topic Re: Pay off installment loan or 4 credit cards in General Credit Topics

Pay off installment loan or 4 credit cards

Anonymous — Sat, 05 May 2018 12:21:25 GMT

I started working a part time job and I have some extra money coming in. I would like to be approved for a home loan next March. However, I have a mountain of debt and need to pay it down. The problem is I don't know if I should focus on my DTI or my credit score for the greatest impact and in order to get approved for a home loan of about $300,000 which is needed here in Northern VA. Which should I pay down first to achieve this? Thank you for your help.

Installment Loan-$505 a month, 27 months remaining, 12% interest

Credit card 1- balance $7300, 21% interest, minimum $110, limit $9000

Credit card 2-balance $7100, 23% interest, minimum $79, limit $8500

Credit card 3-balance $1400, 24% interest, minimum $49, limit $4500

Credit card 4-balance $1300, 24% interest, minimum $29, limit $6500

I've also been saving for a down payment so I have $5100 in savings but I would hate to use this to pay down debt even though I know it's a better use of the money. So hopefully a scenario where I won't have to tap into this.

Re: Pay off installment loan or 4 credit cards

Anonymous — Sat, 05 May 2018 02:31:17 GMT

You don't indicate the credit limit for each card, which is crucial before anyone can advise you.

We also need to know whether these four cards are your only revolving accounts.

Re: Pay off installment loan or 4 credit cards

Anonymous — Sat, 05 May 2018 04:25:09 GMT

OP, it looks like you have around $17k in revolving debt and $5k that you can put toward it (or any debt) currently. When it comes to utilization and score impact, only a specific point in time matters. If you're going for a home loan around 10 months from now, so long as you have everything paid off/down to idea levels within 8-9 months you'll possess the same score [with respect to utilization] as you would if you paid them all off today. My question for you is when thinking realistically, how much of that debt do you believe you can pay down in the next 8-9 months?

CGID asks a very important question regarding the credit limits of your revolvers.

Re: Pay off installment loan or 4 credit cards

Anonymous — Sat, 05 May 2018 12:22:29 GMT

I added the info. Thanks for the heads up. And yes these are my only revolving accounts with a balance. The other two are store charge cards with $0 balances.

Re: Pay off installment loan or 4 credit cards

Anonymous — Sat, 05 May 2018 12:28:17 GMT

I'm bringing in an extra usually $2500 a month, no less than this but sometimes $100 -200 more here or there. I've been working now 3 months so that's how I saved the $5100. I feel like I should save some for my down payment as it comes in; so save $1000, $1000 towards debt and the rest as extra spending money? Correct me if I'm wrong for this thinking.

Re: Pay off installment loan or 4 credit cards

601flyguy — Sat, 05 May 2018 14:10:27 GMT

What % of the loan is paid? I'd focus on the cards first. I would pay off cc3, cc4, and pay some on cc1 or 2. That would lower cc util some and the interest being paid.

Re: Pay off installment loan or 4 credit cards

Anonymous — Sat, 05 May 2018 14:39:29 GMT

Continue to make all payments for all accounts on time. Put some of your extra money into an emergency fund (savings account) to ensure that you never are in a situation where you have to be late on a payment. You already have 5k so you are set there.

That said, make no extra payments on the loan.

Do, however, make payments on the credit cards. Always make more than double the minimum payment on every card, given that your cards have such high balances. Making more than double will send a message to your creditors that your are serious about paying down your debt. Making only the minimum can be construed by a creditor as a person who is high risk.

You should develop five different plans. I'll call them plan 1, 2, 3, 4, and 5. Plan 1 focuses almost all of your extra money on paying off your CC debt. Plan 2 focuses most of your extra money on paying off your CC debt, but still saves some of it toward your down payment. Plan 3 splits it 50/50. And with Plan 5 you are only making double the MP and saving mostly toward the down payment.

Compare all five plans and see how much CC debt you have and how much money toward the DP at the end.

I will tell you know that you should scrap plan 4 and 5, but you should still sketch them out. If it turns out that you need to implement plan 4 or 5 to have enough DP money, that's a sign that you shouldn't buy a house.

My personal bias will be a plan that succeeds in getting all CC debt paid off (with one card showing a small positive balance). But you need to crunch the numbers to see what is right for you.

All of the cards have a similar interest rate so there is no advantage to paying one of sooner right now (more than the other). But eventually you want all cards at $0 with one card showing a balance of < 29% of its credit limit. Better still would be all cards at $0 with one showing a small positive balance (like $15).

Re: Pay off installment loan or 4 credit cards

Anonymous — Sat, 05 May 2018 18:09:12 GMT

Thank you so much to all the contributors and an extra special thank you to Great Guy in Dixie for taking the time to give me the plans and options. I at least know for sure not to focus on the installment loan which honestly that's where I was going to start before the advice. You're right about probably not being ready for a home but with rent at $1850 I assumed it would be a better use of my money. However, I listen to good advice because if I knew all the answers I wouldn't be on here so I honestly need someone to be tough and honest with me. I will start with plan 1 and begin with credit card 3 and 4 which should take a month and a half then do as you said and double my minimums on the other two. Then start on card 1. I feel like you have saved me. Thank you ALL for time and help!

Re: Pay off installment loan or 4 credit cards

Anonymous — Sat, 05 May 2018 18:43:41 GMT

Good for you, pal! You'll know the best plan as you work it out.

For what it is worth, I'd advise right away making a little more than double the minimum payment on every card. Don't adopt that later -- do it now. Here's own advise about priorities:

(1) Pay the double the minimum payment + one dollar on every card.

(2) With whatever you have left over, attack all cards that have an individual utilization of > 87%.

(3) When all cards are at < 87.00% then work on getting them to < 67.00%

(4) After that you can pay them down, however you like.

Final goals.... all are decent options:

(a) All cards at $0 except one, with the remaining card reporting $15.

(b) All cards at $0 except one, with the remaining card < 28.00%.

(d) All cards at $0, except two, with the remaining tw0 < 28.00%.

(A) is the best for your score. C and D are decent places to strive for, and they may be what you settle on if you need to save more for the downpayment. If you conclude that you cannot reach any of the four, then the home purchase may be wrong.

Re: Pay off installment loan or 4 credit cards

SouthJamaica — Sat, 05 May 2018 20:48:52 GMT

@Anonymous wrote:
I started working a part time job and I have some extra money coming in. I would like to be approved for a home loan next March. However, I have a mountain of debt and need to pay it down. The problem is I don't know if I should focus on my DTI or my credit score for the greatest impact and in order to get approved for a home loan of about $300,000 which is needed here in Northern VA. Which should I pay down first to achieve this? Thank you for your help.

Installment Loan-$505 a month, 27 months remaining, 12% interest
Credit card 1- balance $7300, 21% interest, minimum $110, limit $9000
Credit card 2-balance $7100, 23% interest, minimum $79, limit $8500
Credit card 3-balance $1400, 24% interest, minimum $49, limit $4500
Credit card 4-balance $1300, 24% interest, minimum $29, limit $6500

I've also been saving for a down payment so I have $5100 in savings but I would hate to use this to pay down debt even though I know it's a better use of the money. So hopefully a scenario where I won't have to tap into this.

1. I don't understand your point about DTI vs credit score. Any payments you make toward paying down your debt will help both.

2. Your mortgage scores will benefit most from moving all but one of your credit balances into the zero balance column. So the first thing to do is get rid of the balances on credit cards 3 and 4.

3. Then concentrate on getting credit cards 1 and 2 down to 28% or less.

Perhaps you're not ready to buy a house. Just because you can be approved for a mortgage doesn't mean you can afford it. Nowadays banks make loans more readily because they then 'securitize' them -- i.e. sell them off. They take no risk. So it really doesn't matter to them if you default down the road or not. My advice is to wait until you're sure you can afford to buy a house.

Re: Pay off installment loan or 4 credit cards

kshurika — Sat, 05 May 2018 23:16:03 GMT

I agree with SouthJamaica and a few others that you're not ready to buy a house (no "perhaps" about it). You will just dig yourself into a deeper hole until the debt becomes so onerous you won't be able to do renovations to your house, or even to enjoy it. Your $5,100 is being eaten alive by the high interest you're paying on your credit cards. You may think you have a small amount saved towards the future down payment on a house, but, right before your very eyes that amount is getting smaller and smaller with every passing day that you're accruing such huge interest.

I tried to read the various multilevel plans presented to you under this topic but, because I have some form of ADD, I quickly went into the MEGO state (My Eyes Glaze Over). So, presented here for your consideration is Plan K:

1. Throw every cent of your $5,100 at your CC debt immediately, starting with the highest interest cards. Get rid of 30% of that debt in one flash. Watch your Util go down and your credit scores go up.

2. Don't incur any more CC debt. Self-control is needed here.

3. You don't need a safety cushion now. Your amount of CC debt deflates that cushion instantly. You have the beginnings of a bottomless financial pit that so many have dug for themselves (but you're not there yet; not even close). You need to pay off debt and not acquire new debt. Then, embroider your safety cushion.

4. Go to a bank or CU and inquire about a consolidation loan that would pay off in full the remainder of your CC debt and greatly reduce the interest you pay. This will not only get your finances under better control; it will eventually raise your credit scores even more.

5. With the same discipline you've shown to save for a house, make a plan to reduce whichever of your two installment loans has the higher interest.

6. With steps 1 through 5 completed fully and your other installment debt under control, start saving for and shopping for a house. You'll sleep in it peacefully.

Plan K is drastic, but it will save you a lot of money and grief. Best of luck.

Re: Pay off installment loan or 4 credit cards

Anonymous — Sun, 06 May 2018 00:02:58 GMT

Deciding to apply for a mortgage while you have CC debt isn't a smart move IMO. Simply pay off the CC debt first, then move on to the mortgage. From the sounds of the OP, this may only actually take a handful of months (say 6, tops) longer to accomplish based on his CC debt and income that he has available to put toward it. Not only would it look better going into the mortgage app with no CC debt (better profile, better scores) but it would just "feel" a lot better on your end not having any CC debt weighing on your mind when you're now taking on a monthly mortgage payment.

Re: Pay off installment loan or 4 credit cards

kshurika — Sun, 06 May 2018 00:22:27 GMT

BBS said it a LOT more concisely than I did.

Re: Pay off installment loan or 4 credit cards

Anonymous — Sun, 06 May 2018 10:54:50 GMT

Wow lots of great info here. I'm listening and I really appreciate it. The consensus seems to be I am not ready for a house. That really stings but I get the reasoning behind it. I did the "is it better to rent or buy" calculator and it told me buying is best. I'll take personal, human advice over the computer. So I'm going to take $3000 of the $5000 TODAY and put it on credit cards 3 and 4. I put my credit cards on ice 3 months ago when I started this plan so I won't make any new debt. I know I should use the entire $5000 but its honestly a mental thing seeing it in my account. If I'm being incredibly irrational (or dumb) about that, throw the hard truth at me and I'll reconsider. But if its okay to leave the $2000 I just won't add any more money to it until all the debt is clear. With my next paycheck, I'll focus on card 1.

Thank you Kshurika for plan K and to BBS for telling me a big NO on the house. I need honesty and tough words. I'll update my progress in 6 months.

Re: Pay off installment loan or 4 credit cards

HeavenOhio — Sun, 06 May 2018 13:12:40 GMT

@Anonymous wrote:
I at least know for sure not to focus on the installment loan which honestly that's where I was going to start before the advice.

Credit card debt is much more harmful to one's score than installment debt. I'd surmise that it's because credit cards are a "help yourself" kind of debt while a loan has been vetted by a computer, a banker, and the customer to make sure that it fits into one's budget. Loans seem to be relatively neutral in terms of scoring, and when they're mostly paid off, they can actually become a positive.

Note that paying off one's only installment loan entirely can hurt several flavors of FICO scores, including FICO8 and (I believe) one of the mortgage scores. If you feel inclined to put extra money toward your loan once your card debt has been addressed, make sure you come back here for advice on the best way to do it.

Re: Pay off installment loan or 4 credit cards

dynamicvb — Sun, 06 May 2018 21:01:09 GMT

It sounds like you have decided to wait on the house, which I think is probably a good idea. I also agree with everyone saying to pay down your highest interest cards to get that utilization down.

the one thing I have not seen mentioned is for 300k, you would need around 10.5k for a down payment on an FHA which I believe is about the lowest DP on any of the convential loans and you could need 15-20% down depending on the bank. There may still be banks that will do the zero down on a mortgage, but I’ve come to the conclusion that just does not make good sense from a personal finance stance. Then there are also closing costs, moving expenses, etc that are also involved. Not to mention you will want a new living room or bedroom to go with it. Blinds decorations, etc.

i would factor in all these types of items into the mix too.

Re: Pay off installment loan or 4 credit cards

Anonymous — Sun, 06 May 2018 23:48:26 GMT

@AnonymousThe consensus seems to be I am not ready for a house.

Not ready may be putting it a bit harsh, as it gives a tone (IMO) that you may not be ready for a while. A better phrase I feel would be you aren't in the best [financial] position for a house at this moment. Realistically it seems like you could have that debt squared away in 6 months, maybe even sooner. I'd say you aren't far off from being in a good place, so I'd look at this as more of a positive thing rather than a negative one.