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Paying down credit card debt

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Anonymous
Not applicable

Paying down credit card debt

Okay, I've been workign on rehabbing my credit for a few months. A coworker friend who I have spoken with regarding my progress posed a question to me. She has 5 cards of low but varying CLs. I'll post the CL and amount she has on each. $1500/$1430, $1000/$620, $750/$700, $650/$500, $300/$250. She has no negatives on her reports, no late payments on her cards. She had some medical issues over the past 2 years and had to charge quite a bit on her cards. She doesnt like it, knows it was not a good thing to have had to do, but it is what it is. Now, she is at a point where she can start paying $400-$500 a month to pay these down/off. Obviously, in most cases you want to attack the highest interest first. The thing is, she needs to purchase a car fairly soon, as in probably early next Summer. In the interest of boosting her FICO as much and quickly as possible, what would be the best way to proceed? Should she do the snowball method and pay off the smallest balance first then proceed to the next and so on. Or, would it help boost her score quicker by spreading out the $ and contributing a larger percentage to the higher utilized cards? I know, each one is high utilization as it is, but would it be better to get the highest amounts owed paid down sooner and then focus more on the lower amounts?

Message 1 of 17
16 REPLIES 16
OmarGB9
Community Leader
Super Contributor

Re: Paying down credit card debt

Well, FICO dings you both for having multiple accounts with balances reporting and for maxing out (or nearly maxing out) a card. I think the hit is a lot worse for maxing out a card though, so I'd suggest lowering all cards gradually, paying particular attention of course to the higher interest ones and getting those down to zero ASAP.

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Message 2 of 17
SouthJamaica
Mega Contributor

Re: Paying down credit card debt


@Anonymous wrote:

Okay, I've been workign on rehabbing my credit for a few months. A coworker friend who I have spoken with regarding my progress posed a question to me. She has 5 cards of low but varying CLs. I'll post the CL and amount she has on each. $1500/$1430, $1000/$620, $750/$700, $650/$500, $300/$250. She has no negatives on her reports, no late payments on her cards. She had some medical issues over the past 2 years and had to charge quite a bit on her cards. She doesnt like it, knows it was not a good thing to have had to do, but it is what it is. Now, she is at a point where she can start paying $400-$500 a month to pay these down/off. Obviously, in most cases you want to attack the highest interest first. The thing is, she needs to purchase a car fairly soon, as in probably early next Summer. In the interest of boosting her FICO as much and quickly as possible, what would be the best way to proceed? Should she do the snowball method and pay off the smallest balance first then proceed to the next and so on. Or, would it help boost her score quicker by spreading out the $ and contributing a larger percentage to the higher utilized cards? I know, each one is high utilization as it is, but would it be better to get the highest amounts owed paid down sooner and then focus more on the lower amounts?


 

 

 

 

She should keep them all at roughly the same percentage, and work on bringing them down to below 50%, then below 30%.

 

Depending on the cards she should apply for luv button credit limit increases, if and only if they are soft pull, not for the purpose of borrowing more, but for the purpose of decreasing utilization percentage.

 

 

 

 


Total revolving limits 741200 (620700 reporting) FICO 8: EQ 701 TU 704 EX 685

Message 3 of 17
Anonymous
Not applicable

Re: Paying down credit card debt


@SouthJamaica wrote:

@Anonymous wrote:

Okay, I've been workign on rehabbing my credit for a few months. A coworker friend who I have spoken with regarding my progress posed a question to me. She has 5 cards of low but varying CLs. I'll post the CL and amount she has on each. $1500/$1430, $1000/$620, $750/$700, $650/$500, $300/$250. She has no negatives on her reports, no late payments on her cards. She had some medical issues over the past 2 years and had to charge quite a bit on her cards. She doesnt like it, knows it was not a good thing to have had to do, but it is what it is. Now, she is at a point where she can start paying $400-$500 a month to pay these down/off. Obviously, in most cases you want to attack the highest interest first. The thing is, she needs to purchase a car fairly soon, as in probably early next Summer. In the interest of boosting her FICO as much and quickly as possible, what would be the best way to proceed? Should she do the snowball method and pay off the smallest balance first then proceed to the next and so on. Or, would it help boost her score quicker by spreading out the $ and contributing a larger percentage to the higher utilized cards? I know, each one is high utilization as it is, but would it be better to get the highest amounts owed paid down sooner and then focus more on the lower amounts?


 

 

 

 

She should keep them all at roughly the same percentage, and work on bringing them down to below 50%, then below 30%.

 

Depending on the cards she should apply for luv button credit limit increases, if and only if they are soft pull, not for the purpose of borrowing more, but for the purpose of decreasing utilization percentage.

 

 

 

 


I found a spreadsheet and shared it with her. We inputted all of her cards, the limits, the balance for each. It shows the utilization for each and total% of all together. We looked at various scenarios of paying alot on one till it was gone as well as spreading it over each one. It looks like with the $$ she will have available to pay on them each month, she can get down below 30% total by January. She said she is also going to use whatever taqx refund she gets to apply to whatever if any balance is left.

Message 4 of 17
Anonymous
Not applicable

Re: Paying down credit card debt

Good advice, but my biggest issue would probably be with the car premise. Why not do whatever it takes right now to get rid of that credit card debt and think in terms of saving interest and not fico score?

It wouldn't be wise to have a lot of credit card debt and then go buy a car while still having a decent amount of credit card debt. I would attempt to save a bit of money for a car while aggressively paying down the credit card debt. I'd use the money saved for a car to get something cheap and used.

I guess to me it seems like thinking about the current fico scores should be put on the back burner as she looks to save as much money as possible by paying down the highest interest debt quickly.
Message 5 of 17
Anonymous
Not applicable

Re: Paying down credit card debt


@Anonymous wrote:
Good advice, but my biggest issue would probably be with the car premise. Why not do whatever it takes right now to get rid of that credit card debt and think in terms of saving interest and not fico score?

It wouldn't be wise to have a lot of credit card debt and then go buy a car while still having a decent amount of credit card debt. I would attempt to save a bit of money for a car while aggressively paying down the credit card debt. I'd use the money saved for a car to get something cheap and used.

I guess to me it seems like thinking about the current fico scores should be put on the back burner as she looks to save as much money as possible by paying down the highest interest debt quickly.

She's not buying the car until the cards are paid off. We were just talking about how she should approach paying them off, and the FICO score boost was my thought. I figured if her plan was to buy the car later after they were paid off, why not hit two signs with one stone and do it in a way to boosted her score as much as possible while she was paying them off. I know the snowball method is typically regarded as the best course with also giving a nod to higher interest, but I wasnt sure if it would make more sense to whittle down the utilization rate on all of them at the same time or one at a time would help her score the most. The lower limit cards are the ones with the higher rates actually, so while paying any interest is not desirable, it's not as bad in her case since the higher limit cards are decent interest rate points.

Message 6 of 17
longtimelurker
Epic Contributor

Re: Paying down credit card debt


@Anonymous wrote:

@Anonymous wrote:
Good advice, but my biggest issue would probably be with the car premise. Why not do whatever it takes right now to get rid of that credit card debt and think in terms of saving interest and not fico score?

It wouldn't be wise to have a lot of credit card debt and then go buy a car while still having a decent amount of credit card debt. I would attempt to save a bit of money for a car while aggressively paying down the credit card debt. I'd use the money saved for a car to get something cheap and used.

I guess to me it seems like thinking about the current fico scores should be put on the back burner as she looks to save as much money as possible by paying down the highest interest debt quickly.

She's not buying the car until the cards are paid off. We were just talking about how she should approach paying them off, and the FICO score boost was my thought. I figured if her plan was to buy the car later after they were paid off, why not hit two signs with one stone and do it in a way to boosted her score as much as possible while she was paying them off. I know the snowball method is typically regarded as the best course with also giving a nod to higher interest, but I wasnt sure if it would make more sense to whittle down the utilization rate on all of them at the same time or one at a time would help her score the most. The lower limit cards are the ones with the higher rates actually, so while paying any interest is not desirable, it's not as bad in her case since the higher limit cards are decent interest rate points.


And have her redo her tax withholding.   While it usually makes little sense to get big tax refunds, some people like it as a sort of enforced savings account.   Here she has been paying money to the credit card companies while giving an interest free loan to the government.

Message 7 of 17
Anonymous
Not applicable

Re: Paying down credit card debt


@longtimelurker wrote:

@Anonymous wrote:


@Anonymous wrote:
Good advice, but my biggest issue would probably be with the car premise. Why not do whatever it takes right now to get rid of that credit card debt and think in terms of saving interest and not fico score?

It wouldn't be wise to have a lot of credit card debt and then go buy a car while still having a decent amount of credit card debt. I would attempt to save a bit of money for a car while aggressively paying down the credit card debt. I'd use the money saved for a car to get something cheap and used.

I guess to me it seems like thinking about the current fico scores should be put on the back burner as she looks to save as much money as possible by paying down the highest interest debt quickly.

She's not buying the car until the cards are paid off. We were just talking about how she should approach paying them off, and the FICO score boost was my thought. I figured if her plan was to buy the car later after they were paid off, why not hit two signs with one stone and do it in a way to boosted her score as much as possible while she was paying them off. I know the snowball method is typically regarded as the best course with also giving a nod to higher interest, but I wasnt sure if it would make more sense to whittle down the utilization rate on all of them at the same time or one at a time would help her score the most. The lower limit cards are the ones with the higher rates actually, so while paying any interest is not desirable, it's not as bad in her case since the higher limit cards are decent interest rate points.


And have her redo her tax withholding.   While it usually makes little sense to get big tax refunds, some people like it as a sort of enforced savings account.   Here she has been paying money to the credit card companies while giving an interest free loan to the government.


I asked her about the tax thing. Her ex had it set up that way. I'm not sure why etc and didn't feel like I should get preachy or involved in that. She's just a good friend asking advice on the credit card thing. After talking about it and thinking, she's just going to snow ball them. The lower limit cards are the higher interest ones and she's not set in stone on having to get a car at a certain date. She's goal oriented and a linear type thinker. She said she's afraid if she just spreads the $ out over each, she will get frustrated. But, if she can bigger amounts to one, she will see a quick gain towards her goal. She's confident she will have enough to get the three lower limit cards paid off by December 1at. Then she can start on the bigger limit cards.

Message 8 of 17
Anonymous
Not applicable

Re: Paying down credit card debt

Hello--I think that it's awesome that you're trying to help your friend out.

 

I'm not an expert at all, but I recently kind of did the same thing without the car purchase being involved but just paying down my debt.  What I've learned from these forums and my own credit report is that FICO does ding you for maxing out your credit cards and I read somewhere that using 90% of the available credit is considered maxing it out...but in my case, none my cards were at 90% percent and I still had this as as negative indicator on my credit file...that some of my accounts were maxed out.  So upon futher reading, I came to the conclusion that less balances carried forward to the credit limit available is the magic trick.  So each card should be less than 10-20%...so for example, on her card with the $1500 limit, the most that should ever report at a given time is $150 (using 10%, of course). 

 

So, in an effort to get her score up to purchase a car, FICO doesn't take interest rates into consideration (that I know of).  So, I would start with the debt avalanche method from the highest amount owed and work my way down.  Get every card under 10% utilization on each--which should boost her credit score some, then once everything is at or below 10%, then I would start knocking out the debt in order of the highest interest on down. 

 

And additionally, "SouthJamaica" had a good point, doing CLI also helps to bring down her credit to debt ratio.

 

Everytime my balances would update a lower amount, my score would go up a teeny bit--it also depends on where she's starting out as well.  Just my two cents...like I mentioned, I'm in no way a professional but I'm just providing what worked for me.

 

Also, prior to her going to a dealership to car shop, it would be wise to either get a loan thru her bank or put "fraud alert" on her credit report.  I unfortunately didn't know any better when I had to buy a car short notice due to my vehicle at the time having mechanical issues and my credit was less than stellar...and once the dealership had finished, I had over 22 credit inquiries between all of the bureaus.  But the sad part was that they assured me that they hadn't done this and they didn't know why it happened (lying, of course), so at least with a fraud alert, they will have to contact her each time someone is trying to run her credit and the alert is automatically on there for 90 days...

 

Let me know if you have any questions...

Message 9 of 17
Anonymous
Not applicable

Re: Paying down credit card debt


@Anonymous wrote:

Okay, I've been workign on rehabbing my credit for a few months. A coworker friend who I have spoken with regarding my progress posed a question to me. She has 5 cards of low but varying CLs. I'll post the CL and amount she has on each. $1500/$1430, $1000/$620, $750/$700, $650/$500, $300/$250. She has no negatives on her reports, no late payments on her cards. She had some medical issues over the past 2 years and had to charge quite a bit on her cards. She doesnt like it, knows it was not a good thing to have had to do, but it is what it is. Now, she is at a point where she can start paying $400-$500 a month to pay these down/off. Obviously, in most cases you want to attack the highest interest first. The thing is, she needs to purchase a car fairly soon, as in probably early next Summer. In the interest of boosting her FICO as much and quickly as possible, what would be the best way to proceed? Should she do the snowball method and pay off the smallest balance first then proceed to the next and so on. Or, would it help boost her score quicker by spreading out the $ and contributing a larger percentage to the higher utilized cards? I know, each one is high utilization as it is, but would it be better to get the highest amounts owed paid down sooner and then focus more on the lower amounts?


Based on the information you've provided, if she pays $400 towards her debt each month she will still owe $300 by the end of May. If she pays $500 a month, her debt will be PIF before the end of May. My previous two statements don't take into consideration interest, but if she went with paying $500 a month she would have more than enough to cover any interest she would accrue. If she can only afford to pay $400 a month then she would be better off carrying the $300 balance on the card with the $1430 CL.

 

At this point it really is a matter of choice. What type of person is she? Would it make her feel better to see her balances disappear every month or would she be more focused on interest? Ask her and she what she says then that will determine which pay down/off method she should use.

 

Another option, using part or all of her income tax return may help her be debt free before May. Please remember that paying all of her credit card balances to $0 could have a negative impact on her credit profile. She should allow one card to report a balance with a utilization between 1%-9%. Best wishes to you and your coworker!Smiley Happy

 

Message 10 of 17
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