topic Re: Pay DOWN credit cards of pay OFF personal loan? in General Credit Topics

Pay DOWN credit cards of pay OFF personal loan?

Anonymous — Wed, 29 Jul 2020 11:23:53 GMT

Hi guys, I'm trying to improve my credit score by paying down my balances. I have a 3 year 10k personal loan that has 1 year and $3,700 balance left on it. The loan is at 15% I also carry a big balance across my credit cards. Averaging 17%. (3 cards with $7k balance and 10k limit each). I have $3,700 in cash and really wanna throw it at my loan just so I can be done with it.

But I recently read that paying off a loan completely doesn't give you as much of a credit score improvement as paying the same amount down on your cards. Some even said that paying off their loan completely actually reduced their score because it reduced the number of categories they are being scored on since it eliminated their installment category and only left them with revolving category.

i totally understand that it would be better to reduce the higher interest cards first before moving on to the lower categories, but throwing the 3.7k on the loan will finally make it go away. It's just really frustrating seeing that $327 has been auto debited from my checking account every 1st of the month, while the 3 $100 minimum payments on my cc's don't look as threatening/frustrating even though they add up to the same amount as the loan payment. Also reducing my credit cards by $1,200 each doesn't have the same effect and doesn't feel as motivating as killing the loan. More like a drop in the bucket.

Any thoughts on which payment would bring better score improvement?
And if it's all the same should I go with my brain and pay the cards or my gut and finish the loan?

Thank you all so much for your advice.

Re: Pay DOWN credit cards of pay OFF personal loan?

Brian_Earl_Spilner — Wed, 29 Jul 2020 12:07:45 GMT

Unless you're planning to app for something, do what makes fiscal sense instead of worrying about your score.

Re: Pay DOWN credit cards of pay OFF personal loan?

SouthJamaica — Wed, 29 Jul 2020 12:49:31 GMT

@Anonymous wrote:
Hi guys, I'm trying to improve my credit score by paying down my balances. I have a 3 year 10k personal loan that has 1 year and $3,700 balance left on it. The loan is at 15% I also carry a big balance across my credit cards. Averaging 17%. (3 cards with $7k balance and 10k limit each). I have $3,700 in cash and really wanna throw it at my loan just so I can be done with it.
But I recently read that paying off a loan completely doesn't give you as much of a credit score improvement as paying the same amount down on your cards. Some even said that paying off their loan completely actually reduced their score because it reduced the number of categories they are being scored on since it eliminated their installment category and only left them with revolving category.

i totally understand that it would be better to reduce the higher interest cards first before moving on to the lower categories, but throwing the 3.7k on the loan will finally make it go away. It's just really frustrating seeing that $327 has been auto debited from my checking account every 1st of the month, while the 3 $100 minimum payments on my cc's don't look as threatening/frustrating even though they add up to the same amount as the loan payment. Also reducing my credit cards by $1,200 each doesn't have the same effect and doesn't feel as motivating as killing the loan. More like a drop in the bucket.

Any thoughts on which payment would bring better score improvement?
And if it's all the same should I go with my brain and pay the cards or my gut and finish the loan?

Thank you all so much for your advice.

1. You don't say which scores you want to improve. FICO 8's and 9's, or mortgage scores? It makes a difference. For now I'll assume FICO 8.

2. You don't mention if this is your only loan. I.e., no mortgage, car loan, car lease, etc. I'll assume it's your only loan.

3. From a pure scoring perspective you'll get the single biggest bang in FICO 8 by paying the loan down to $900.

4. If you were talking mortgage scores, you'd get the biggest bang for your bucks by reducing the revolving balances.

All that being said, scoring isn't everything. It sounds to me like you would get a lot more satisfaction from removing the loan. That counts for something, too.

Re: Pay DOWN credit cards of pay OFF personal loan?

CreditInspired — Wed, 29 Jul 2020 14:20:36 GMT

@Anonymous wrote:
Hi guys, I'm trying to improve my credit score by paying down my balances. I have a 3 year 10k personal loan that has 1 year and $3,700 balance left on it. The loan is at 15% I also carry a big balance across my credit cards. Averaging 17%. (3 cards with $7k balance and 10k limit each). I have $3,700 in cash and really wanna throw it at my loan just so I can be done with it.
But I recently read that paying off a loan completely doesn't give you as much of a credit score improvement as paying the same amount down on your cards. Some even said that paying off their loan completely actually reduced their score because it reduced the number of categories they are being scored on since it eliminated their installment category and only left them with revolving category.

i totally understand that it would be better to reduce the higher interest cards first before moving on to the lower categories, but throwing the 3.7k on the loan will finally make it go away. It's just really frustrating seeing that $327 has been auto debited from my checking account every 1st of the month, while the 3 $100 minimum payments on my cc's don't look as threatening/frustrating even though they add up to the same amount as the loan payment. Also reducing my credit cards by $1,200 each doesn't have the same effect and doesn't feel as motivating as killing the loan. More like a drop in the bucket.

Any thoughts on which payment would bring better score improvement?
And if it's all the same should I go with my brain and pay the cards or my gut and finish the loan?

Thank you all so much for your advice.

Hi OP,

It is great that you have a lump-sum of money to pay toward whichever debt you choose to pay off/down. I do want to say I agree with Brian_Earl_Spilner to not worry about scores but what makes fiscal sense.

So , let's break it down:

the monthly interest you are paying on the loan is $46.25. So, $280.75 is gong toward principal (a huge plus)
the monthly interest you are paying on each CC is $98. Making minimum monthly payments of $100 only allow $2 toward principal So on three CCs that's $294 per month in interest payments only. YIKES!!!!

If it were me, I would gladly pay the $327/month for one more year.

IMO, I suggest taking the $3700 and putting it toward the CCs. So $1,233 on each card will leave a balance of $5,767. This way, the monthly interest payment on each card decreases from $98 to $80.74.

Just my 2cents anyway.

GL2U

Re: Pay DOWN credit cards of pay OFF personal loan?

ccquest — Wed, 29 Jul 2020 15:47:57 GMT

Financially, the best idea would be the highest interest rate. But for your mental well-being as you mentioned, I'd say go ahead with the plan to get rid of the the personal loan then use whatever your minimum was there to more rapidly pay down the credit card debt.

At the very least, you'll have decreased your DTI and be in a better position should things worsen for you and won't have to make that extra payment every month.

Re: Pay DOWN credit cards of pay OFF personal loan?

FlaDude — Wed, 29 Jul 2020 18:18:45 GMT

@Anonymous wrote:
Hi guys, I'm trying to improve my credit score by paying down my balances. I have a 3 year 10k personal loan that has 1 year and $3,700 balance left on it. The loan is at 15% I also carry a big balance across my credit cards. Averaging 17%. (3 cards with $7k balance and 10k limit each).
i totally understand that it would be better to reduce the higher interest cards first before moving on to the lower categories, but throwing the 3.7k on the loan will finally make it go away. It's just really frustrating seeing that $327 has been auto debited from my checking account every 1st of the month, while the 3 $100 minimum payments on my cc's don't look as threatening/frustrating even though they add up to the same amount as the loan payment. Also reducing my credit cards by $1,200 each doesn't have the same effect and doesn't feel as motivating as killing the loan. More like a drop in the bucket.

One advantage of paying off the loan is that it reduces your monthy mininum due a lot more than putting that same amount towards credit cards. Ideally you'd then take the money you're paying on the loan and put it to cards, but if finances get tighter for some reason, you'd have more cushion.

@CreditInspired wrote:
Hi OP,
It is great that you have a lump-sum of money to pay toward whichever debt you choose to pay off/down. I do want to say I agree with Brian_Earl_Spilner to not worry about scores but what makes fiscal sense.

So , let's break it down:
the monthly interest you are paying on the loan is $46.25. So, $280.75 is gong toward principal (a huge plus)
the monthly interest you are paying on each CC is $98. Making minimum monthly payments of $100 only allow $2 toward principal So on three CCs that's $294 per month in interest payments only. YIKES!!!!

It's scary that the CC companies can have min payments that barely pay the interest, I'd hate to see what the OP's statements say about how long it will take to pay off at mininum payments. Even so, I'd pay the loan, then take the money that is going to loan payments and apply that to the cards, starting with highest interest rate.

Re: Pay DOWN credit cards of pay OFF personal loan?

Anonymous — Wed, 29 Jul 2020 19:16:54 GMT

Hi Brian, yes I'm trying to apply for the (Chase) Amazon Prime credit card so I can get the 5% cash back on everything from Amazon.

Re: Pay DOWN credit cards of pay OFF personal loan?

Anonymous — Wed, 29 Jul 2020 19:24:58 GMT

Hi SouthJamaica,

Sorry for the gaps in my story.

1) Yes, looking to improve Fico 8. I'm trying to apply for the (Chase) Amazon Prime Rewards so I can get 5% cash back on everything from Amazon.

2) This is the only unsecured personal loan i have. But I also have a 5 year car loan with 4K balance and I think 2 years left. (Originally 15k). I'm not worried about that one since it's only at 1.99%

3)Interesting idea to pay the loan down to $900. Can you please clarify how does that help the most?

4) House is paid off

Thanks so much.

Re: Pay DOWN credit cards of pay OFF personal loan?

FlaDude — Wed, 29 Jul 2020 19:37:10 GMT

@Anonymous wrote:

2) This is the only unsecured personal loan i have. But I also have a 5 year car loan with 4K balance and I think 2 years left. (Originally 15k). I'm not worried about that one since it's only at 1.99%

That should satisfy the installment loan requirement, no need for it to be unsecured.

Re: Pay DOWN credit cards of pay OFF personal loan?

KLEXH25 — Thu, 30 Jul 2020 00:20:58 GMT

@Anonymous wrote:
Hi SouthJamaica,

Sorry for the gaps in my story.
1) Yes, looking to improve Fico 8. I'm trying to apply for the (Chase) Amazon Prime Rewards so I can get 5% cash back on everything from Amazon.

2) This is the only unsecured personal loan i have. But I also have a 5 year car loan with 4K balance and I think 2 years left. (Originally 15k). I'm not worried about that one since it's only at 1.99%

3)Interesting idea to pay the loan down to $900. Can you please clarify how does that help the most?

4) House is paid off

Thanks so much.

If you also have an auto loan, then you won't lose points for paying off the personal loan, since you'll still have a loan on your CR, satisfying credit mix. Generally, you'll see a score boost once a loan is paid down to 8.9% or less.

With that said, you'll also see point gains when you get each card paid below certain thresholds. So 68.9%, 48.9%, 28.9%, and then 8.9%. Even so, I wouldn't apply for anything until each of those cards are at least under 30%.

Re: Pay DOWN credit cards of pay OFF personal loan?

Anonymous — Thu, 30 Jul 2020 00:29:56 GMT

I'd pay off the personal loan and then use that extra $300 per month to pay off the CCs faster. I like to start with the smallest balance and pay it off, then work my way up. It doesn't necessarily maximize interest savings but it feels great and ultimately staying motivated is key.

And yeah don't apply for new credit cards when you're carrying balances. I love my Amazon Card for the 5% off but I don't carry balances. Focus on getting rid of the debt and then apply.

Re: Pay DOWN credit cards of pay OFF personal loan?

dogmeat — Thu, 30 Jul 2020 02:41:12 GMT

Actually, we have no idea how much of your minimum payment on your CCs is going towards interest, because we don't know the interest rate of the balances on those cards.

You pretty much answered your own question though. There is no "right" way here - other than to do what is right for you. Removing more "really frustrating" experiences from your life meets the criteria. Pay off the loan completely.

Re: Pay DOWN credit cards of pay OFF personal loan?

SouthJamaica — Thu, 30 Jul 2020 03:37:34 GMT

@Anonymous wrote:
Hi SouthJamaica,

Sorry for the gaps in my story.
1) Yes, looking to improve Fico 8. I'm trying to apply for the (Chase) Amazon Prime Rewards so I can get 5% cash back on everything from Amazon.

2) This is the only unsecured personal loan i have. But I also have a 5 year car loan with 4K balance and I think 2 years left. (Originally 15k). I'm not worried about that one since it's only at 1.99%

3)Interesting idea to pay the loan down to $900. Can you please clarify how does that help the most?

It won't help you at all. That was based on the assumption that you had only one loan. With the 2 loans you would get a score boost by getting the aggregate total of your loans down to 9%, or a total of $2250 between the 2 loans. FICO 8 gives you a bonus when you get your aggregate installment utilization percentage down to 9%. It can be a really big bonus in some profiles.

4) House is paid off

Congratulations.

Thanks so much.

Re: Pay DOWN credit cards of pay OFF personal loan?

Anonymous — Thu, 30 Jul 2020 19:42:35 GMT

There are a lot of good suggestions here, though some lean towards Finance over Fico. However, OP asked how to improve their score as it seems there's an upcoming app on the horizon.

With that i would say that paying down any balances will help as it lowers the UT sting. I would tend to think Banks are looking at your CC debt over installment debt when it comes to approving a person for a new card, because installments are fixed payments and will end. Especailly with yours in only a year. CC debt just keeps piling up with only minimum payments getting made, because you can jeep adding to that debt.

If you're looking purely to boost scores for a better rate i would probably pay down the CC's, and it makes better finacial sense IMO. The loan only plays into things if you're looking at a large puchase where DTI is going to factor in. Truthfully $327 isn't that much to pay for just a few more months, though you could always pay it down to 9% for a bigger boost. I just don't think it's going to make a big difference as CHase has set APRs for their products.

I don't think you even mentioned your current score, so all of this may not even be necessary. Which isn't the biggest factor in the decision, it's what is in your profile that matters most. However, like someone said paying off the loan would give you an extra $327 to put towards those card payments with one less bill to pay.

Re: Pay DOWN credit cards of pay OFF personal loan?

Heatt99 — Thu, 30 Jul 2020 20:55:57 GMT

If the money is a bonus or windfall, I would pay the CC, but if it is consistent income, I would pay the loan off, then add the extra to the cards.