Payoff car of $11K or Credit Cards of $11K?

[Anonymous]

I want to increase my credit score from 618, but I don't know what would be the best thing to do, so I can maximum my score increase.  I have $11K in savings, should I use it to payoff my car loan or payoff my credit cards?  Any thoughts???  Thank you.

[Junejer]

Hello april, and welcome to the forums. Please read Credit Scoring 101, if you haven't already.

If you need to raise your FICO score for some reason, then I would suggest getting CC util to 1-9%. Only allow one card to report this small balance. The other cards should be at $0. Paying off the card loan will do very little for your FICO score. It may even hurt your score, if that's the only installment loan that you have.

[smallfry]

FICO would probably reward you more for paying down the credit cards depending upon you available credit and other considerations like how much you would have left to pay on the 1 card you choose not to pay down. I imagine you are concerned about your scores because you are buying a house? If you are does the 11K deplete the down payment? You need to consider how long it will take to rebuild that 11K in savings. Cash in hand these days is more important than a few FICO points. If you are not buying a house why not accelerate your CC payoff and keep your money. Reduce CC usage.

[MattH]

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@Junejer wrote:
Hello april, and welcome to the forums. Please read Credit Scoring 101, if you haven't already.

If you need to raise your FICO score for some reason, then I would suggest getting CC util to 1-9%. Only allow one card to report this small balance. The other cards should be at $0. Paying off the car loan will do very little for your FICO score. It may even hurt your score, if that's the only installment loan that you have.

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As ByrdMan says, from the FICO scoring perspective paying down revolving debt will have much more benefit than will paying down installment debt.  However, there is another factor you didn't mention: interest rates.  The rule of thumb many financial planners use is when deciding where to put spare cash, look at the aftertax return and risk of each option.  For paying down debt, the effective rate of return will either be the interest you pay, or in the case of tax-favored debt such as a mortgage likely somewhat less depending on your tax situation.  For most investments the effective rate of return will be less than what the investment earns because the returns are taxable, unless the investment is a tax-favored one.  However, paying down debt is in effect a totally risk-free investment so for most people paying down debt should take precedence over investing.  But cash flow considerations also must be thought through, especially now that credit is harder to get.  During the boom many people ignored cash flow considerations in the assumption that if needed they could either run up their credit cards or take out a home equity loan.  Today cash is king.  So depending how much emergency reserves you have, it might be wise to put some portion of your extra cash into an FDIC-insured account rather than put all of it into paying down debts.  And unless you have a substantial emergency fund already, I would not advise putting all your spare cash into paying off the car because you could not easily get it back if you needed it.

Of course, once you do have some reserves then paying down debts ought to be a high priority.  Your long term goal should be to have no debt other than a mortgage and substantial savings.  But while getting there you need to preserve your financial flexibility.