topic Re: High utilization rate in General Credit Topics

High utilization rate

Anonymous — Mon, 07 Dec 2015 02:03:58 GMT

So I'm thinking of using 70% of my credit line to take advantage of 0% interest offer I currently have and lower my student loan. I owe 33k and was planing on putting down 10k and taking 8k with my Freedom card. That way I can pay the 8k during a period of 1 year without acquiring interest , plus I get to lower my loan debt to 15k. The problem I'm seeing is that my credit score will get a hit because I will be using 8k out of 11k.

Is this a smart move?

Re: High utilization rate

Anonymous — Mon, 07 Dec 2015 02:09:59 GMT

On other thing is, should I pay the 10k in one payment now or split it in two? I'm not sure if lowering my loan that fast will affect my score in a negative way.

PS I was thinking this month 5k and the next month 5k

Re: High utilization rate

Anonymous — Mon, 07 Dec 2015 02:23:35 GMT

If you spike your utilization rate that high very suddenly, you may risk AA from a lender, either the lender on the card with high utilization, or another card from a different lender who sees the utilization spike and becomes worried. People have done it before, and it doesn't mean automatic AA, but there is always a possibility.

Re: High utilization rate

Anonymous — Mon, 07 Dec 2015 02:30:42 GMT

AA?

Re: High utilization rate

Anonymous — Mon, 07 Dec 2015 02:32:33 GMT

What about going up to 8k but little by little? Let's say 2k per month or 1k every 2 weeks, etc.

Re: High utilization rate

Anonymous — Mon, 07 Dec 2015 03:09:14 GMT

AA is adverse action (i.e., canceling your card or cutting your credit limit)

Re: High utilization rate

Anonymous — Mon, 07 Dec 2015 03:11:54 GMT

An 8k increase in your utilization and what you owe is a sizeable increase no matter how you look at it. It is hard to predict how the lender on that card and your other lenders will view that. Realistically, it could result in everything being fine or there could be AA. It's happened both ways with people on the board here. No one can tell you for certain in advance.

Re: High utilization rate

Anonymous — Mon, 07 Dec 2015 04:41:08 GMT

Well I could just lower the amount to 5k. That's 45% instead of 70%. Once I lower the balance to 2k I can bump it up to 5k again. I'm just trying to lower the principal balance of my loan so I can lower the amount of interest acquired.

Re: High utilization rate

Anonymous — Mon, 07 Dec 2015 05:07:45 GMT

What's the interest rate on the student loan? And what sort of transaction fee to you have to pay for the balance transfer?

Re: High utilization rate

Anonymous — Mon, 07 Dec 2015 12:34:19 GMT

varies from 3.xx% to 6.xx%. I curently have 0% fee for purchases and balance transfer (12 month remaining)

Loan Type

Direct Subsidized Stafford

Principal Balance *

$3,000.00

Interest Rate

3.150%

Loan Type

Direct Unsubsidized Stafford

Principal Balance *

$4,012.86

Interest Rate

6.550%

Loan Type

Direct Subsidized Stafford

Principal Balance *

$5,579.35

Interest Rate

3.150%

Loan Type

Direct Unsubsidized Stafford

Principal Balance *

$3,451.36

Interest Rate

6.550%

Loan Type

Direct Subsidized Stafford

Principal Balance *

$5,590.07

Interest Rate

3.610%

Loan Type

Direct Unsubsidized Stafford

Principal Balance *

$7,384.04

Interest Rate

3.610%

Loan Type

Direct Subsidized Stafford

Principal Balance *

$1,833.00

Interest Rate

4.410%

Loan Type

Direct Unsubsidized Stafford

Principal Balance *

$2,396.87

Interest Rate

4.410%

Re: High utilization rate

takeshi74 — Mon, 07 Dec 2015 13:07:24 GMT

@Anonymous wrote:
I curently have 0% fee for purchases and balance transfer (12 month remaining)

Make sure you're considering both the BT APR and fee. Your post above makes it sound like you're conflating the two.

Re: High utilization rate

Anonymous — Mon, 07 Dec 2015 13:26:00 GMT

The offer is 0% APR and 0% BT

Re: High utilization rate

Anonymous — Mon, 07 Dec 2015 16:05:04 GMT

Given that you have a 0% APR and no BT fees (or any other similar transaction fees) it sounds like a reasonable plan, assuming that you use it to clear just the high interest loans. If you pay those off completely early, then you no longer have to make installment payments on them, which money now goes into paying off the 0% balance, etc. If you have an average balance of $4000 throughout the year on the 0% account it sounds like you might be getting $240 out of this whole deal. (6%?)

On the other hand this whole approach only works if you have a bunch of extra cash coming in throughout the year (that you are using to pay down the 0% card). And if you have a lot of extra cash, you could be using that to simply pay off the high interest loans as the money came in, without any special cleverness with a 0% account. A simpler approach like that would also save you a lot of interest.

So if I were you I'd compare the two strategies with a spreadsheet as a month by month projection. You may discover that the 0% Card strategy ultimately saves you maybe $80 more than the other. In which case maybe it is simpler just to pay off high interest loans with extra cash as it comes in.

Re: High utilization rate

Anonymous — Tue, 08 Dec 2015 01:28:33 GMT

@Anonymous wrote:
Given that you have a 0% APR and no BT fees (or any other similar transaction fees) it sounds like a reasonable plan, assuming that you use it to clear just the high interest loans. If you pay those off completely early, then you no longer have to make installment payments on them, which money now goes into paying off the 0% balance, etc. If you have an average balance of $4000 throughout the year on the 0% account it sounds like you might be getting $240 out of this whole deal. (6%?)

On the other hand this whole approach only works if you have a bunch of extra cash coming in throughout the year (that you are using to pay down the 0% card). And if you have a lot of extra cash, you could be using that to simply pay off the high interest loans as the money came in, without any special cleverness with a 0% account. A simpler approach like that would also save you a lot of interest.

So if I were you I'd compare the two strategies with a spreadsheet as a month by month projection. You may discover that the 0% Card strategy ultimately saves you maybe $80 more than the other. In which case maybe it is simpler just to pay off high interest loans with extra cash as it comes in.

Can you explain where the $240 comes from? Why would I only save that amount since the per diem interest is based on the principal balance (Per diem = principal balance*interest rate/365). It would make a big difference a principal balance of 33k to 15k. I don't see how 18K less would save me only $240. If I would drop the balance to 15k I would be acquiring ~$3 of interest per day. So i would have to pay more than $3*30=$90month to bring down the principal balance. If I would leave the balance at 33k it would be ~$6, making it $6*30=$180month minimum. In other words, less interest acquired and faster I can repay the loan. That's why I wanted to use the cc to bring down the principal balance and I don't have to worry on getting any interest on the cc balance. Am I missing something? any help would be nice.

Re: High utilization rate

Anonymous — Tue, 08 Dec 2015 02:59:20 GMT

It's possible I misunderstood your plan. Your original post said this:

I owe 33k and was planing on putting down 10k and taking 8k with my Freedom card. That way I can pay the 8k during a period of 1 year without acquiring interest , plus I get to lower my loan debt to 15k. The problem I'm seeing is that my credit score will get a hit because I will be using 8k out of 11k.

In the subsequent discussion you seemed to reinforce the idea that the total amount that might go on the 0% card is 8k (you later said it might be less).

So here is how I understood your plan. It sounded like you had 10k in cash right now, which you were planning to use right away to pay down some of the debt. (You are "planning on putting down 10k....") Then you are planning to put an additional 8k of debt on a 0% card, and pay that steadily off over a 1 year period (all while making payments on the existing loans).

Let me know if I misunderstood your plan -- and if I did misunderstand you, what you meant.

I ignored the initial 10k piece, because you can do that whether you use the addititional strategy about the 0% card or not. But certainly I do agree that paying off 10k of debt will save you interest on the loans you pay off with the 10k.

Instead I focused only on the strategy of 8k going on a card for a year. If you put 8k on the card on day 1 and gradually pay it off by day 365 in even increments, that will give you an average balance of $4000 on the card for the whole year. If we say that you would have spend 6% of interest on that 4k during that year, had the 4k remained locked up in loan principal, then you are saving yourself $4000 * 6% = $240.

The 0% card strategy saves you $240 in other words. Rethinking it, I was assuming that you would have had 6% loans left after the initial 10k payoff, but I think I may have been optimistic. It looks to me like the highest interest loans would be paid off in the initial 10k payoff, so perhaps a better estimate is $4000 * 4% = $160.

Again, I may have misunderstood the big arc of your plan. Happy to discuss it further if you want -- or not! Best wishes....

Re: High utilization rate

Anonymous — Tue, 08 Dec 2015 04:07:11 GMT

@Anonymous wrote:
It's possible I misunderstood your plan. Your original post said this:

I owe 33k and was planing on putting down 10k and taking 8k with my Freedom card. That way I can pay the 8k during a period of 1 year without acquiring interest , plus I get to lower my loan debt to 15k. The problem I'm seeing is that my credit score will get a hit because I will be using 8k out of 11k.

In the subsequent discussion you seemed to reinforce the idea that the total amount that might go on the 0% card is 8k (you later said it might be less).

So here is how I understood your plan. It sounded like you had 10k in cash right now, which you were planning to use right away to pay down some of the debt. (You are "planning on putting down 10k....") Then you are planning to put an additional 8k of debt on a 0% card, and pay that steadily off over a 1 year period (all while making payments on the existing loans).

Let me know if I misunderstood your plan -- and if I did misunderstand you, what you meant.

I ignored the initial 10k piece, because you can do that whether you use the addititional strategy about the 0% card or not. But certainly I do agree that paying off 10k of debt will save you interest on the loans you pay off with the 10k.

Instead I focused only on the strategy of 8k going on a card for a year. If you put 8k on the card on day 1 and gradually pay it off by day 365 in even increments, that will give you an average balance of $4000 on the card for the whole year. If we say that you would have spend 6% of interest on that 4k during that year, had the 4k remained locked up in loan principal, then you are saving yourself $4000 * 6% = $240.

The 0% card strategy saves you $240 in other words. Rethinking it, I was assuming that you would have had 6% loans left after the initial 10k payoff, but I think I may have been optimistic. It looks to me like the highest interest loans would be paid off in the initial 10k payoff, so perhaps a better estimate is $4000 * 4% = $160.

Again, I may have misunderstood the big arc of your plan. Happy to discuss it further if you want -- or not! Best wishes....

yup that's basically it.... 10k now, 5-8k to the cc, pay the cc in 1 year and keep paying the loan. That way if I keep paying my monthly payments to the loan, more will go to the principal balance (need to find out if the monthly payment quntity will change due to a drastic change in the loan balance)

Does this makes sense: if the balance is $33,300 at a per diem of ~$6 in one (1) month I will acquire $180 in interest and with a balance of $15,000 at a per diem of ~$3.25 in one (1) month I will acquire $97 in interest (using same interest rate). That's a difference of $83 of less interest. So, is it really a saving of $160-240 or a bit more?

Re: High utilization rate

Anonymous — Tue, 08 Dec 2015 05:09:58 GMT

It sounds like you are factoring in the benefit you get from paying off a big chunk of your debt with the 10k in cash you have now.

Nobody is doubting that you will save yourself a lot of interest by paying off a big chunk of your debt with that 10k. That's certain. Indeed, the best strategy is to use the 10k to pay off the two loans on which you pay the most interest (6.55%) and another loan that is next highest (4.41%). Those three loans together are about 10k.

So imagine you do that next week, since that's indisputably the right move. You will then be paying much less interest, partly because the capital has gone down but also because the remaining loans are costing you interest at a lower rate (mostly 3.1% and 3.6%).

The question now is how much you'd save by paying off a comparatively low interest loan with money from your 0% account. That is the question you are bringing to the table, not the question of whether you will benefit from using the 10k of cash you have in hand now to pay off higher interest loans.

It's not hard to figure out. The way to do it is to look at how much money on average will be sitting inside your 0% loan (the card) throughout the year, compared to how much you would have paid on the same money in your loans. If $8000 starts on the card on Day 1 and you steadily pay it off by Day 365 in even amounts, then the average amount on the card that year was $4000. If that $4000 had sat inside one of your loans, it would cost you $4000 * 4% = $160. (That assumes a loan at 4%, though the actual amount might be closer to 3.6%.)

That's how much you will benefit from the 0% card strategy.

But it seems clear to me that, for that strategy to work, you must be bringing in a good monthly income, where you can afford to pay off an additional 8k from the card in the next year. So a different and simpler strategy is to simply take that 8k in income, as it comes in, and pay down your loans with it. This will also save you some interest. Exactly how much I can't be sure -- maybe $80?

So the total amount of money you'd be saving with the 0% card -- compared with just paying off loans as your money comes in -- as not very much, as far as I can see.

Re: High utilization rate

empiror22 — Tue, 08 Dec 2015 18:26:16 GMT

I agree with Dixie. The math is not as simple as he made it but the numbers are close enough that its a great ball park of savings. I had a similar amount of school loans and basically i Paid down my 6.8% loans first (in a lump sum) then i made a few large payments early to bring the debt lower. So instead of ten years and 10k in interest its like 3-4 years and about 2k in interest. I made an excel sheet that i used with my numbers (very similar to you), if you paid 10k today and paid the extra $667 a month (8k/12=667) versus the 18k now (10k cash, 8k on card, still have to pay 667 a month) The difference between the two plans is between $200-$400 over the life of the loan (10 years). basically you will only save a few hundred dollars with the credit card method and always run the risk of missing a pay date or don't pay off in time and then the interest is counteractive to day one of balance transfer.

Me i just paid big upfront Hight interest loans first, paid monthly lowest balance highest interest first. Ill be done in about another year and half or so.