3-4 (or 5-6) cards, enough to get your momentum up, and then switch to the high APR cards.

Alternative hybrid (I'm making these last two terms up as I go, lol): Go with the smallest-balance tactic for 3-4 (or 5-6) cards, then pay others down to 49% of each card's CL as an intermediate step, then pay them off. In this scenario, after the first X number of low balance cards, you would then pick the remaining card that would require the least amount of cash to get it down to 49%, pay that down, then onward. So after you pay X number down to $0, look at the remaining cards. If one only needs $200 to get down to 49%, and the others require $300 or more, pay down that one (the one that only needs $200.) And so forth. Once you've gotten all cards below 50%, resume paying them off using whatever tactic floats your boat.

Since you're specifically shooting for score optimization, I'd recommend going for the last one. Although total util is a big factor, so are such things as "number of accounts with balances" and individual card util. This last approach will help you on these areas, while still reducing overall util.

Hope this didn't confuse you utterly, lol. And congrats on starting to attact the debt monster. Good luck!

edited to remove weird randomness and attempt to add clarity

edited again to remove the "at least" on making minimum payments on other cards when snowballing. Make minimums; any additional available cash goes to paying off the snowball card.

[Anonymous]

haulingthescoreup, you are Amazing, I wish I knew 1/4 of what you know. 

Awesome post. I applaud you for the time you take to help others.

I want to Thank you for that post, as I just learned a boatload of info from it.

[haulingthescoreup]

Glad I could help. I got confused typing it, so I'm happy that it made sense to someone!

IMO, the hardest thing about getting out of debt (well, besides finding the money to pay it off with) is dealing with all the guilt and shame and anger and fear and other emotions that cloud the common sense that we all have. If any of these tactics can help defuse all that junk that gets in our way, then I'm grateful to be able to share the things that I've learned here over the last several years.

Pass it on, pass it on...

[Zark419]

Ah, thank you very much for your insight! Coincidentally, my lowest balances have the highest APRs so that hybrid method will defnitely work out nicely.

Do you know how low I would need to get my utilization before I would be able to get some soft inquiry CLIs?

Also, I don't know much about auto loans, given my high utilization would I even be able to qualify for a small loan with a decent rate? I'm currently leasing right now and would like to buyout the lease.

Thanks again for all your help!

[OnWayUpinTexas]

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@Anonymous wrote:

haulingthescoreup, you are Amazing, I wish I knew 1/4 of what you know. 

Awesome post. I applaud you for the time you take to help others.

I want to Thank you for that post, as I just learned a boatload of info from it.

---

+1000

HTSU = the best

[haulingthescoreup]

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@Zark419 wrote:

Ah, thank you very much for your insight! Coincidentally, my lowest balances have the highest APRs so that hybrid method will defnitely work out nicely.

Do you know how low I would need to get my utilization before I would be able to get some soft inquiry CLIs?

Also, I don't know much about auto loans, given my high utilization would I even be able to qualify for a small loan with a decent rate? I'm currently leasing right now and would like to buyout the lease.

Thanks again for all your help!

---

Well, your lenders soft you all the time, probably. The question is when they might start making nice noises at you. I would guess that the first chirps might come at around 680, and more (duh me) as you go higher, especially when you hit 720 or so. Lenders are often surprisingly nice to those with high util who otherwise have absolutely squeaky clean reports --no lates, no nuthin'.

As for a good source for an auto loan, I have two suggestions:

1. Go check out the Auto Loans board here on the forums, if you haven't already.
2. Cultivate a relationship with a credit union, especially a local one. Credit unions are usually the best source by far for auto loans, and many have broadened their eligibility requirements in recent years, and you might be surprised to find how many you qualify for. Many (certainly not all) pull Equifax. You might even try printing out a current EQ score report from here (current as in the day that you go looking) and carry it with you as you visit local CU's. Tell them that it's a Beacon 5.0 (the industry name for an EQ FICO), and that you're curious if they would be interested in having you as a member. They will have to pull a full report (= hard inq) if you decide to apply, but most loan officers at CU's will be willing to give you an educated guess after looking at a Beacon 5.0.

Even if your auto loan is still several months off, there's a lot to be said for lining up a potential lender ahead of time. Additional bonus for going through a CU: they won't shop you to forty-'leven lenders, as do car dealers, so you won't have a zillion hard inqs on your report. Inqs for auto loans are "de-duped" (counted as one inq) for FICO scoring if they occur in a limited time frame, but they freak out other lenders when they see them on your reports.

[haulingthescoreup]

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@OnWayUpinTexas wrote:

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@Anonymous wrote:

haulingthescoreup, you are Amazing, I wish I knew 1/4 of what you know. 

Awesome post. I applaud you for the time you take to help others.

I want to Thank you for that post, as I just learned a boatload of info from it.

---

+1000

HTSU = the best

---

lol, thanks guys. Just keep doing the good work that you're doing, and pass it on!

[Uborrow-Upay]

Well, I 've gotta say that I'm getting a little tired of your outstanding solutions, Hauling.

Can't you **bleep** 'em up once in a while??!?? 

(All kidding aside, kudos to both the original questioner and the solutioner for each of their wonderfully well-written and on-target posts!)