Best strategy to get score boosted most quickly based on personal circumstances

[Anonymous]

I had a previous thread here related to working on a mortgage for a new home.  Turns out the home itself wasn't what we wanted, so I am back to square one on looking.  Now looking to seek mortgage approval in a few months' time.  As a physician, there are $0 down mortgage programs with a certain credit score minimum, so no worries about saving up for down payment aside from closing costs, moving expenses, etc.

Note that a lot of numbers are somewhat rough estimates here so may not match up with my prior threads here.  The concepts of what is going on are more important here I think, hence the rough numbers.

I am trying to improve my FICO score quickly by a reasonable amount.  This is simply for a mortgage, so the mortgage-related scores are what matter most.  I have a large number of installment accounts totaling around $300,000, many related to medical school debt, which are between 9 and 12 years old.  None can really be paid down much percentagewise right now and utilization is relatively high due to their age (I believe they are paid off over 30 years).  There is a private loan for physicians (considered a business loan) I have which is around the same age as the med school loans and matures over either 20 or 30 years, around $30,000.  Can't be paid off or down substantially.  The other installment accounts are related to grad school classes for the wife (2-4 years old), also which can't be paid down or off right now.  There are two car leases, both of which will mature and be closed within the next 3 months.  Both are nearly 3 months old.  Total on these two accounts originally was around $65,000.  Total number of installment accounts is close to 20 and they consist of all of the above, and nothing else.  My first question is this - will the closing of the car lease accounts be more likely to help or hurt my credit?  My wife claims vehemently that car lease accounts being opened or closed, aside from the credit check you go through initially, do not affect your credit.  If anyone here can clarify that, it would be helpful.  Not planning on opening new lease accounts when we return the cars and will likely be doing monthly rentals until getting a mortgage secured in a few months' time.

Other pertinent info -

I have never had a late payment or missed payment or terminated accounts or consolidation or bankruptcy - basically no bad debt or true bad marks on the report anywhere

I had a mortgage for 6 years which closed in mid-2014 when I sold my old home.  I currently rent.

I have learned the hard way recently that with my current financial situation, asking for credit limit increases will not lead to actual increases and may lead to threats of closing accounts

My revolving lines of credit/credit cards are 3, 3, 15, and 17 years old (approximate numbers).  My question, really, is this.  I have about 95% utilization on all four cards, which looks like so:

Card 1 - limit $22,000, balance $20,900

Card 2 - limit $20,000, balance $19,000

Card 3 - limit $17,500, balance $16,625

Card 4 - limit $10,000, balance $9,500 (3 year old account)

If I had, say, $15,000 to spend to reduce these balances (will be getting a $15k bonus check in early November), how would that be best spent?  Would it be better to pay all 4 down to 88%, or totally pay off the $10,000 and close it, or just totally pay off the $10,000 card and keep it open?  Basically trying to figure out if it's better to pay all cards down equally (percentagewise), or if it would be better to pay the $10,000 limit card off entirely and then work on either a) keeping 2 out of the other 3 at high usage while paying one down as much as possible, or b) pay each of the other 3 down equally (percentagewise).

Let me know if this doesn't make sense or if I can clarify further.  Hopefully will hear something helpful back soon. 

[SouthJamaica]

Car leases:  the car leases are treated like installment loans. If you close one, you are reducing the size of the denominator, thus increasing your utilization percentage. So it is better not to close them. As to which mortgage scores care about installment utilization, there is a difference of opinion among forum members on that. Revelate, who is senior to me, and notably smarter, is of the view that EQ FICO 5 and TU FICO 4 are indifferent to installment utilization, while EX FICO 2 does factor it in slightly. I am of the view that TU FICO 4 does respond to installment utilization, while EX FICO 2 is indifferent to it. I have no opinion yet on EQ FICO 5 one way or the other.

Credit cards: your credit card utilization is devastating; you need to reduce that drastically, optimally to 9% overall, and to 29% on any single card. But since you are basically over your head in debt, and paying interest on everything, I would suggest applying the snowball method, which in your case would entail, with 15k, paying off card 4 completely, and applying the rest to card 3. That probably won't give you your absolute best scoring improvement, but in my view our focus should be getting your debt down to manageable proportions, rather than incurring new debt in the form of a home mortgage.

[Anonymous]

I agree with SouthJ: the installment accounts (including car leases) should be of zero concern to you.  Only thing you need to do is make regular on time payments on them.

SouthJ is also right that the CC balances should be your sole area of focus. 

The first thing I would do is get a reliable calculator and get more comfortable with how to calculate utilization.  Paying your CC debt down by 15k will not lower your utilization to 88%, as you said.  It will lower it to 73.4%.  Let us know if you don't understand how CC utilization works.

I will diverge from SJ a bit and suggest that I would pay all of your cards down somewhat equally so that you can get each card at < 69%.  The reason is that you are in serious danger of being balance chased (or other adverse action) due to your ultra high U on each card.   That's where a creditor lowers your credit limit as the consumer pays down his debt.  You need to be sure that you have enough money set aside in the next three months to make more than double the minimum payment on every card and the remainder should be thrown at the existing balances to get them much lower (but always making more than double the monthly payment).

And under no circumstances should you choose to close a card unless they force you to (and they may unfortunately do that).

I agree with SJ in his closing comments that until your CC debt is MUCH lower you should not be even thinking about a home mortgage.  If you can get one card to < 49% and all three other cards at $0 that might be a decent place to start looking for a mortgage, though getting 99% of all CC debt paid off is preferable.

[Anonymous]

Dixie and SJ, interestingly, regarding usage, I have been at over 95% on 2 of the 4 cards for about 5 years; The CC companies didn't even hesitate, interestingly, on giving me over 25k in credit lines between two brand new cards within a 6 month span despite that when I opened cards 3 and 4.  Probably because I was a physician making north of $300k at that time.  I in fact got an increase in the credit line of card 3 out of nowhere around 6 months ago, without asking.  Not sure what it's about but again I would guess(?) my profession and income and payment history.  The only time anything like a balance chasing issue ever came up is 4 years ago, when I was on a trainee's salary of around $45k/year, and I asked for a credit line increase on card 2 to decrease utilization.  They actually informed me that my account would be closed due to high utilization.  The account did close and without explanation opened back up within 24 hours.  I never called to ask what happened and left well enough alone.  Basically, I am padding the creditors' pockets with interest and have been for a number of years now.  I'm as sick of it as anyone, but the desire for a house is rooted in spousal complaint and threat, honestly.  I don't want to get into anything personal here beyond credit and will not expound further except to say that the home is higher priority than anything and everything else currently, and as discussed below, shouldn't put me in a credit death spiral at all.  I have been treading water on a stable salary for 3 years at this point and once I make partner my income will change drastically.

For perspective, my middle credit score for mortgage scores currently is 713 - despite my insane CC utilization.  I need 720 to get approved for the mortgage.

Regarding the mortgage, even if we got a $650k house, and even considering property taxes, costs of maintaining an owned home (which I've dealt with and budgeted before), etc, given my increase in income as of October 1 (substantial), there is virtually no way barring loss of my license or physicial ability to practice that my CC debt is not paid down entirely within 3 years, and more likely 2 or less.  I eagerly await that day...  The only downside is not being able to put money into retirement, college funds, etc, in the meantime, which at this point is a pipe dream for me until the CC debt is gone.

Actually am looking at a mortgage that would be not much more than my current rent payment.  When considering building equity, the mortgage does not seem to be all that bad of an idea.  One thing I can tell you is that unless I plan on divorcing and going back to a bachelor pad that I will not be downsizing in any way from where I'm at now homewise, and wouldn't want to anyway.

I can make reliable calculators and calculate utilization but before doing that really wanted to know in theory whether it is better to pay one CC account off entirely and leave the others at 90 or 85 or 95 percent or some other arbitrary number (the "snowball method" mentioned by SJ), or if it is better to simply pay all down equally, percentagewise, if that makes any sense.

I really, really appreciate the insight y'all have already provided.

[Anonymous]

OLDF, I apologize for possibly taking this conversation in another direction for a moment and don't mean to come off as bashing you here, but I have a question.  With your substantial income for several years, what caused you to roll with several of your cards maxed out for a period of years (presumably paying lots of interest) when I would think you could have made the decision to pay them down/off along the way?

[Anonymous]

You ask a good question, and I do not want to get into having folks here giving personal advice outside of credit score stuff.  I am sure you have heard it all here on these forums.  Since you asked, I can at least elaborate a bit.  Some details are missing in the story I am about to share, but hopefully it gets the point across.  I just don't want this to devolve into a conversation about anything other than the original topic I asked about.

My CC utilization was in the 5-10 percent range while I was still earlier in training (i.e. after medical school but during residency/fellowship, during which ~$250k of debt was there from med school, but prior to entering practice; residents at the time made $45-55k/year when I was in training), but then major expenses started adding up.  I had to start making interest only payments on some loans as I ran out of deferment late in training.  There was some student loan debt for grad school for my spouse.  Wedding and honeymoon were not cheap.  Rent and overall living expenses went up at one point due to moving to a more expensive metro market.  We also had a baby in the meantime which added some expense.  By the time we had our baby nearly 3 years ago, CC utilization had hit somewhat close to where it is now.  On current income I have been able to maintain CC balances nearly static for the last 3 years.  I suppose that during training when I had a credit card account literally frozen for being above 100% utilization for a month or two it was a somewhat "scared straight" moment and did curb personal spending, for what it's worth.

As my income will go up substantially very soon, it is reflective of a way out, presuming expenses otherwise do not change substantially.  Stinks to think that I literally make more than 99% of the US population currently and am in this situation.  The damage that has already been done relating to interest payments alone so far, compounded with inability to invest in retirement funds, college funds, etc, leads me to believe that barring drastic decreases in spending, even with the outcome I am about to have, that I won't be able to retire until I'm in my late 60's if not my 70's.

...but I digress.  You did ask, so I'm just telling you.  Not asking for sympathy, but here we are.

Also of note: My middle score was more along the lines of 780 four years ago, before all of this started happening.

[SouthJamaica]

In response to your question, I don't know. If you pay off one card completely that would give you some points. But if you reduce utilization across the board that would give you points. As to which scenario gives you more points, I don't know, and I doubt anyone can tell you that.

[NRB525]

Thanks for sharing the info on your situation. It's a challenging balance of history and current events you have going on.

For the four credit cards (or more) what are the banks and card brands of those cards?

[Anonymous]

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@Anonymous wrote:

[I] really wanted to know in theory whether it is better to pay one CC account off entirely and leave the others at 90 or 85 or 95 percent or some other arbitrary number (the "snowball method" mentioned by SJ), or if it is better to simply pay all down equally, percentagewise, if that makes any sense.

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Depends on how the word better is being used.  Better for what?  Let's take a few different senses in turn.

As far as purely improving your score, you are being penalized for each card that has a very high utilization.  So if you were only thinking about your score, then I think the strategy of paying all cards somewhat evenly (as I suggested) is best -- until you can get each card at < 69%.  After you get there, the per card indivudal utilization penalty will be less extreme, and multiple pay-down strategies might be equally good.

There's a different issue, which is protecting yourself against adverse action by creditors.  People who have all of their credit cards nearly maxxed out are at far greater risk of this than other people.  One of the best ways to protect yourself from this is to start making substantial payments on each card, and have a financial plan that will ensure that you make more than double the minimum payment (triple is even better) for the next five months.   Always paying far more than the minimum and additionally making a serious dent in your debt shows creditors you are safe -- not at risk of defaulting.  THis reduces the chance that they will balance chase you or take other AA.  Note that with this issue too, the best strategy appears to be spreading your payments across all four cards.

After you get your cards at < 69%, then you can consider other senses of the word better.

The Snowball Method is psychologically better for many people -- it creates feelings of accomplishment.  This is important, since it can make or break a person's ability to stick with a debt paydown plan.

Paying down cards that have a much higher interest rate than the other is financially better, in a cold mathematical sense.  A mathematician can provve that you will pay off your debt faster this way.  (Assuming psychology doesn't matter, and it may!)

[Anonymous]

OLDF, I appreciate you taking the time out to let us know what you have going on.  It helps make sense of everything.  I've been through similar situations and actually have started a few threads in the money and relationships section of the forum here which touched on some of the issues you are experiencing.  No doubt you are making smart decisions and things will get better as a result.