topic Re: FICO Score: What to pay down first? in Rebuilding Your Credit

FICO Score: What to pay down first?

Anonymous — Sun, 14 Jan 2018 19:16:40 GMT

I answer this question every day so it's time for a thread I can link to in my "homework" signature links.

FICO Scores don't look at all debts equally

Most folks who are rebuilding are looking to snag a higher FICO score for one and only one reason: so they can qualify and get approved for either more credit, or better credit options. That's the #1 reason for rebuilding, and sometimes it has to do with a mortgage desired, other times people want more cash back, and some folks "need" credit to float a large purchase like furniture or a big TV or an engagement ring.

FICO scores don't look at all debts equally. From chargeoffs to collections to public records like judgments or liens or foreclosures, bankruptcies and repos, each of these debts is looked at differently in FICO. I'll be talking about FICO Score 8, the most popular "flavor" of FICO for credit card approvals, but all flavors of FICO look at debts differently. Remember there are many flavors of FICO, including FICO Auto Score, the popular mortgage scores, and many others.

To conquer debt, one must first conquer savings

My rules on paying down debt have helped a lot of folks out over the years, except for myself! I didn't follow my own message which is why I found myself in the FICO gutter from 2015-2017. My own FICO score caved in 2015 because of a card I cosigned for and then ignored. It went to chargeoff status within 7 months of me cosigning for it, but I didn't know for over a year after because I wasn't using credit since 2005 or so.

Before you can pay down debt safely, you really need to get on your emergency fund. I've discussed and guided and documented a lot of folks' credit rebuild and financial paths to wealth and all of the successes and failures in the process came down to one thing: can this person live without income during their rebuild and after?

If your emergency savings account is $0 right now, you are not rebuilding credit. Instead, you're just piling on more debt, and this is going to bite you once again. Rebuilding credit doesn't mean just boosting your FICO scores, getting a mortgage approval or financing that fancy car. Rebuilding credit doesn't mean paying off your student loans or getting your bankruptcy to fall off your reports. Rebuilding credit means learning what messed you up in the past, and never allowing that to happen again.

Everyone here who is rebuilding credit is in that position for one reason: you didn't have enough money for a short period of time to just pay your minimums. It wasn't the debt total that crushed you, it was the minimum payments that crushed you. Think about that for a moment and learn from it.

STEP 1: Emergency savings teaches you better credit

When you get your emergency savings account equal to just 1 month's income, you start seeing credit in a new light. You can lose your job tomorrow and be OK for 1 month. Doesn't sound all that great, does it? That's because if your emergency savings is LESS than 1 month, you won't even make it to the next month without creditors calling and harassing you.

So the first step in 'what to pay down first' is simple: if your emergency savings account is LESS than 1 month of income, pay that first. You aren't going to do any good paying off a chargeoff or high utilization or collection if you aren't protected from what may happen in the future. There's no debate that I've heard in many years that has overcome this. I don't care if your interest rates are 42% on $50,000 in student loans, if you don't have at least one month's emergency income, you're not doing anything but finding new ways to overextend yourself.

STEP 2A: Paying down debts that make sense to pay down

Some debts don't make sense to pay down because they lose your negotiation power or have zero effect on your FICO score. Collections reported on your credit reports don't matter if they're paid or not (this varies in FICO 9 but we're focusing on FICO 8 which is much more popular with lenders). So you can pay all your collection accounts to $0 and your score will go up 0 points.

The first step (after your 1 month emergency income fund) is to see what accounts are reported "over limits". There are 3 ways this can happen:

You have a chargeoff reported by the original credit (OC) showing any balance due
You have open credit cards that report a balance higher than the limit
You have loans that report a balance higher than the starting balance (for example, deferred student loans)

We can't do much for the 3rd group, so let's attack the first two. Chargeoffs may or may not accrue interest, but those balances are eviscerating your FICO scores. Open cards with overlimit balances are also cratering your FICO score, plus you may get new fees posted for being overlimit, plus you may anger your creditors who will be quick to lower your limits as soon as you pay them down.

My rule on paying down debt is never use more than 50% of your emergency savings to pay down chargeoffs, collections or overlimit cards, but attack overlimit cards first. If 50% of your emergency fund doesn't cover the amount you're overlimit, you need to work more, spend less or save more. Write this down if this is the case and post it on your computer monitor.

Remember that you may be overlimit on a card and pay down the difference and next month new interest posts taking you overlimit again and hitting you with new fees. So if you want to pay down an overlimit open account, pay it down to under limit plus also pay down whatever the interest posting will be. You can do the math to figure this out or ask for help in this thread.

STEP 2B: Overlimit open cards first, chargeoffs next

Now that your cards are no longer overlimit, your next step is to work on chargeoffs with balances. You are going to force yourself to never let your cards report overlimit again, so please make sure your future payments there are the minimum PLUS whatever interest might accrue. Also make sure to get your emergency income fund back to 1 month before continuing.

Once your emergency income fund is back to 1 month minimum, attack chargeoffs with balances. It doesn't matter WHICH accounts you pay, but pay them. I'd suggest paying each account equally to try to get the OC from selling or assigning the debt to a collection agency. Call the OC, tell them how much you have to pay THIS MONTH, and pay it. Don't make a payment arrangement yet until you've built your emergency savings account up past 1 month. If for some reason your emergency account is up to 3 months income, you are welcome to negotiate a payment arrangement with the original creditor.

Note: you are not using more than 50% of your emergency fund to pay down chargeoffs, and if you fall back to 50% of 1 month's income, you have to halt and get back to paying the minimums on open accounts while socking the rest into your savings account.

STEP 2C: Open card utilization

At this stage, you've paid all your credit cards so they're not overlimit. You've paid down all your chargeoff balances to $0. You've built up your emergency fund back to 1 month income.

The next step is to attack individual card utilization. This is not the "aggregate utilization" that MyFico or CCT reports. Snag a calculator out and type in any open credit card limit and hit the multiply button and type "0.689". So if your limit is $1000, type in "1000 x 0.689" and hit enter.

This is the number that each and every credit card (with different limits) needs to be under. 68.9% utilization. Go through each and every credit card you have and figure out which ones you can get below 68.9% right away. Remember that if you get charged interest and only pay down to 68.9%, on statement cut you will be OVER 68.9% again. So make sure to pay enough to get below 68.9% including whatever interest posts. Super important!

Once you've paid all your credit cards down to under 68.9% and your chargeoffs all report a balance of $0, you can expect a FICO score boost.

Your goal from this point forward is to never let a credit card ever report over 68.9%. You can use the card more, but make sure it reports less than 68.9%. If you ever go over that number, you're on my bad list. I will roll my eyes at you -- because you have an emergency savings account that means you never will let yourself get here again, ever.

STEP 3A: Collections and collection agencies

As mentioned, paying a $500 collection to $0 has no effect on FICO 8. Paying a $50,000 collection to $0 has no effect. So we need a different process.

My rule here is that you are now in a situation where you will be able to work your emergency savings account up to 3 months income. There's no different move because once it is up to 3 months income, I will allow you to use half of that (1.5 months income) to negotiate with collection agencies.

In writing, by mail, you will offer them a payment without accepting responsibility of the debt, only if they write back to you with a promise to delete this account from all credit reports. Don't accept them saying "we will report it as paid" or "we will report it as settled in full" -- this has no effect on FICO scores.

Some collection agencies will report back that they can't delete accounts. This is a lie. Just turn around and send a letter saying you will pay this account if they send you a letter confirming they will delete the account ("tradeline").

While you are writing these payment settlements to the collection agencies, you will continue to build your emergency savings account, keeping it at 3 months of income and no less, ever. If you pay off one collection agency in exchange for deletion, you can use up to 50% of your emergency savings account but you will not offer any other pay-offs until you are back to at least 2 months emergency savings.

STEP 3B: Beans and Rice Diet

It's not low carb, sorry. But if you're having issue raising your emergency savings account, it's time for beans and rice for every meal. Yes, your teenagers need more protein, but the rest of you can do it. There is no excuse for wanting new credit cards and a new home and a fancy car if you don't have 3 months of income saved. All that will happen is another life emergency happens in the future and you'll be back here asking for help once again. From volunteers.

The process all relies on you becoming responsible with finances

Emergency savings = responsible employee, responsible taxpayer, responsible debtor, responsible parent.

If you can't save 10% of your income every month, show me your spending and budget and I will tell you what to do. Chances are it means a second job, but that's life. If you don't like this idea, you're not mentally ready to actually reprogram your brain to becoming a responsible borrower who sleeps well at night without anxiety and stress over tomorrow's finances.

No new clothes, no restaurant dining or fast food, no Starbucks or Dunkin Donuts, no fancy groceries or movies or video games.

You CAN do this, and I know you can, because I've seen hundreds of others say they can't do it but a year later they are out of the bad credit situation and have 3-6 months of emergency income set aside -- some of them had to cut their spending to $0, others had to get a second job or drive for Uber. But almost everyone CAN do it, and you are probably in that group.

Re: FICO Score: What to pay down first?

Reighn9 — Sun, 14 Jan 2018 20:26:39 GMT

I read this just after I posted looking for advice. I went through my emergency fund and every time I try to rebuild it I have more emergencies. I have been paying the cards the way you suggest when they are high, minimum plus interest so they don't go over limit. I don't have charge-offs, just high balances. The only score I care about is fico auto 2, but it won't budge. My CU was willing to refinance my car loan if I brought it up 2 points and ignore my high balances. My fico 8 has come up 20 points in that time but not fico auto 2. I noticed the 68.9% utilization relationship to the fico scores but when I've dropped below that or even quite a bit lower with some accounts I suddenly see a credit line decrease bringing my utilization to the 90% range. It's hard to avoid fast food or restaurants when your stove goes out, your refrigerator breaks, power knocks out your freezers causing food loss. I can't cut grocery costs much with kids and with people on special diets. I have cut everywhere I know to, but I can't catch a break from emergencies, high interest rates, and lying individuals.

Re: FICO Score: What to pay down first?

Anonymous — Sun, 14 Jan 2018 20:38:21 GMT

@Reighn9 wrote:
I read this just after I posted looking for advice. I went through my emergency fund and every time I try to rebuild it I have more emergencies. I have been paying the cards the way you suggest when they are high, minimum plus interest so they don't go over limit. I don't have charge-offs, just high balances. The only score I care about is fico auto 2, but it won't budge. My CU was willing to refinance my car loan if I brought it up 2 points and ignore my high balances. My fico 8 has come up 20 points in that time but not fico auto 2. I noticed the 68.9% utilization relationship to the fico scores but when I've dropped below that or even quite a bit lower with some accounts I suddenly see a credit line decrease bringing my utilization to the 90% range. It's hard to avoid fast food or restaurants when your stove goes out, your refrigerator breaks, power knocks out your freezers causing food loss. I can't cut grocery costs much with kids and with people on special diets. I have cut everywhere I know to, but I can't catch a break from emergencies, high interest rates, and lying individuals.

I'm on a special diet myself and have found dozens of ways to save money -- I literally pay 80-90% less at the grocery store even though I don't eat gluten or dairy -- you may want to look into a DIY sous vide (beer cooler oven) as a method to saving thousands of dollars a year.

I think the most important thing you can do is find someone in your community (church? school parent?) who you can sit with on a monthly or twice a month basis and go over each other's spending and circle/highlight things that may seem irresponsible.

Even though I am crazy thrifty and super responsible, I still catch myself spending $200-$250 per month without notice.

Re: FICO Score: What to pay down first?

Reighn9 — Sun, 14 Jan 2018 20:53:52 GMT

These are some of the people that have already given me advice that didn't work. I can't cut out spending money on things I don't buy. Other than grocerices, and the low cost medicine I buy for a dependent (mine is covered by the VA) my entire check goes to paying bills and whatever emergency pops up.

Re: FICO Score: What to pay down first?

Anonymous — Sun, 14 Jan 2018 22:22:37 GMT

Its not only about saving money on expenses its about looking for ways to make more money for savings? You got a car right? You can do uber when you are not working. Are you handy? When i was in a similar situation i went door to door offering to do things around the house for a lil money i would do that after work and on days i was off.
Do you rent? Look for a cheaper place to move to and move yourself.
Do you have an extra room you can rent out?
Anyone else in the house that works and can help contribute?

This is the harsh truth youre in a situation that you need more money you have to find a way to make it and get your finances in order

Re: FICO Score: What to pay down first?

Anonymous — Sun, 14 Jan 2018 22:32:42 GMT

It usually involves at least one harsh truth. I do an open door financial help session at my home and "mancave" rented office and people come from word of mouth and the harsh truths come out daily -- moreso when I go over spending including "I really need that 1200 sqft apartment" or "Uber is beneath me".

I've seen some stunning turnarounds in less than a year, but it always requires a ridiculous change of mindset.

If emergencies happen a lot to a person, then something's gotta give somewhere during periods of NO emergencies. I know two single parents local to me who both drive for Uber and watch the other's kid while the one is driving. They do 4-8 hour shifts each a few days a week, and I know each of them is bringing in over $900/month and not charging for the babysitting time for the other. It's $10,000/year each and neither wants to do it, but they have to, because of many prior emergencies that wiped out spending and forced them to "live" on credit cards.

3 years of doing that => $30,000 in savings, each. If they could find one more single parent to join the club, they'd increase earnings 50% more.

Re: FICO Score: What to pay down first?

Reighn9 — Sun, 14 Jan 2018 22:56:46 GMT

I would love to drive for uber. Uber is not in my city. I tried for a job with the local independent cab company and kept get put off, given excuses. Watched them hire younger people that came in after me, when they kept telling how they were looking for experience and long, good driving records.

Re: FICO Score: What to pay down first?

javonnj — Mon, 22 Jan 2018 15:10:56 GMT

This is truthfully something that I needed to see this month. Thank you so much for posting this!!!!!

Re: FICO Score: What to pay down first?

Caleb87 — Tue, 23 Jan 2018 02:57:40 GMT

I personally donate plasma twice per week. With bonuses often available i make 280 to 320 per week tax free. Can read or watch netflix on phone whike i do it

Re: FICO Score: What to pay down first?

Anonymous — Tue, 30 Jan 2018 11:40:03 GMT

I'm currently waiting for my tax return to come in, the only debt/issues I have is 2.5k in balances, a car loan, and the deluge of inquiries I received from the car loan (3 months ago). I was planning on taking my return ($500) and totalling paying off one of my cards, thus reducing my monthly expenses and the amount of directions my money has to be split. With this new info however about the percentages, would it be better for my score to pay down my one card that is $300 above the utilization ratio you listed or is one card not going to affect it that much? My next goal would be of course to drop it under but it could take 1-2 months to do that

Re: FICO Score: What to pay down first?

Anonymous — Tue, 30 Jan 2018 12:44:34 GMT

Post your balances and limits each and I'd be happy to do the math for you!

Re: FICO Score: What to pay down first?

Down_2Bizness — Fri, 02 Feb 2018 06:07:06 GMT

Great post! Thank you.

Re: FICO Score: What to pay down first?

BM3 — Sun, 04 Feb 2018 22:55:22 GMT

Great post. I am so tired of money related anxiety. This is maybe crazy but I feel more free now that I have at least some money available via CC if I must make a change in my life. With one bank account for a couple, I felt like I could never have "escape path" money. Yet I feel this is fool's gold, and the saving one is the real deal. Emergency fund is such a novel concept to some people. I am still wrapping my head around it truly, but I want to at least experience the **bleep** thing.

Re: FICO Score: What to pay down first?

sueblue34 — Tue, 06 Feb 2018 22:35:17 GMT

This post was nothing but the cold hard funny truth.lol I needed this as mu UTL is my only issue. I do have savings(not much) but Im slowly adding to it and starting today I will work on bringing all my cards down

Re: FICO Score: What to pay down first?

LShan82 — Sun, 25 Feb 2018 05:50:47 GMT

good info!

Re: FICO Score: What to pay down first?

Anonymous — Sat, 19 May 2018 14:26:54 GMT

Awesome article! I will heed this advice! I currently have zero collections on my credit reports because I have done the pay for deletion letter to the collection agency. I have also one month of reserve income to date. Still working to stop dining out. I spend too much on dining out and getting my coffee from Starbucks. I looked at my bank statement and saw that I’ve spent a total of $387.73 on restaurants alone. I’ve got to do better. Each month I put $403.00 into my savings account. I don’t touch it for any reason. If I can put a portion of that $387.73 elsewhere such as savings or to my grocery budget, I’d be much better off. I just need to cook at home more. I’m being lazy. I can and will do better. I like this forum. I can see my errors and fix them. You all are so knowledgeable and helpful.

Re: FICO Score: What to pay down first?

Anonymous — Tue, 12 Jun 2018 22:17:23 GMT

I just want to share my story because so many websites and articles 'spank' people for having credit card debt- and commentators should consider that may sometimes be unfair. Most of all, I would like to hear advice from anyone who actually KNOWS how these scores are calculated so I can most effectively restore my score.

I am going to be 62 next month, and I'm not planning to draw SSI yet. I was self-employed since 1998, but haven't been able to get back into the field without extensive travel now which I can't do. When the economy collapsed, I thought I'd be able to make a comeback after a couple years- so...I used my credit cards to avoid taxes and penalty for necessary, but premature IRA withdrawals (vicious tax rules- a $1000 expense, like health insurance premium costs $1000, plus 25% (or more) IRS + 9% CA state tax+ 12% tax penalty= $1460, which of course makes the distribution $1460, NOT $1000 anymore) it was just incredible the box they get you into. BTW- if you are self employed, you can NOT, by definition, be unemployed. Anyway....that's how I got into credit card debt- paying taxes, paying my mortgage, paying the now crazy health insurance premiums, and the tax ramifications of doing so.

I have no installment debt. I have two active credit cards from the good old days- a MasterCard with 25K limit/owing 18.5K @ 16%, and a DISC with 19.4K limit/owing 17.5K @5% (was a balance transfer). I paid off my mortgage (oops- guess THAT was a mistake), and now own an expensive house (850K+) that I can't refinance- I tried. I have a old HELOC from Countrywide (remember them?) with a balance of about 18K, showing as a 'closed account' on my report, as it has entered the repayment period since BoA killed these lines of credit when they bought Countrywide. It's at 4% so that's a low priority payoff, even though it's not tax deductible any more- my property taxes already exceed the new trump total tax deduction of 10K.

So. I need help please: should I pay EACH credit card down to below 68.9% utilization as has been suggested? I'll have to pay income tax on the funds drawn ($5500), but if it helps my score maybe I can leverage that better score into a personal loan, or a lower rate on the Mastercard? Or, should I pay the MC high-rate card down by $5500 and keep the low interest Discover balance transfer until it expires June 2019?

Is there any possibility that the credit card companies will lower my credit limit if I pay balance down?! I read an anecdote of that.

I also have medical bills that I'm paying direct at 0% interest; these don't show up on my credit report- as long as I keep them out of collections!

I also am in a quandry as to what to say my 'income' is on any credit application. I have a significant SEP-IRA that I am drawing down now that I'm over 59 1/2 years old, though that makes me a bit nervous. I have been saying my income = the amount of income shown on my 1040; I think this is honest but I don't want to get any demand letter saying I committed fraud!

I never imagined I'd be in such a mess after working and behaving my entire life! But, that's for Dr. Phil, I guess.

Thanks for any help you can offer

As of today, my FICO was 643 (Transunion)/642(Experian), the FICO 8s were: 741 (discover)/735 (Mastercard).

Re: FICO Score: What to pay down first?

ItsCASHual — Wed, 13 Jun 2018 22:05:59 GMT

@Anonymous wrote:
I just want to share my story because so many websites and articles 'spank' people for having credit card debt- and commentators should consider that may sometimes be unfair. Most of all, I would like to hear advice from anyone who actually KNOWS how these scores are calculated so I can most effectively restore my score.
I am going to be 62 next month, and I'm not planning to draw SSI yet. I was self-employed since 1998, but haven't been able to get back into the field without extensive travel now which I can't do. When the economy collapsed, I thought I'd be able to make a comeback after a couple years- so...I used my credit cards to avoid taxes and penalty for necessary, but premature IRA withdrawals (vicious tax rules- a $1000 expense, like health insurance premium costs $1000, plus 25% (or more) IRS + 9% CA state tax+ 12% tax penalty= $1460, which of course makes the distribution $1460, NOT $1000 anymore) it was just incredible the box they get you into. BTW- if you are self employed, you can NOT, by definition, be unemployed. Anyway....that's how I got into credit card debt- paying taxes, paying my mortgage, paying the now crazy health insurance premiums, and the tax ramifications of doing so.
@I have no installment debt. I have two active credit cards from the good old days- a MasterCard with 25K limit/owing 18.5K @ 16%, and a DISC with 19.4K limit/owing 17.5K @5% (was a balance transfer). I paid off my mortgage (oops- guess THAT was a mistake), and now own an expensive house (850K+) that I can't refinance- I tried. I have a old HELOC from Countrywide (remember them?) with a balance of about 18K, showing as a 'closed account' on my report, as it has entered the repayment period since BoA killed these lines of credit when they bought Countrywide. It's at 4% so that's a low priority payoff, even though it's not tax deductible any more- my property taxes already exceed the new trump total tax deduction of 10K.
So. I need help please: should I pay EACH credit card down to below 68.9% utilization as has been suggested? I'll have to pay income tax on the funds drawn ($5500), but if it helps my score maybe I can leverage that better score into a personal loan, or a lower rate on the Mastercard? Or, should I pay the MC high-rate card down by $5500 and keep the low interest Discover balance transfer until it expires June 2019?
Is there any possibility that the credit card companies will lower my credit limit if I pay balance down?! I read an anecdote of that.
I also have medical bills that I'm paying direct at 0% interest; these don't show up on my credit report- as long as I keep them out of collections!
I also am in a quandry as to what to say my 'income' is on any credit application. I have a significant SEP-IRA that I am drawing down now that I'm over 59 1/2 years old, though that makes me a bit nervous. I have been saying my income = the amount of income shown on my 1040; I think this is honest but I don't want to get any demand letter saying I committed fraud!
I never imagined I'd be in such a mess after working and behaving my entire life! But, that's for Dr. Phil, I guess.
Thanks for any help you can offer
As of today, my FICO was 643 (Transunion)/642(Experian), the FICO 8s were: 741 (discover)/735 (Mastercard).

Just for clarification....you mention you paid off the mortgage but have 850K house that you can't refinance? Or do you mean the 18K HELOC you can't refinance? I'm sure some of the more seasoned folks in the forum will have some good advice for you. Stay tuned.

Re: FICO Score: What to pay down first?

Anonymous — Thu, 14 Jun 2018 01:02:52 GMT

It's the house can't refi, and no I'm not exaggerating 'value'; mine needs work but the comps are in the 950K+ range. There was some dim possibility if my brother co-signed (!), so I had the mortgage agent talk with him direct. Bottom line- Fico<720 was a no-go. BTW- My inquiry was triggered by a promo between Schwab and an online mortgage company (was it quicken?), PLUS, my brother's refusal to believe I couldn't refi- so I tried. When I pointed out my larger Vanguard SEP-IRA to qualify based on actual assets in hand, she indicated what they do is divide the total value of the account by 360 (a 30year mortgage assumed) to arrive at your monthly 'income' then try to qualify you from there. HAHA when I pointed out the slim chance that I'd be around another 30 years (let alone my brother who is 8 year older), it makes no difference- they just check their little boxes, then say no.

Long story short there is no 'first' mortgage, just the left over HELOC as mentioned.

Re: FICO Score: What to pay down first?

srloring13 — Thu, 19 Jul 2018 17:28:36 GMT

What amount are you trying to refinance the house at? Can you refinance at a lower amount?