Should I use extra money to reduce debt and improve score?

[Anonymous]

Hi Everyone, I suffered some serious financial issues late last year which caused my credit score to drop to below 620. I decided that the best way to fix this was for me to get a part-time job and use that money to reduce debt thus improving my score. I have been doing that since January and so far have paid off 2 credit cards. I will be getting a $3500 bonus in May and I ma wondering if I should use the money to reduce debt or leave it savings. The reason for my debate is that due my wife's and I income level our accountant already told us that working the part-time all year will mean we will owe the IRS come income tax time. So if I use all of the bonus to reduce debt, that will mean less time working the part-time job thus reducing the amount of income tax I will owe next year. Suggestions please. thanks P

[bicknar]

Hi alges,

Welcome to the Forums.  First with the taxes, you will idealy want to break even at tax time.  That way you aren't giving the Govt a free loan until refund time, and you don't want to pay too little and get hammered next year either.  You may want to talk to your Accountant to help figure what adjustments to your withholding will accomplish that.

With regards to the credit cards vs savings.  It's always a good idea to have an emergency fund set aside.  However it all depends upon your goals.  If your goal is to increase your credit score right away, you can invest in paying down balances.  However in the long run if an emergency arrises you run the risk of hurting your credit again if you can't keep up payments etc. 

There is the opinion that the credit cards can be your emergency fund.  The risk with that though is that in todays credit climate, many card companies are lowering credit limits.  That can blindside your savings plan.

The gang here is fantastic with this sort of thing.  If you can post more details on your outstanding debt, I'm sure you will receive a ton of GREAT advice.  The basics such as When the account was opened; The Credit Limit; the current Balance; Interest Rate, and how it's showing up on your credit reports is a great place to start developing a plan to pay down and start re-building.

Hope this helps,

A

[Anonymous]

Thanks bicknar. I know an emergency fund is needed, but I am jsut tired of being in this position and want to end the year with little debt and not having to owe much in taxes. So the quicker I pay off the debt the quicker I can quit the part-time job. Then I can concentrate on taking 10% off of my check and set it aside for emergencies. Thanks P