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Consolidation question for the experts

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danieljohnsonk
Established Member

Consolidation question for the experts

I obtained a consolidation loan and will have the funds in a few days. I would like to ask your expert opinions on the best course of action for consolidating my debt. With the loan and some savings I’ll have $24,000 to consolidate most of the debt. My MyFico TU score is 681 today. I know the sweet spot is <9% on one card and 0 on all others but looking at my mix of credit type and balances and knowing I have 24,000 to “spend” what would you do to maximize your credit score?

 

Balance / Limit
Credit Cards:
700      1000
700      1000
400      1000

550      2000
3000    6000
3850    4000
1760    1800
3900    4000
2400    2600
2000    3000

 

Installment:
2500    5000
6300    13000

 

Car:
3500  11000

Message 1 of 15
14 REPLIES 14
Anonymous
Not applicable

Re: Consolidation question for the experts

It's hard to say without the interests rates being provided, but I would just pay all credit card balances and split the remaining betewwn your instalment loans. You can always return and charge something small on one of the credit cards to get the 9% on one card. Definitely don't pay off both installment loans too quickly as you will need one to maintain your "credit mix".

Message 2 of 15
danieljohnsonk
Established Member

Re: Consolidation question for the experts

Is 9% on a 700 limit card scored exactly the same as 9% on a 4000 limit card?

Message 3 of 15
StartingOver10
Moderator Emerita

Re: Consolidation question for the experts


@danieljohnsonk wrote:

Is 9% on a 700 limit card scored exactly the same as 9% on a 4000 limit card?


^^^ Do you mean from a scoring POV? I have no idea, but you can experiment by doing the 9% on the 4k first and then pay down to $63  dollars and see if your score jumps or remains the same.

Message 4 of 15
Anonymous
Not applicable

Re: Consolidation question for the experts

Best thing is to pay off all your credit cards completely, including anything you need for fees and interest and so on.  Then you can begin charging whatever purchases you need to on the card that is most useful to you.

 

If your total utilization is low (e.g. 1-5%), then it doesn't matter whether a particular revolving tradeline is 5%, or 15% or probably even 25%.  When you have a low total utilization, the next most important factor for credit card debt is the number of cards reporting $0.

 

But the really important concept is that the amounts owed on credit cards is something that has a very fast effect on your score, and one where FICO has no memory of what you did in previous months.  So by all means you should pay off all the CC debt because it is high interest debt.  And yes, if you want to squeeze every extra point possible out of the "Amounts Owed" category, then you  want all cards zero except one and a total U at 1-5%. But the key idea is you can quickly get that benefit anytime you want -- there's no need to try to keep almost all the cards reporting $0 for a long time.

 

You only ask about what constellation of decisions will give you the most scoring benefit.  Overwhelmingly, that's paying off the credit cards.  After that, the decisions have far less to do with scoring benefit and more about other kinds of financial benefit.

 

For example, it is likely that you are required to have full collision insurance on your car as a requirement for the bank still having the title to the car.  If you pay off the car, maybe you will choose to drop much of that and just pay liability.  That's not the universally "right" decision, but it is one that some people make (e.g. me).  Or perhaps the interest rate on the consolidation loan is much higher than the car loan, in which case maybe you should take all of the money that you don't spend on the credit cards and make an early start on the consolidation loan.

 

Another key factor from the amounts owed FICO scoring category is this: FICO adds up all the open non-mortgage installment loans you have and takes the sum total of all the original amounts versus the sum of the amount you owe and it looks at the percent you owe.  It's very much like total credit card utilization in that sense, except that CC utilization is weighed much more heavily than "installment utilization."  Anyway, the point here is that you are adding a new loan where you owe 24k.  You won't experience some magic boost by paying the other loans down to (say) 5% of their original amount because you are doing that by adding a bunch of new installment debt.  Don't get me wrong -- you are doing the right thing by paying off your CC debt.  It's just that after that once you do that much, you have a different set of priorities, that have more to do with what earns you the most money rather than what gets you the most scoring points.

 

 

 

 

Message 5 of 15
danieljohnsonk
Established Member

Re: Consolidation question for the experts

Thanks for your very detailed response. I greatly appreciate your time. After reading your response I’ve refined my thought process into a few important requirements I just want to clarify a couple of things regarding credit scoring:


1) If I pay off an installment loan, is it true that the paid off account is no longer used when calculating my installment util? If this is true, should I leave a few payments on each installment loan and not pay them off completely? I think leaving some meat on the bone would help offset the negative effects of a new consolidation loan.

 

2) Is there a magic credit card util point where the score is negatively affected the most? For example, at 9% or 30% util the score isn’t hit too hard but at 60% the score takes a big hit? The simulator shows that if I pay $7000 towards my credit cards my score will increase to 730 but I find that hard to believe.

 

My final decision on what to pay and what not to pay is complicated by several factors:
1) I want to lower my monthly payments as much as possible.
2) I want to increase my 681 fico score to > 720.
3) I want my credit to survive a period of unemployment. My job is fairly unstable and I could become unemployed at any time. Installment accounts don’t have unemployment insurance and credit cards do have it. The insurance would help reduce my payments during a period of unemployment.

Message 6 of 15
NRB525
Super Contributor

Re: Consolidation question for the experts


@danieljohnsonk wrote:

Thanks for your very detailed response. I greatly appreciate your time. After reading your response I’ve refined my thought process into a few important requirements I just want to clarify a couple of things regarding credit scoring:


1) If I pay off an installment loan, is it true that the paid off account is no longer used when calculating my installment util? If this is true, should I leave a few payments on each installment loan and not pay them off completely? I think leaving some meat on the bone would help offset the negative effects of a new consolidation loan.

 

2) Is there a magic credit card util point where the score is negatively affected the most? For example, at 9% or 30% util the score isn’t hit too hard but at 60% the score takes a big hit? The simulator shows that if I pay $7000 towards my credit cards my score will increase to 730 but I find that hard to believe.

 

My final decision on what to pay and what not to pay is complicated by several factors:
1) I want to lower my monthly payments as much as possible.
2) I want to increase my 681 fico score to > 720.
3) I want my credit to survive a period of unemployment. My job is fairly unstable and I could become unemployed at any time. Installment accounts don’t have unemployment insurance and credit cards do have it. The insurance would help reduce my payments during a period of unemployment.


Then you need to provide information about which cards you have (bank and the brand name of the card), interest rate on each card, interest rate on each installment loan and how many months the installments have to run.

The auto loan is at a low APR, is that a safe assumption? If so, it's likely outside the scope of this pay down.

 

What is the APR on the consolidation loan you received?

 

Regarding card utilization, I've seen a score increase when all cards went below 50% each, in June, and then a score penalty when the two $500 cards each went over 50% two months ago, then a score improvement when they went below 50% each. There are likely other threshholds, but IMO a top priority for your pay down is to get each of the cards below 50%, as an obvious start.

 

Depending on the answer about the installment loan APR's, I'd be inclined to leave them as is. It would take a high APR to convince me to pay those down, but they may be in a high APR situation.

High Bal Jan 2009 $116k on $146k limits 80% Util.
Oct 2014 $46k on $127k 36% util EQ 722 TU 727 EX 727
April 2018 $18k on $344k 5% util EQ 806 TU 810 EX 812
Jan 2019 $7.6k on $360k EQ 832 TU 839 EX 831
March 2021 $33k on $312k EQ 796 TU 798 EX 801
May 2021 Paid all Installments and Mortgages, one new Mortgage EQ 761 TY 774 EX 777
April 2022 EQ=811 TU=807 EX=805 - TU VS 3.0 765
Message 7 of 15
SouthJamaica
Mega Contributor

Re: Consolidation question for the experts


@danieljohnsonk wrote:

I obtained a consolidation loan and will have the funds in a few days. I would like to ask your expert opinions on the best course of action for consolidating my debt. With the loan and some savings I’ll have $24,000 to consolidate most of the debt. My MyFico TU score is 681 today. I know the sweet spot is <9% on one card and 0 on all others but looking at my mix of credit type and balances and knowing I have 24,000 to “spend” what would you do to maximize your credit score?

 

Balance / Limit
Credit Cards:
700      1000
700      1000
400      1000

550      2000
3000    6000
3850    4000
1760    1800
3900    4000
2400    2600
2000    3000

 

Installment:
2500    5000
6300    13000

 

Car:
3500  11000


What I would do is pay everything down to 29% or less

Then I would immediately pay back at least 10% of the consolidation loan

Then I would pay everything down to 19% or less

Then I would pay back another 10% of the consolidation loan

Then I would pay everything down to 9% or less

Then I would pay back another 10% of the consolidation loan

Then I would zero out some of the remaining and chip away at the consolidation loan

When you have the consolidation loan below 20% + mostly zero balances on the revolving accounts, you'll be in good shape.


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

Message 8 of 15
Revelate
Moderator Emeritus

Re: Consolidation question for the experts


@danieljohnsonk wrote:

Thanks for your very detailed response. I greatly appreciate your time. After reading your response I’ve refined my thought process into a few important requirements I just want to clarify a couple of things regarding credit scoring:


1) If I pay off an installment loan, is it true that the paid off account is no longer used when calculating my installment util? If this is true, should I leave a few payments on each installment loan and not pay them off completely? I think leaving some meat on the bone would help offset the negative effects of a new consolidation loan.

 

2) Is there a magic credit card util point where the score is negatively affected the most? For example, at 9% or 30% util the score isn’t hit too hard but at 60% the score takes a big hit? The simulator shows that if I pay $7000 towards my credit cards my score will increase to 730 but I find that hard to believe.

 

My final decision on what to pay and what not to pay is complicated by several factors:
1) I want to lower my monthly payments as much as possible.
2) I want to increase my 681 fico score to > 720.
3) I want my credit to survive a period of unemployment. My job is fairly unstable and I could become unemployed at any time. Installment accounts don’t have unemployment insurance and credit cards do have it. The insurance would help reduce my payments during a period of unemployment.


The pink is correct; if you can afford the marginal interest rate, and if the loan by pre-paying allows you to put it at some small number of payments left and pushes the due date way out in the future, from a scoring perspective that's how you want to go.  If it's trivial financially, if it's not just pay it off.  You only need one loan really to get the installment utilization aka mix of open credit or whatever it realistically could be called.

 

Take the simulator with a grain of salt; FICO works on percentages.  I didn't see a point drop at 67% but I did get one north of 80%, and presumably there may be another north of 90 but I didn't really test that well unfortunately.  Will get a chance around this Christmas to do that.  I just leave a minimal balance ($2-$100 or whatever, that vs. a higher number didn't seem to make much difference on my file, YMMV) on one card when I want to optimize my score for an application or to test something, but otherwise I just PIF everything after the statement cuts generally.

 

 




        
Message 9 of 15
Anonymous
Not applicable

Re: Consolidation question for the experts

Hi Danieljohnsonk.  You ask:

 

"If I pay off an installment loan, is it true that the paid off account is no longer used when calculating my installment util?"

 

You are right.  If you pay off a particular installment loan, it no longer counts towards the "installment utilization" we talked about earlier. 

 

One of the things I think I am getting from your last post is this: You are not required to spend all of the 24k on paying off debts.  Some of it you could place in a savings account to protect yourself against the possibility of a job loss.  Am I understanding you right?  And is that true?

 

If so, that's really helpful to know.  It hadn't occured to me that your could do that.

 

If that is the case, then my guess is that the best strategy (balancing all three of your concerns) is to pay off all your credit cards and then park the remainder in a high yield online savings account.  (Earning at least 1% interest.) 

 

This will lower your monthly payments, since you are currently making monthly payments on many different credit cards.  It will also give you a big credit score boost in a short period of time.  Finally it will give you a pool of money to continue to make payments on your installment loans even in the event of a job loss.  And should such a loss occur, you can begin charging expenses on the cards that have the unemployment insurance.

 

If you want to have even more money in your rainy day fund, you could see if any of your credit cards are 0% APR.  With those you could choose not to pay them off entirely.  As long as your total CC utilization is < 9% and each account is < 49% you will still be getting a big FICO boost.

 

On the other hand, I may have misunderstood you, and the thing I originally assumed may be the case: which is that the terms of your consolidation loan may require you to use all of the 24k to pay down or pay off specifically named debts.  (You can't save any of it for a rainy day fund.)

 

Can you clarify?

Message 10 of 15
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