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I spoke to my mortgage advisor and was told closing the cards is the worst thing I could do in this situation. Pay them down and keep 'em shredded (if I need to stay away from them) she said
@niko79 wrote:I spoke to my mortgage advisor and was told closing the cards is the worst thing I could do in this situation. Pay them down and keep 'em shredded (if I need to stay away from them) she said
Hello Niko! Thanks for sharing your story! When will you be applying for a mortgage?
It's important to remember that your utilization ratio as it applies to your credit score isn't helped or hindered by the past (unlike other aspects of your score such as payment history, account age, etc.) - it's just a snapshot in time. So yeah, as several have said, I wouldn't worry about paying down in the way that will most benefit your score in the short-term; focus on paying down in the way that will save you the most money and the utilization aspect of your score will rebound regardless once you've paid everything off. So yeah, the classic approach to this is to line up all your cards from highest APR to lowest and pay minimum payments on everything except the highest and throw EVERYTHING at the highest (since you have a good bit of initial money to put out this will probably mean completely paying off a few of the highest APR cards). Every time you pay off the highest APR balance move to the next balance and so on. That will save you the most money in the long run. Just make sure not to miss any payments and to always pay at least the minimum on all cards.
I agree with your mortgage advisor: don't close the cards once you pay them off, just stop using them. Closing them will lower your total available credit and thus hurt your utilization. However, personally I'd advise against considering a mortgage at all in the immediate future. I'm sure it's tempting to move as quickly as you can into becoming a homeowner, but you really need to make sure to pay off ALL (every last dime) of your credit card debt first, save enough for a large downpayment (preferably at least 20% so you can avoid PMI), AND still have enough of an emergency fund not to get yourself into trouble again (especially now that you'll be a homeowner and exposed to even more financial risk). Of course you know your budget and income better than anyone else, but I would assume doing all that would take at least 3+ years, probably longer. The bright side is that waiting not only allows you to pay off debt and accrue savings, it'll also give your score time to rebound for the most favorable rates when you do pull the trigger.
You can do this. I advocate the Debt Snowball approach. Pay the minimums on all the cards, but pay off the card with the SMALEST debt FIRST. Why? Fico factors your total score based on #1 the % of utilization of EACH card. And #2 it factors the % of utilization of all cards. It stands to reason that the larger the # of cards reporting a ZERO (0) balance, the better your score will be. That just makes logical sense. If you have twenty accounts and all twenty have a balance, then your risk assesment profile says you are somewhat spread thin. If you on the other hand, have twenty cards and 10 have a zero balance, and ten have some balance, then your risk assessment profile says you have work to do to improve your profile, but you are not too much of a risk for default.
People who advocate paying off the highest % rate cards first often overlook that following their approach versus mine only offers a marginal improvement in the aggregate CC debt numbers. But you still are burdened down by a large number of cards with a balance.
Follow the Debt Snowball approach that offers you the psychological boost of seeing your accounts paid off in successive oder. Google it to verify what I have said is true.
Google Dave Ramsey's approach to debt freedom.
@niko79 wrote:Welcome!
So, I am finally taking the initial steps to paying down the CC debt and will pay about a third of what I owe on the credit cards. It is not much but its is a good start I think. I have 19 opened CC accounts, 16 with balances. I am trying to find our what is the best way to pay them down to get the highest FICO scores out of it for the time being so I can consolidate the rest via Lending Club or Prosper loan into one single payment not at 25-30% interest.
Long term goal is saving for the mortgage and having high enough FICO scores to get one. We have two incomes totaling 151k. Wife does not have almost any debt.
Here is the spreadsheet of the cards I carry and the pay down amounts I am thinking about making at this point:
Credit Line Current Balance Pay Down New Balance Min. Payment Chase Slate 500 450 450 0 25 Chase United 7100 7000 1000 6000 125 Chase Freedom 5000 4700 1000 3700 125 Chase Marriott 5000 5000 1000 4000 125 AMEX 680 0 0 0 Discover 3300 3200 1000 2200 100 AA 3250 3000 1000 2000 100 Care Credit 5000 2200 2200 78 Amazon 2500 250 250 0 25 Macys 1900 1800 800 1000 60 BestBuy 900 830 830 0 25 Lowes 10000 300 300 0 25 Merrick 400 100 100 0 39 BR 1000 270 270 0 25 CapitalOne 700 600 600 0 25 CapitalOne 750 400 400 0 25 CapitalOne 950 950 950 0 25 Total 48250 31730 9950 21100 952
I understand I am still being left with around 20k in debt but I gotta start somewhere. BTW, even after having about 10-15k in debt last year, I had FICOs over 700 on each report. I am still waiting for a big loan payback from parents after they sell the inherited house overseas.
Please help
Thank you!
#1, congratulations on starting your paydown plan. I was at $116k of owed balances on cards at January 2009, so it is possible. With your and DW income level, I'd suggest looking at ways to scrimp and scrape together more funds each month to pay these down directly, really put the budget pressure on yourself, rather than using Lending Club or Prosper. The reason being, with your income, and what sounds like a loan payback on the near term horizon, you will probably be able to cut this down enough to see your score recover quickly, without trying for any other lending. That other lending is only going to encourage you to slow down payments. Once your score improves, you can probaly get another Capital One card with a good limit, like the QS no AF card.
#2 I agree 100% with your mortgage broker: Do Not Close Any Of These Accounts. The small value ones you get paid off? Like the Slate you are going to pay off today? You can start re-using those as Pay In Full accounts, and keep new charges off of the existing debt amounts.
#3A Capital One is the least likely of this bunch to have any problem with your balances, so I would stop using those for new charges, and pay those off in three payments each. Maybe even 4 payments each. Put the extra money from the first payment onto the Chase cards, for example try to get the Freedom card also paid to zero, along with the Slate card.
#3B - If you really really feel like you have to pay off the Capital One accounts, fine, do that. Then use the no-fee BT capability to transfer some more funds from the other accounts, like those Chase cards, to each of the three CapOne cards, and then pay the Cap One cards off in 4 payments.
#4 Care Credit, looks like you are keeping that on whatever payment plan it has. That is fine.
#5 Macy's, Best Buy and Lowes, I would pay slower. Yeah, it's higher interest but the balance isn't that bad, and they are not going to do any AA, so it is what it is. The thing about these debts is, the bank has to accept your payment and your payment only has to be more than the minimum. Apply more funds earlier to those Chase accounts. You can circle around to these three later, when the other balances are more reasonable levels.
#6 Discover and AA (I presume that is American Airlines?) same thing, pay slower, pay $500 per month, not $1k each initially. Pay more than the minimum, obviously, but Discover is not going to have a problem with this size balance.
Good luck!
beautifulblaquepearl, not anytime soon it seems. I want to pay off most of the cards until the end of the year and tackle the condo (mortgage) in the first half of next year.
Good luck! It's so good to have a plan, isn't it?