topic Re: Paying off debt - which is better for my scores? in Credit Cards

Paying off debt - which is better for my scores?

Anonymous — Sun, 26 Apr 2009 14:28:34 GMT

Hello,

I have the opportunity to pay down some debt, and I'm trying to decide which debt to pay off first. Here's what I have:

$7,000 balance in an AmEx flexible payment account costing about $175/mo of interest charges alone

$4,700 on a Chase account

$1,300 on a Capital One account

$1,000 on a revolving credit account

I have $7,000 to work with, here. Is it better to pay off all of the smaller accounts, or pay off the larger debt? I could save a few bucks a month if I paid off the smaller accounts, but I want to do what's best for my score right now (mid 600's on all scores). Current APR on the accounts above are 20.99%, 25%, 12.9% and 28.9%, respectively. Any help would be appreciated!

Re: Paying off debt - which is better for my scores?

Scamp — Sun, 26 Apr 2009 14:37:14 GMT

Welcome to the forums!

Please post your limits and APRs on your accounts, as this information will help us determine your best course of action.

Re: Paying off debt - which is better for my scores?

haulingthescoreup — Sun, 26 Apr 2009 14:40:41 GMT

What are the limits on the four accounts? We need to know the util of each one.

Off the top of my head, I'd say kill off the last two small ones, and then apply the balance to one of the others, but again it depends on the CL of each card.

Another factor is to consider which card(s) you most want to hold onto, if the CCC's turn on you.

eta: Scamp out-typed me.

Message Edited by haulingthescoreup on 04-26-2009 07:40 AM

Re: Paying off debt - which is better for my scores?

Anonymous — Sun, 26 Apr 2009 14:50:14 GMT

Thanks for the quick responses! Credit limits are as follows:

AmEx - None

Chase - $5,000

Capital One - $1,500

Revolving credit - $1,500

Re: Paying off debt - which is better for my scores?

Scamp — Sun, 26 Apr 2009 14:55:57 GMT

We need your APRs, too - if you would, please post everything in one shot, something like this:

Account Name & Type Balance Credit Limit APR (or for AmEx, the $175/mo. you mentioned)

It'll be easier for us to analyze if things are laid out that way. Thanks!

Re: Paying off debt - which is better for my scores?

Anonymous — Sun, 26 Apr 2009 15:01:35 GMT

Sorry, I posted my APRs in the first note, but here they are again:

AmEx: 20.99% (on the balance due portion)

Chase: 25%

Capital One: 12.9%

Revolving account: 28.9%

In terms of credit limit, although AmEx doesn't have a pre-set limit, it seems as if they're reporting my largest balance as my credit limit each month. This makes it seem that I don't have any available credit, but maybe it's just me reading my credit report like that...

Re: Paying off debt - which is better for my scores?

haulingthescoreup — Sun, 26 Apr 2009 15:10:28 GMT

I've got the APR's from the original post. So it looks like:

Amex - $7,000 - charge card; no limit - 20.99%

Chase - $4,700 - $5,000 - 25%

Cap One - $1,300 - $1,500 - 12.9%

other revolving - $1,000 - $1,500 - 28.9%

Conventional wisdom says to pay down highest interest first. I look at that, but I also look at individual balances and relationship with lender.

Is either AmEx or Chase hassling you? Did you have to come to some sort of agreement with AmEx, or do you have one of those options to pay over time? (ticking time bombs, those are.)

My gut instinct says that the Chase card is more likely to be saved intact and continue to help you than the AmEx. So I would pay off the Chase, Cap One, and other account now, and then redirect everything to AmEx. And in the meantime, continue to use each paid-off card once a month each, but only for essentials that you would otherwise pay cash for --think gas and groceries. Don't let your debt climb back up.

If you feel that you'd do better winding up with the AmEx than the Chase, then I would pay the two little ones, then pay Chase $2,300 to get it down to a $2,400 balance, and then pay the rest to AmEx.

eta: We cross-posted. Yes, that is how AmEx charge cards report.

Message Edited by haulingthescoreup on 04-26-2009 08:10 AM

Re: Paying off debt - which is better for my scores?

Scamp — Sun, 26 Apr 2009 15:14:04 GMT

Nixtang wrote:
Sorry, I posted my APRs in the first note, but here they are again:

AmEx: 20.99% (on the balance due portion)
Chase: 25%
Capital One: 12.9%
Revolving account: 28.9%

In terms of credit limit, although AmEx doesn't have a pre-set limit, it seems as if they're reporting my largest balance as my credit limit each month. This makes it seem that I don't have any available credit, but maybe it's just me reading my credit report like that...

Yup, so you did - sorry. The caffeine hasn't quite fully kicked in, obviously!

I echo hauling's advice, above.

Re: Paying off debt - which is better for my scores?

Anonymous — Sun, 26 Apr 2009 15:19:44 GMT

Thanks for the info! No one is hassling me from either CC company, just want to pay off what I owe to them. And yes, the AmEx balance is a "pay over time" account - the worst idea ever!

The only reason I have the AmEx is because I've recently (in the past year) decided to put just about every monthly expense I can on there to generate points ( I LOVE Home Depot gift cards!!). I generate about 3,500 points a month, which gets me $350 - $400 of gift cards each year...well worth the $95 annual fee IMO.

I also have to think what would happen if I had a major appliance or something go out - what would I use? I'm just now beginning to save a little money so that I don't have th rely on credit, but I'm not there yet. Another couple of years, hopefully...

Re: Paying off debt - which is better for my scores?

Anonymous — Sun, 26 Apr 2009 15:24:19 GMT

Are these your only credit accounts?

You're maxed out on Chase and Cap1, and close enough on your other account that it's hurting you badly at more than 66% utilization. If these (with Amex) are the only accounts that you have open, I'd suggest paying Chase, Cap1, and the other revolver in full. Take the payments that you would have been making to those cards, and roll it into your payment to Amex to pay down faster. With an APR of 20%, it's going to take quite a while.

SO, I'd further suggest that once your updated zero balances all report (this should give you a signifant FICO boost), to go for a credit union card, with a low APR and low or no balance transfer fees to transfer the Amex balance. 20% is going to cost you a lot of money. Definitely try to get a better rate if you can't PIF.

ETA: I started typing, stopped to take a phone call, came back, posted my response, and low & behold... Hauling had it all wrapped up. LOL!

Message Edited by LilMirth on 04-26-2009 11:24 AM

Re: Paying off debt - which is better for my scores?

Anonymous — Sun, 26 Apr 2009 15:31:51 GMT

Hi,

These are not my only accounts, but the ones that I'm most concerned about. I have a couple of zero interst accounts that I must may off this year in order to avoid finance charges and three other accounts with combined utilization of about 55% ($29,000 limit/$16,000 utilization). Two of these three are lines of credit through my credit union with 9.9% APRs, so I've been using these accounts to help pay off the higher interest accounts.

When I first started this thing, I had over $55,000 of combined credit utilization (please reserve judgement, here - it seemed like the American thing to do at the time). After I pay down the next $7,000, I'll owe a total of about $23,000 with about 50% total credit usage.

I'll tell you what, I've learned my lesson the hard way! Although general credit spending is common sense, they don't really teach you about this in school (and they should - can't rely on parents if the have poor spending and saving habits).

Re: Paying off debt - which is better for my scores?

Itsmeagain — Sun, 26 Apr 2009 20:29:45 GMT

Kudos to you Nixtang. You have come a long way. And it sounds like you have learned to manage your credit instead of letting it manage you. Keep up the great work.

Re: Paying off debt - which is better for my scores?

Anonymous — Sun, 26 Apr 2009 20:49:22 GMT

@Anonymous wrote:
Thanks for the info! No one is hassling me from either CC company, just want to pay off what I owe to them. And yes, the AmEx balance is a "pay over time" account - the worst idea ever!

The only reason I have the AmEx is because I've recently (in the past year) decided to put just about every monthly expense I can on there to generate points ( I LOVE Home Depot gift cards!!). I generate about 3,500 points a month, which gets me $350 - $400 of gift cards each year...well worth the $95 annual fee IMO.
$7,000 balance in an AmEx flexible payment account costing about $175/mo of interest charges alone
I also have to think what would happen if I had a major appliance or something go out - what would I use? I'm just now beginning to save a little money so that I don't have th rely on credit, but I'm not there yet. Another couple of years, hopefully...

I have to question the wisdom of using this high interest card this way. $175 in interest per month would buy you a $350 gift card in two months...6 in one year. Not even counting the $95 AF.

Unless you can PIF each month this reward card is costing you much more than you will ever save by using it.

Re: Paying off debt - which is better for my scores?

Anonymous — Sun, 26 Apr 2009 21:30:16 GMT

@Anonymous wrote:
@Anonymous wrote:
Thanks for the info! No one is hassling me from either CC company, just want to pay off what I owe to them. And yes, the AmEx balance is a "pay over time" account - the worst idea ever!

The only reason I have the AmEx is because I've recently (in the past year) decided to put just about every monthly expense I can on there to generate points ( I LOVE Home Depot gift cards!!). I generate about 3,500 points a month, which gets me $350 - $400 of gift cards each year...well worth the $95 annual fee IMO.
$7,000 balance in an AmEx flexible payment account costing about $175/mo of interest charges alone
I also have to think what would happen if I had a major appliance or something go out - what would I use? I'm just now beginning to save a little money so that I don't have th rely on credit, but I'm not there yet. Another couple of years, hopefully...
I have to question the wisdom of using this high interest card this way. $175 in interest per month would buy you a $350 gift card in two months...6 in one year. Not even counting the $95 AF.

Unless you can PIF each month this reward card is costing you much more than you will ever save by using it.

The "wisdom" is that I owe the $175 per month regardless if I put anything additional on the card or not. The expenses that I charge to the card today are things that would come out of my checking account. If I were using my checking account for these expenses, I would get zero "rewards".

Re: Paying off debt - which is better for my scores?

Anonymous — Mon, 27 Apr 2009 00:46:17 GMT

Nixtang,

I think what VEEnVEGAS is pointing out is that what you're paying in interest exceeds by far the $350-450 in "rewards". From a financial standpoint, you're upside down on the rewards game. For high APR credit (particularly ones that come with an annual fee as well), you have to PIF to actually be gaining anything on the rewards end.

Ironically, a couple of months ago, VEEnVEGAS posted this helpful calculator for another member who is in the process of paying down debt: CNN Money: Debt Planner. This is a really nice calculator that you can play around with, and figure out what it's really costing you to carry a balance, and whether or not the rewards are worth the price of the credit.

Re: Paying off debt - which is better for my scores?

Anonymous — Mon, 27 Apr 2009 09:19:23 GMT

@Anonymous wrote:

The "wisdom" is that I owe the $175 per month regardless if I put anything additional on the card or not. The expenses that I charge to the card today are things that would come out of my checking account. If I were using my checking account for these expenses, I would get zero "rewards".
__________________________________________________________________________________

You owe $7000 on a card charging you over 20% APR, paying $175 a month in interest....mathematically it isn't wise at all. But, it is your money so I'll say no more. Good luck.

Thank you LilMirth for trying to help me explain.

Re: Paying off debt - which is better for my scores?

Anonymous — Mon, 27 Apr 2009 12:52:34 GMT

@Anonymous wrote:

You owe $7000 on a card charging you over 20% APR, paying $175 a month in interest....mathematically it isn't wise at all. But, it is your money so I'll say no more. Good luck.

Thank you LilMirth for trying to help me explain.

Thank you for making me feel like the dumbest man on earth. I realize that my debt was not a wise decision. I asked this forum for my best course of action with what I have available, not to be judged by my prior bad decisions. Fortunately, other contributors were much more helpful in their advice, which is what I will follow.

Re: Paying off debt - which is better for my scores?

Anonymous — Mon, 27 Apr 2009 13:36:27 GMT

Nobody was saying that you were dumb for not knowing, or dumb for getting into debt. Nobody was trying to make you feel badly at all. Please don't think that.

As you're paying down your debt, some of us were just trying to point out the rewards trap-- when the price of the rewards are disproportionately higher than any value that you're realizing. The reason for pointing this out wasn't to make you feel worse. It was to help you keep more of your own $$$ which, when you do the calculations, is of far greater value (tangible cash) than the rewards-- because of the APR & annual fee.

The reason that I suggested transferring the balance to a CU card after your new balances update was because of this. I want you to have to pay LESS money. Once that balance is cleared, you can use your AMEX card for monthly expenses that you can PIF, and then the rewards will go in your financial favor. The rewards won't cost you anything-- it'll be a net gain, rather than a net loss due to interest. That's all we're saying. I'm really sorry that you took it in any way other than the spirit in which it was intended-- to help you.

@Anonymous wrote:
@Anonymous wrote:

You owe $7000 on a card charging you over 20% APR, paying $175 a month in interest....mathematically it isn't wise at all. But, it is your money so I'll say no more. Good luck.

Thank you LilMirth for trying to help me explain.
Thank you for making me feel like the dumbest man on earth. I realize that my debt was not a wise decision. I asked this forum for my best course of action with what I have available, not to be judged by my prior bad decisions. Fortunately, other contributors were much more helpful in their advice, which is what I will follow.

Re: Paying off debt - which is better for my scores?

Anonymous — Mon, 27 Apr 2009 16:40:28 GMT

I've gone back and re-read both of my posts to you and I really do not see where you get that I was trying to make you look dumb. As Lil pointed out, I was trying to help you see that continued use of this card was costing you money.

Many here love rewards cards and profit from them. But, you can't come out ahead using these cards unless you avoid the high APRs these cards usually charge by PIF each month.

I generally tend to carry balances like you do. Because of this I prefer Plain Jane cards with lower rates. Any rewards cards I do have I try to use only when they offer low BTs. Several years ago I used one continually for all kinds of purchases, I ended up paying much more in interest than I ever received in rewards. I didn't have a clue then that the rewards were the reason the interest rate on this card was so high. It took my coming here and reading to understand what was going on. No one could have been dumber about credit cards and their usage than I was. Now I know my weaknesses and try to work with them.

The last thing I'd ever want to do is insult anyone here. Like so many other forum members I've had my own credit problems in the past and want no more than to help others avoid the traps I fell into myself.

We're all here to learn.

I honestly do wish you good luck and hope you follow LilMirths advice to transfer this $7000 to a lower rate card if at all possible or to pay it off as quickly as possible. Only then should you continue to use it for normal purchases that you PIF each month in order to reap the benefits of the rewards card.

Re: Paying off debt - which is better for my scores?

Itsmeagain — Mon, 27 Apr 2009 17:50:01 GMT

@Anonymous wrote:
Thank you for making me feel like the dumbest man on earth.

You'll never be the dumbest man on earth as long as I'm alive . . . .

Now, a question. On you Amex account you have a balance of 7K on a flex-pay account. You also use the card regularly for the points, correct?

So, when you make a payment, does part of the payment go to pay off the 7K and part go to pay off the current charges?

Does all the payment go to pay off the 7K?

or the current charges?

Based on what I have seen so far, if it were me, I would:

Pay off both the Cap 1 and revolving acct ($2.300). and sock-drawer both of them.
Since you are so close to your limit on Chase, pay them down to less than 50% = (at least) $2,200
Pay the balance of your $7,000 ($3,800), to Amex. This will reduce your Amex to approx. $3,200 which will reduce your monthly interest substantially.

In addition, you may soon see a score increase because of your reduced debt to credit ratio and your Average Age of Accounts (AAoA).