topic Re: Best Utilization plan in Rebuilding Your Credit

Best Utilization plan

tim1017 — Wed, 12 Nov 2014 16:48:29 GMT

I currently have three credit cards with high util (90ish %). I want to get them down but was curious on what would be the best way to gain increases in my scores while paying them down? Pay one off now, split the payments equally, start with the highest apr, start with the highest balance, start with the lowest balance? I have roughly $1300 I can put toward the following balances

1. $1,435 Balance, Limit $1,500 (secured), 18%

2. $2,181 Balance, Limit $2300, 19%

3. $251 Balance, Limit $400,

What plan of action would you suggest? Again my goal is to get the max out of the $1300 toward these. My gut says, pay off 3, pay down 1.

Re: Best Utilization plan

Anonymous — Wed, 12 Nov 2014 17:03:07 GMT

I would say get all three well below 90% first. Number 3 is not in bad shape, so I would split the $1300 between 1 and 2. After that work on the highest interest rate balance first. Once you get all of them below 10%, keep two of them paid in full and let one carry a small (<10%) balance.

Keep in mind that UTI has no 'memory', so whatever you do this month has no bearing on what things will look like next month.

Re: Best Utilization plan

Anonymous — Wed, 12 Nov 2014 17:07:32 GMT

I'm in the same boat only with much higher balances

I'm interested to see the replies. There are two ways to go: First you can pay off the lowest balance and then add what would've been that card's minimum payment to the next lowest balance the next month, and so on. This way, you'll probably pay off everything sooner.

However, if you just have on lump sum of cash, you're probably better off paying down on the highest APR first. This saves you the most in interest expense assuming you either a). won't be able to, or b). for whatever reason, won't want to, make extra payments in the future.

Of course, you can use an online loan calculator to figure out what the most cost efficient way is. The problem is, cost efficiency isn't always more advantageous than time. In other words, you migh want to forgo some extra costs in order to get your utilization down in a more timely manner. That's just my two cents, but I'll be interested to see what others say. Good luck!

Re: Best Utilization plan

Anonymous — Wed, 12 Nov 2014 17:15:22 GMT

This is informative. Are you saying that untilization scores are not based on total utilization, but on individual utilization?

IOW - It doesn't go by a percentage of total credit balance/total credit lines? So if you have a $9900 balance on a $10k credit line, and two $470 balances on $500 credit lines, and you pay off $9800 on the $10k line, you will have a poorer utilizattion score than if you had paid off the two $500 balances?

Re: Best Utilization plan

Anonymous — Wed, 12 Nov 2014 17:57:48 GMT

Scorewise its probably *nearly* the same... BUT my personal preference would be to keep all of the cards well below max limit. The interest rates are not that much different, so dollarwise its not a huge difference in interest.

Re: Best Utilization plan

Anonymous — Wed, 12 Nov 2014 19:41:48 GMT

@Anonymous wrote:
This is informative. Are you saying that untilization scores are not based on total utilization, but on individual utilization?

IOW - It doesn't go by a percentage of total credit balance/total credit lines? So if you have a $9900 balance on a $10k credit line, and two $470 balances on $500 credit lines, and you pay off $9800 on the $10k line, you will have a poorer utilizattion score than if you had paid off the two $500 balances?

The number used by FICO to score utilization is your overall utilization but scoring looks at both.

High overall utilization can hurt but so can high individual account utilization.

Re: Best Utilization plan

RobertEG — Wed, 12 Nov 2014 22:31:30 GMT

Scoring is of both overall % util, and the util of each individual card.

The weighting of overall and individual % util is part of the proprietary nature of the trade secret algorithm, but anecdotal experience seems to be that overall % util counts more than the combined effect of each undivid card.

Obviously, overall % util is affected the same, regardless of which account a payment is applied to.

However, since % util is not scored linearly, meaning that the same increase or decrease at high util levels has more scoring impact than at lower util levels, which card you apply payment to can make a difference in the combined scoring of individ cards.

Paying against the higher % util card will thus usually give greater improvement.

Two other non-scoring factors, however, come into play.

First is that, from a purely financial point of view, applying payment to the higher % APR card as opposed to the highest current % util card, makes the most sense.

Second, keeping an account at high % utils over an period of time may result, as the util is paid down, in the creditor also reducing your CL on the card if they are concerned about the risk of your maintaining high utils. In that event, paying down a card could result in no improvment in % util. Thus, you miight give a bit more emphasis to high util accounts if the util has remained high over a period of time......

Re: Best Utilization plan

tim1017 — Wed, 12 Nov 2014 22:45:34 GMT

@RobertEG wrote:
Scoring is of both overall % util, and the util of each individual card.
The weighting of overall and individual % util is part of the proprietary nature of the trade secret algorithm, but anecdotal experience seems to be that overall % util counts more than the combined effect of each undivid card.

Obviously, overall % util is affected the same, regardless of which account a payment is applied to.
However, since % util is not scored linearly, meaning that the same increase or decrease at high util levels has more scoring impact than at lower util levels, which card you apply payment to can make a difference in the combined scoring of individ cards.
Paying against the higher % util card will thus usually give greater improvement.

Two other non-scoring factors, however, come into play.
First is that, from a purely financial point of view, applying payment to the higher % APR card as opposed to the highest current % util card, makes the most sense.
Second, keeping an account at high % utils over an period of time may result, as the util is paid down, in the creditor also reducing your CL on the card if they are concerned about the risk of your maintaining high utils. In that event, paying down a card could result in no improvment in % util. Thus, you miight give a bit more emphasis to high util accounts if the util has remained high over a period of time......

Excellent explanation! Card #1 is a secured card so I think maybe the chances of that cards limit being reduced is minimal. So if my math is correct I will get a better impact by reducing the balance on #1.

Re: Best Utilization plan

StartingOver10 — Wed, 12 Nov 2014 23:25:14 GMT

@tim1017 wrote:
I currently have three credit cards with high util (90ish %). I want to get them down but was curious on what would be the best way to gain increases in my scores while paying them down? Pay one off now, split the payments equally, start with the highest apr, start with the highest balance, start with the lowest balance? I have roughly $1300 I can put toward the following balances

1. $1,435 Balance, Limit $1,500 (secured), 18%
2. $2,181 Balance, Limit $2300, 19%
3. $251 Balance, Limit $400,

What plan of action would you suggest? Again my goal is to get the max out of the $1300 toward these. My gut says, pay off 3, pay down 1.

This is my opinion only:

I would pay off card #3 to zero. Then pay $1000 toward card #2.

Then you have two cards you are working on - card 1 and card 2 to reduce their balances, both need to have reductions but I think you will see a very good jump with having at least one card report zero and another card below 50%. Then you can get the other card down (its secured so it is less risky to the lender) next month if possible.