topic Re: Paying off Credit Cards or Loans First for Biggest FICO Boost? in Understanding FICO® Scoring

Paying off Credit Cards or Loans First for Biggest FICO Boost?

Cpmcmxc — Sat, 27 Aug 2022 01:52:28 GMT

Hi Everyone,

I am in a unique situation and would really like some advice. I am going to be coming into some money roughly to the tune of around $30,000 after taxes. Now I am just trying to decide which would benefit me the most in the long run:

I have credit card debt sitting at around $25,000 which costs me roughly $1,300 in monthly payments alone to cover. Additionally, I have $30,057.00 of installment-based debt that costs me $1,388.89 to pay the minimum payment every month. Which would be the better one to pay off first? The end goal is to take out a debt consolidation loan to consolidate the rest into a more manageable payment, which would thereby alleviate a lot of my monthly expenses.

Current FICO 8s:
Equifax 657, Transunion: 657, Experian: 654

Any information or advice you can offer is greatly appreciated.

Re: Paying off Credit Cards or Loans First for Biggest FICO Boost?

Taurus22 — Sat, 27 Aug 2022 02:03:01 GMT

I think the interest rates on CC's would be much higher than those for installment loans and it would probably benefit you more to pay off the CC's first. That would also give you the extra contingency if you needed to use the cards for other expenses while you're working on paying down the loan.

That's my first instinct, unless someone else has a more reasonable response....lol.

Additionally, as an added thought.....depending on how many CC's your debt is spread across (and if any of those cards are maxed out), this would also help reduce individual utilization for "X" number of cards, which would help your overall FICO scores.

Re: Paying off Credit Cards or Loans First for Biggest FICO Boost?

CH-7-Mission-Accomplished — Sat, 27 Aug 2022 03:45:18 GMT

@Cpmcmxc wrote:
Hi Everyone,
I am in a unique situation and would really like some advice. I am going to be coming into some money roughly to the tune of around $30,000 after taxes. Now I am just trying to decide which would benefit me the most in the long run:

I have credit card debt sitting at around $25,000 which costs me roughly $1,300 in monthly payments alone to cover. Additionally, I have $30,057.00 of installment-based debt that costs me $1,388.89 to pay the minimum payment every month. Which would be the better one to pay off first? The end goal is to take out a debt consolidation loan to consolidate the rest into a more manageable payment, which would thereby alleviate a lot of my monthly expenses.

Current FICO 8s:
Equifax 657, Transunion: 657, Experian: 654

Any information or advice you can offer is greatly appreciated.

What is the interest rate and loan term on that installment loan? That is a huge monthly payment for a $30K loan. Should be $500-$600. That said, usually it's better to pay off credit cards, but I would line up your debt for each account by interest rate and pay off the highest rate debt until you run out of money to use.

Re: Paying off Credit Cards or Loans First for Biggest FICO Boost?

SouthJamaica — Sat, 27 Aug 2022 03:52:44 GMT

@Cpmcmxc wrote:
Hi Everyone,
I am in a unique situation and would really like some advice. I am going to be coming into some money roughly to the tune of around $30,000 after taxes. Now I am just trying to decide which would benefit me the most in the long run:

I have credit card debt sitting at around $25,000 which costs me roughly $1,300 in monthly payments alone to cover. Additionally, I have $30,057.00 of installment-based debt that costs me $1,388.89 to pay the minimum payment every month. Which would be the better one to pay off first? The end goal is to take out a debt consolidation loan to consolidate the rest into a more manageable payment, which would thereby alleviate a lot of my monthly expenses.

Current FICO 8s:
Equifax 657, Transunion: 657, Experian: 654

Any information or advice you can offer is greatly appreciated.

Best to pay off the credit cards first. That will boost your scores.

Re: Paying off Credit Cards or Loans First for Biggest FICO Boost?

Anonymous — Sat, 27 Aug 2022 04:32:10 GMT

@CH-7-Mission-Accomplished wrote:
What is the interest rate and loan term on that installment loan? That is a huge monthly payment for a $30K loan. Should be $500-$600. That said, usually it's better to pay off credit cards, but I would line up your debt for each account by interest rate and pay off the highest rate debt until you run out of money to use.

I'm guessing to $30,057 is the remaining balance on a much larger debt

Re: Paying off Credit Cards or Loans First for Biggest FICO Boost?

calisig — Sat, 27 Aug 2022 04:49:25 GMT

@SouthJamaica wrote:
Best to pay off the credit cards first. That will boost your scores.

This ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ will give the fastest biggest boost in scores. FICO looks at installment debt expecting long term payments, and doesn't reduce your scores the same way it reduces scores for revolving debt.

Re: Paying off Credit Cards or Loans First for Biggest FICO Boost?

teekay629 — Tue, 30 Aug 2022 15:27:43 GMT

I agree with this! Since the debt is weighted differently as a loan versus credit card.

I would pay off the credit cards. Since your credit card debt comes under the amount you will be receiving, I would then keep that amount in a good APR savings account to have for emergencies. Then I would take about half to 2/3 of the amount (more or less depending on your financial situation) you paid per month towards credit cards and put that towards the loans (on top of the minimum payment). This will help you pay it down faster, but also less interest in the long run if you apply the extra payment to principal.

Re: Paying off Credit Cards or Loans First for Biggest FICO Boost?

ptatohed — Sun, 28 Aug 2022 09:08:05 GMT

I guess I am missing the dilemma. If you can afford to pay down debt, assuming the debt is costing you more than you could make with investing that same money, you put the money toward paying down the highest APR debt, period. Forget the FICO boost.

Re: Paying off Credit Cards or Loans First for Biggest FICO Boost?

Anonymalous — Sun, 28 Aug 2022 11:39:01 GMT

@ptatohed wrote:
I guess I am missing the dilemma. If you can afford to pay down debt, assuming the debt is costing you more than you could make with investing that same money, you put the money toward paying down the highest APR debt, period. Forget the FICO boost.

I'd usually agree with this, but @Cpmcmxc wants to try for debt consolidation loan, so paying off the credit card debt first may be the best move. With FICO 8s in the mid 600s and presumably fairly high utilization, paying off the credit card debt could result in pretty decent scores. Especially since it sounds like the current installment loans have very high rates, consolidating them into a single lower rate loan might be the best option.

Re: Paying off Credit Cards or Loans First for Biggest FICO Boost?

CL-Addiq — Sun, 28 Aug 2022 15:35:20 GMT

To give the best advice, one would need to know all the variables.

What is the nature of your cash flow?

You're currently paying about $2.7k a month in debt servicing. Presumably, this is after paying necessities like food and shelter. Is this sustainable, or is your income seasonal or in some other way at risk? Is your total credit card debt going down or are you just paying the minimums?

Is the loan secured or unsecured?

If the loan is secured against say a truck then the impact to your credit is probably negligible. The loan can be recouped by just seizing the truck. However, if that truck is required for your job then securing your livelihood might be a more important goal than minimizing your credit score.

Does the loan even allow prepay?

I had a student loan which did not and I paid a big chunk of money only to discover I didn't save a penny of interest and lost out on hundreds or even thousands of dollars of investment potential.

What are the interest rates?

If you have a 0% or low intro rate, it might save you money in the long run if you put the money in an interest bearing account for now and paying it off once the intro is over. Otherwise, generally you want to pay the highest interest first.

What is your credit card utilization?

AZEO is generally a good score hacking technique, but I think if the one card is at 90% then you're probably better off spreading it out over a few cards.

I know your stated goal was maximizing your credit score. I also recommend trying to keep enough cash on hand to cover 3-6 months of expenses. You might be able to do this while also significantly increasing your score.

Re: Paying off Credit Cards or Loans First for Biggest FICO Boost?

CreditMarathoner — Sun, 28 Aug 2022 18:19:33 GMT

If your goal is to save on interest, I'd hit the highest APR debts first, or the ones you're paying the most interest on. All else equal though, I'd hit the credit cards before the installment loans since (a) the APRs are probably higher, and (b) high revolving utilization is keeping your scores down.

If you're seeking a consolidation loan, I'd pay off the credit cards, get them all to zero except one which reports a small balance--this will boost your scores for qualifying for the loan. Then get the loan, pay off the rest of your debts, and then pay toward the consolidation loan.

Another option is to pay off the credit cards, then use the additional $1300/month you're freeing up to make a bigger dent in the installment loan debt. Make sure your loans can be prepaid toward principal before paying extra on them.

Re: Paying off Credit Cards or Loans First for Biggest FICO Boost?

Aim_High — Sun, 28 Aug 2022 18:55:55 GMT

The discussion has broadened far beyond OP's original question:

"Would paying off my credit cards or loans first provide the biggest FICO boost?"

The answer is paying off credit card debt would provide the largest FICO boost.

If that is OP's only concern, the rest is a moot point.

OP also said the end goal was to take out a debt consolidation loan. IMO, paying off the credit card debt with cash-on-hand would boost FICO and make lenders more comfortable in approving a consolidation of the installment loan. During underwriting, that revolving debt involves a much higher risk assessment than the installment loan debt.

However, if OP would like to bring other variables into the discussion, there are some excellent points. Many of us on the forum would consider the lowest cost or quickest way to repay substantial debt, but this might requires disregarding FICO impacts in lieu of saving money or time. I think @CL-Addiq makes some excellent points and we would need to know more details to help @Cpmcmxc fine-tune debt repayment. In general, paying off credit cards first would normally be the way to both boost FICO score and also save money since credit cards typically have much higher APR than installment loans. However, there are exceptions in both cases. The question about what kind of installment loans we're talking about also matters. Are these loans a mortgage loan, a student loan, a car loan, a small business loan, or a high-APR payday loan? What are the terms on each loan? How do they compare to the terms on credit card debt? Is saving money on repaying the debt even a concern for OP?

@CL-Addiq wrote:
To give the best advice, one would need to know all the variables.

What is the nature of your cash flow?
You're currently paying about $2.7k a month in debt servicing. Presumably, this is after paying necessities like food and shelter. Is this sustainable, or is your income seasonal or in some other way at risk? Is your total credit card debt going down or are you just paying the minimums?

Is the loan secured or unsecured?
If the loan is secured against say a truck then the impact to your credit is probably negligible. The loan can be recouped by just seizing the truck. However, if that truck is required for your job then securing your livelihood might be a more important goal than minimizing your credit score.

Does the loan even allow prepay?
I had a student loan which did not and I paid a big chunk of money only to discover I didn't save a penny of interest and lost out on hundreds or even thousands of dollars of investment potential.

What are the interest rates?
If you have a 0% or low intro rate, it might save you money in the long run if you put the money in an interest bearing account for now and paying it off once the intro is over. Otherwise, generally you want to pay the highest interest first.

What is your credit card utilization?
AZEO is generally a good score hacking technique, but I think if the one card is at 90% then you're probably better off spreading it out over a few cards.

I know your stated goal was maximizing your credit score. I also recommend trying to keep enough cash on hand to cover 3-6 months of expenses. You might be able to do this while also significantly increasing your score.

Re: Paying off Credit Cards or Loans First for Biggest FICO Boost?

805orbust — Mon, 29 Aug 2022 02:54:03 GMT

Totally agree with @Aim_High and @CreditMarathoner . I'd like to add that credit card utilization makes, or breaks scores. To maximize scores? No brainer... pay off the cards.

However I'd eat froot loops or rice and beans for a while to payoff that remaining $30k. That's a high payment for the balance if it's not a nearly done mortgage.