Which payment option works best to increase FICO?

[mlynne37wiu]

Hello to all -- quick question...I've read that the best way to reduce credit card debt is to pay off the ones with the highest interest first and then focus on the next highest, etc. until they are paid off.  I have also read that to increase your FICO score you should have small debt-to-credit ratios on your credit cards.

I am paying off about $10,000 worth of debt and I'm not sure which way will help my FICO score most:

1) paying off the highest interest-bearing cards while the lower interest-bearing cards are still almost maxed out leaving me a high debt-to-credit ratio on those cards, or

2) putting payments toward all credit cards (and not paying off largest interest-bearing cards) to reduce my debt-to-credit ratio

Suggestions? Advice? Thanks in advance for any help!

Michele

[Anonymous]

Michele,

First off, the CBs do not differentiate between interest rates on cards.  They simply do not know the rates.  What they do know is balances, credit limits, usage activity, payment activity, age of account, etc.  The FICO scoring models work by determining your total revolving limits versus your balances, not by which account has a higher utilization.  Also, the models determine how many revolving accounts have balances, tho this is a lower score hit than having too high of balances (more on that later).  Therefore, pay off as much as you can on the cards with the highest interest rates, and if you have any left over then pay that towards your cards with the lowest interest rates.  It's ALWAYS better to pay off as many accounts with higher APRs as you can first.

As an example, let's say you have 6 credit cards, each with 5k limits and each with 4k balances.  3 cards have 9.99% APRs, and the other 3 have 19.99% APRs.  That's 30k in limits, 24k in outstanding debt, and 6k in available credit (that's a utilization of 80%!).  You have 15k to put towards them.  Pay off the 3 cards with the 19.99% APRs, and put 3k towards one of the cards with a 9.99% APR.  You will now have the 3 cards with the highest interest with balances of $0, and your 2 cards with the best interest rates owing their original balances, and now only 1 owing 1/4 of the original balance.  Your FICO score will improve dramatically because it sees that you have paid down $15k in revolving debt (it sees that you now have total revolving debt of just 9k - a new utilization of just 30% - always try to keep below 35%!), PLUS it will also improve slightly more because you only have 3 out of 6 revolving accounts with balances.

Those who say that the CBs do not differentiate with how many accounts have balances are not "in the know".  They certainly do (trust me, that's one of my current negative factors on my TU report).  However, as I said before, it's not that large of a hit as having too high of balances.

Kind Regards,

EO

Message Edited by eobiomed on 02-28-2008 08:38 PM