topic $ Gift and how to best use it in Rebuilding Your Credit

$ Gift and how to best use it

Montylicious — Sun, 15 Jul 2012 02:32:46 GMT

Hello, this is my first post, brand new to myFico.

I just received a cash gift of $5k from a relative and I am trying to figure out the best way to apply it toward my debt. I have two remaining cards that are at 90% or higher balances. A Discover with a $7,400 limit and a balance of 6,900 and a BofA Visa with a $5k limit and a $4,700 balance. My thought was to pay $3,200 toward the latter to get that below a 30% balance to max, and the remaining amount plus a little extra from other funds to get my Discover below 80% as well.

Will this approach make the most sense?

I see on the thread most people suggesting to get below 9% which I could do on the Visa but it would leave the Discover still with a very high balance.

Thank you for taking the time to read this!

Monty

Re: $ Gift and how to best use it

sge760 — Sun, 15 Jul 2012 05:52:36 GMT

In regards to utilization in the score, I believe the amount you pay will have the same effect no matter where you apply it. Your current utilization is around 93%, so paying the $5000 would drop it down to 53%.

So I guess your answer depends on your end goal.

If those were my debts, I'd pay down the credit card with the highest interest rate first.

Re: $ Gift and how to best use it

Anonymous — Sun, 15 Jul 2012 06:29:51 GMT

I agree, pay the one with the highest interest rate.

Re: $ Gift and how to best use it

marty56 — Sun, 15 Jul 2012 11:57:21 GMT

From a FICO prospective, the debt snowball approach is the best. if you are trying to save money, paying the CC with the highest interest rate first is the way to go. Finally you could pay down your oldest or most useful account first to protect it from AA.

Re: $ Gift and how to best use it

rckstrscott — Sun, 15 Jul 2012 12:06:45 GMT

I agree with the snowball approach...

I mean, when you are far in debt, you clearly want to pay the highest interest cards first.

But FICO wise, it most certainly matter where you apply. If you can pay a lower card down all the way, you will get more points than if you paid 4 accounts partially.

Here is an Example:

Lets say your credit card make up looks like this. 8k balance on a 10k card, $500 on a $650 card, $500 on a $1k card and 1300 of a 2k card...

If you paid the small cards to 0, and showed 8k of a 10k card, and 0 on the other three, you will have a better score than if you had applied that $2300 dollars to the 8k balance instead of the three smaller balances..

But if the interest rate is 29 percent on the 8k balance, you need to forget FICO and pay it as far as you can.

In your situation, I would honestly pay the entire balance on the $5000 card so it reflects a 0. At least that is how i would do it.

-scott

Re: $ Gift and how to best use it

sge760 — Sun, 15 Jul 2012 15:28:07 GMT

Thanks Scott. I didn't realize that FICO perceives it in that way. I always thought it was a sum of all balances/limits.

Re: $ Gift and how to best use it

rckstrscott — Sun, 15 Jul 2012 15:47:35 GMT

@sge760 wrote:
Thanks Scott. I didn't realize that FICO perceives it in that way. I always thought it was a sum of all balances/limits.

Well, as with anything, YMMV -- but, with me, my scores are always better when I have all my cards but one showing a 0 dollar balance...

-scott

Re: $ Gift and how to best use it

Montylicious — Thu, 26 Jul 2012 20:18:24 GMT

Thank you for all the commentary everyone. I chose to pay off 4 cards, 3 with small balances ($600 or less, each) and one with a 2k+ ... This means, in the last few days I've gone from having 6 cards with balances down to 2 and do hope to see this reflected in a few weeks when I run another Equifax/ FICO check.

All of the input was greatly appreciated!

Re: $ Gift and how to best use it

sge760 — Thu, 26 Jul 2012 20:25:22 GMT

Way to go, Monty! Doesn't it feel great to relieve yourself of those debts?

Re: $ Gift and how to best use it

Montylicious — Fri, 27 Jul 2012 02:06:05 GMT

Yes, it does!

Re: $ Gift and how to best use it

Anonymous — Fri, 27 Jul 2012 13:20:30 GMT

Don't start putting balances back on those cards though!

Re: $ Gift and how to best use it

Montylicious — Sat, 04 Aug 2012 22:59:13 GMT

Score moved to 704 today with my changes First short term goal was met so set a new one. Thank you for the guidance all.