savings vs. pay off cards

[Anonymous]

Hi, first time poster here. I'm planning on buying my first house this summer (6 months), and I'm debating paying off my cards vs. saving for closing costs. My FICO is 767. My understanding is that I won't see significant changes in available mortgage rates by increasing my score. I have 2 CCs with balances: $2000 and $7000. I have $6k in a savings account. I can save $8400 over the next six months. My question is whether it would be better to payoff my cards, put the $8400 into savings, or do a combination of both (which what I've been doing for the past couple months). Downpayment is not an issue, as my work offers a first timer program. Thanks for any advice on saving vs. paying off cards!

[haulingthescoreup]

Hi, househunting, welcome to the forums! Sounds like you're already in good shape in score land, so savings is probably the smarter course. However, you didn't list the credit limit on each card, so I don't know what your util (balance owed divided by credit limit) is. If it's over 50%, especially if it's over 75% - 80%, your lender will probably be a bunch happier if you pay them down to at least under 30%. If you were trying to increase scores, it would be one paid off, and the other under 10%.

Mortgage lenders generally pull all three scores (EQ, EX, and TU) and go with the middle one, so to be sure that there are no ugly surprises, you should also pull your other two scores to make sure that they're pretty much in line with the one you have. (There is usually some variance, though.) Also, it would be a good idea to pull your full credit reports from annualcreditreport-dot-com, or directly from each bureau if you have done this within the past 12 months. The reports that you get with your FICO scores, and also from credit monitoring services like TrueCredit and PrivacyMatters, are abbreviated reports and don't have all the details.

Google FICO discount coupons or FICO discount codes to save some money on your score pulls.

Good luck!

[Anonymous]

Thanks for the quick reply! What a great site - can't believe I just found it today. Both cards have 10k limits; I have another 10k card with a zero balance and a 6k card with 0 balance. I use a "creditcheck monitoring" service that puts my total available credit at 73%. It still seems weird to me to keep a 9k balance on my two cards, but they're both at zero percent, and it seems as though raising my FICO won't have much effect on my mortgage rates. Thanks for the advice!

[haulingthescoreup]

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@Anonymous wrote:
Thanks for the quick reply! What a great site - can't believe I just found it today. Both cards have 10k limits; I have another 10k card with a zero balance and a 6k card with 0 balance. I use a "creditcheck monitoring" service that puts my total available credit at 73%. It still seems weird to me to keep a 9k balance on my two cards, but they're both at zero percent, and it seems as though raising my FICO won't have much effect on my mortgage rates. Thanks for the advice!

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That used to make sense on 0% cards, but nowadays there are lots of worries about credit card issuers suddenly dropping credit limits or even closing cards if they are worried that you might be unable to pay. If your util is that high, even with 0%, you might want to start paying a decent-sized chunk of money over the minimums each month. Credit has suddenly tightened up something fierce, and lenders are getting the jitters. Some will even change the terms on their own paid-off cards when they see that you have high balances on a completely different card.

It seems a shame not to be able to take advantage of every last inch of 0%, but this might be a case of better safe than sorry. So in fact, you might want to split that $6800 up between savings and your cards after all.

[Anonymous]

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haulingthescoreup wrote:

That used to make sense on 0% cards, but nowadays there are lots of worries about credit card issuers suddenly dropping credit limits or even closing cards if they are worried that you might be unable to pay. If your util is that high, even with 0%, you might want to start paying a decent-sized chunk of money over the minimums each month. Credit has suddenly tightened up something fierce, and lenders are getting the jitters. Some will even change the terms on their own paid-off cards when they see that you have high balances on a completely different card.

It seems a shame not to be able to take advantage of every last inch of 0%, but this might be a case of better safe than sorry. So in fact, you might want to split that $6800 up between savings and your cards after all.

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Sounds like good advice..

Message Edited by Tmleverage on 12-30-2007 06:10 AM

[ShanetheMortgageMan]

In addition to the solid advice hauling gave you, you should also consider what your debt to income ratio (DTI) is on the mortgage amount you plan on applying for.  If the payments on the credit cards are negatively impacting your DTI to the point where it could be borderline to qualify, that could be a reason to pay them off.  If they aren't pushing your DTI ratio too high, and if you don't have enough reserves (1 month reserves is equivalent to your PITI payment), then saving up for adequate reserves is recommended.  In any situation, I always think that have a good amount of reserves (at least 2 months PITI, preferably 4-6 months) is a good amount to have in case of emergencies.

[haulingthescoreup]

Thanks, Shane, for "the rest of the story"! Wow, 4-6 months --I must say that has kind of eroded in our family savings. Time to get that back up! (We like to pretend that 4+ months of saved vacation time would do the trick, but we'd probably have a hard time convincing a lender of that, lol.)

[Anonymous]

Thanks again for the replies. My DTI is 900 (student loans + car) to monthly 10666. I'm not including the CCs as I don't have monthly payments and they are 0% until 09. I've run a few of the affordability calculators and we're looking in the right range.

My takeaway is that the 8400 over the next 6 months is better "spent" in savings than paying down the cards, as it seems I won't benefit by raising my credit score.

Again, I appreciate all the help. This forum is fantastic.

[ShanetheMortgageMan]

Sounds like your DTI will be fine then, since they are low interest cards, I like the idea of splitting half towards paying them down and half towards your accumulating savings.

[Anonymous]

I think you're going down the right path...  I purchased my first home about 5 months ago, and before doing so I paid off most of my credit cards except for one at 2% interest.  I kept the cash on hand rather than pay the last card off to have a better balance sheet when it came time to get the mortgage.  Your score is already over 760, so your monthly debt payments vs. income will be the only major factor remaining.

Plus, I like having more cash on hand in this kind of market...