Should I Pay Off My Collections to Get a Lower Interest Rate?

[Anonymous]

Hi all! My car recently broke down and I have to get a new car. I am currently in the process of preparing to get a new car but I am also in the process of rebuilding my credit. My credit score ranges between 534-560 between the three credit bureaus. I have five credit cards and one retail card. I recently paid off my retail card ($300), and three of my credit cards with smaller limits (ranging between $200-$500). The other two cards – the card with the largest credit limit ($3500) is current sitting at $3200 and the card with the second largest credit limit ($700) is at $620. I can pay the $620 with no problem and probably about $1500 toward the $3500. But… I also have two collection accounts (totaling about $550) and I also want to save a nice amount of money to put toward a down payment, about 7k-10k. I would like to get a 2018 or 2019 X3 BMW in the low 30k.

Just to see where I stand, I tried Cap One’s pre-approval and I was approved for 25k with a 10.2% interest rate! YIKES! My question is this… Should I pay off my 700 credit card, put $1,500-2k toward the larger card, and pay off those collections to see if they will remove the tradeline from my credit with the hope of improving my score to get a better interest rate (which will lower my down payment by about 1k) or should I only focus on either paying down the credit cards or the collections so that my down payment will be as large as possible? I have no problem paying the credit cards down. In fact, I want to! But I am not sure if I should be in a rush to deal with these collections if it will not make a big difference in helping me get a better interest rate and make the car as affordable as possible.

Thoughts? Thanks so much!

[nycsimone]

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@Anonymous wrote:

Hi all! My car recently broke down and I have to get a new car. I am currently in the process of preparing to get a new car but I am also in the process of rebuilding my credit. My credit score ranges between 534-560 between the three credit bureaus. I have five credit cards and one retail card. I recently paid off my retail card ($300), and three of my credit cards with smaller limits (ranging between $200-$500). The other two cards – the card with the largest credit limit ($3500) is current sitting at $3200 and the card with the second largest credit limit ($700) is at $620. I can pay the $620 with no problem and probably about $1500 toward the $3500. But… I also have two collection accounts (totaling about $550) and I also want to save a nice amount of money to put toward a down payment, about 7k-10k. I would like to get a 2018 or 2019 X3 BMW in the low 30k.

Just to see where I stand, I tried Cap One’s pre-approval and I was approved for 25k with a 10.2% interest rate! YIKES! My question is this… Should I pay off my 700 credit card, put $1,500-2k toward the larger card, and pay off those collections to see if they will remove the tradeline from my credit with the hope of improving my score to get a better interest rate (which will lower my down payment by about 1k) or should I only focus on either paying down the credit cards or the collections so that my down payment will be as large as possible? I have no problem paying the credit cards down. In fact, I want to! But I am not sure if I should be in a rush to deal with these collections if it will not make a big difference in helping me get a better interest rate and make the car as affordable as possible.

Thoughts? Thanks so much!

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I mean...not to sound harsh but if you've got credit cards in collection how about you pay them all off (try and get the creditors to remove those baddies from your credit reports) and settle for a car that's around 15k (maybe a used Santa Fe) for 1-2 years until your credit scores recover and then go after the BMW?

It always drives me crazy when I see someone wanting to put thousands of dollars as a down payment on a luxury vehicle when they can't even pay their current bills.

[Anonymous]

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@nycsimone wrote:

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@Anonymous wrote:

Hi all! My car recently broke down and I have to get a new car. I am currently in the process of preparing to get a new car but I am also in the process of rebuilding my credit. My credit score ranges between 534-560 between the three credit bureaus. I have five credit cards and one retail card. I recently paid off my retail card ($300), and three of my credit cards with smaller limits (ranging between $200-$500). The other two cards – the card with the largest credit limit ($3500) is current sitting at $3200 and the card with the second largest credit limit ($700) is at $620. I can pay the $620 with no problem and probably about $1500 toward the $3500. But… I also have two collection accounts (totaling about $550) and I also want to save a nice amount of money to put toward a down payment, about 7k-10k. I would like to get a 2018 or 2019 X3 BMW in the low 30k.

Just to see where I stand, I tried Cap One’s pre-approval and I was approved for 25k with a 10.2% interest rate! YIKES! My question is this… Should I pay off my 700 credit card, put $1,500-2k toward the larger card, and pay off those collections to see if they will remove the tradeline from my credit with the hope of improving my score to get a better interest rate (which will lower my down payment by about 1k) or should I only focus on either paying down the credit cards or the collections so that my down payment will be as large as possible? I have no problem paying the credit cards down. In fact, I want to! But I am not sure if I should be in a rush to deal with these collections if it will not make a big difference in helping me get a better interest rate and make the car as affordable as possible.

Thoughts? Thanks so much!

---

I mean...not to sound harsh but if you've got credit cards in collection how about you pay them all off (try and get the creditors to remove those baddies from your credit reports) and settle for a car that's around 15k (maybe a used Santa Fe) for 1-2 years until your credit scores recover and then go after the BMW?

It always drives me crazy when I see someone wanting to put thousands of dollars as a down payment on a luxury vehicle when they can't even pay their current bills.

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Thanks for the feedback. The collections are from two utility companies that popped up in the last few months. I tried to help a family member with their utilities and they did not pay their bills and I got burned and of course they are now unable to pay to get them out of collections. I had no idea what was going on until I got the notification from Experian. I did go a little crazy with my credit cards for about a month when my husband was laid off (COVID), but now he's back working. So, I am able to get back to focusing and paying off my credit cards, etc. But I have never been late on my credit cards. They just all had high balances because I was using them more frequently due to supporting the family for a brief time. But like I said, he's back to work now and things are back to normal. I make 98k/year the cars I have been looking at are at about 32k and under. I don't want my monthly payment to be over 350-400/month. I won't have an issue paying the monthly payment. My main concern is how to handle these baddies in my credit right now and where I should place my focus so that I can get a car in the next month. Either way, I will pay the collections off. It's just a matter of if I will do that now or in 2-3 months. 

[sccredit]

For those scores the CapOne rate is not bad, frankly it is pretty good for mid-500 scores. Unless you can get the collections deleted entirely I doubt you will see a huge jump in score from just paying them. Try for PFD on the collection accounts first. 

As the other poster mentioned you may want to look at a cheaper CPO vehicle until you can get your scores in a range to get much lower interest for a $30k+ purchase.

[Anonymous]

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@sccredit wrote:

For those scores the CapOne rate is not bad, frankly it is pretty good for mid-500 scores. Unless you can get the collections deleted entirely I doubt you will see a huge jump in score from just paying them. Try for PFD on the collection accounts first. 

As the other poster mentioned you may want to look at a cheaper CPO vehicle until you can get your scores in a range to get much lower interest for a $30k+ purchase.

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I just spoke with both collection agencies and went ahead and paid them both in full. It was under $500 for both. They both said the tradelines would be deleted within the next 30 days. Fingers crossed! 

[nycsimone]

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@Anonymous wrote:

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@sccredit wrote:

For those scores the CapOne rate is not bad, frankly it is pretty good for mid-500 scores. Unless you can get the collections deleted entirely I doubt you will see a huge jump in score from just paying them. Try for PFD on the collection accounts first. 

As the other poster mentioned you may want to look at a cheaper CPO vehicle until you can get your scores in a range to get much lower interest for a $30k+ purchase.

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I just spoke with both collection agencies and went ahead and paid them both in full. It was under $500 for both. They both said the tradelines would be deleted within the next 30 days. Fingers crossed! 

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I hope you got that in writing from them. Also, give it about 45-60 days and then dispute them with the CRAs and see if they fall off.

[Harvey26]

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@Anonymous wrote:

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@sccredit wrote:

For those scores the CapOne rate is not bad, frankly it is pretty good for mid-500 scores. Unless you can get the collections deleted entirely I doubt you will see a huge jump in score from just paying them. Try for PFD on the collection accounts first. 

As the other poster mentioned you may want to look at a cheaper CPO vehicle until you can get your scores in a range to get much lower interest for a $30k+ purchase.

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I just spoke with both collection agencies and went ahead and paid them both in full. It was under $500 for both. They both said the tradelines would be deleted within the next 30 days. Fingers crossed! 

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Once the collections are removed. I would pay down balances and get your highest card under 30% uti. Look at local credit unions and see if you are able to get preapproved. I second the idea of getting something nice but a little less expensive maybe a nice used Honda might save you 10-12K and you may not even need to save up a downpayment. Do you have any other negatives items on your report? What cards do you have currently?

[Anonymous]

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@Harvey26 wrote:

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@Anonymous wrote:

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@sccredit wrote:

For those scores the CapOne rate is not bad, frankly it is pretty good for mid-500 scores. Unless you can get the collections deleted entirely I doubt you will see a huge jump in score from just paying them. Try for PFD on the collection accounts first. 

As the other poster mentioned you may want to look at a cheaper CPO vehicle until you can get your scores in a range to get much lower interest for a $30k+ purchase.

---

I just spoke with both collection agencies and went ahead and paid them both in full. It was under $500 for both. They both said the tradelines would be deleted within the next 30 days. Fingers crossed! 

---

Once the collections are removed. I would pay down balances and get your highest card under 30% uti. Look at local credit unions and see if you are able to get preapproved. I second the idea of getting something nice but a little less expensive maybe a nice used Honda might save you 10-12K and you may not even need to save up a downpayment. Do you have any other negatives items on your report? What cards do you have currently?

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Thanks! I have the two collections that I just paid off in full, two missed student loan payments (30 day) from 2017, and the following credit cards: 

Discover it: Credit limit: $750 / Balance: $244

Discover it Chrome: Credit Limit: $200 / Balance: $0

Capital One Quicksilver One: Credit Limit: $500 / Balance: $0

Capital One Platinum: Credit Limit: $3,500 / Balance: $2,300

Target: Credit Limit: $300 / Balance: $0

First Premiere: Credit Limit: $500 / Balance: $50.00 

The cards that I have paid off are not yet reporting. They will begin reporting this month. So, my current scores and the CapOne pre-approval interest rate do not reflect the paid off balances. 

[Harvey26]

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@Anonymous wrote:

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@Harvey26 wrote:

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@Anonymous wrote:

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@sccredit wrote:

For those scores the CapOne rate is not bad, frankly it is pretty good for mid-500 scores. Unless you can get the collections deleted entirely I doubt you will see a huge jump in score from just paying them. Try for PFD on the collection accounts first. 

As the other poster mentioned you may want to look at a cheaper CPO vehicle until you can get your scores in a range to get much lower interest for a $30k+ purchase.

---

I just spoke with both collection agencies and went ahead and paid them both in full. It was under $500 for both. They both said the tradelines would be deleted within the next 30 days. Fingers crossed! 

---

Once the collections are removed. I would pay down balances and get your highest card under 30% uti. Look at local credit unions and see if you are able to get preapproved. I second the idea of getting something nice but a little less expensive maybe a nice used Honda might save you 10-12K and you may not even need to save up a downpayment. Do you have any other negatives items on your report? What cards do you have currently?

---

Thanks! I have the two collections that I just paid off in full, two missed student loan payments (30 day) from 2017, and the following credit cards: 

Discover it: Credit limit: $750 / Balance: $244

Discover it Chrome: Credit Limit: $200 / Balance: $0

Capital One Quicksilver One: Credit Limit: $500 / Balance: $0

Capital One Platinum: Credit Limit: $3,500 / Balance: $2,300

Target: Credit Limit: $300 / Balance: $0

First Premiere: Credit Limit: $500 / Balance: $50.00 

The cards that I have paid off are not yet reporting. They will begin reporting this month. So, my current scores and the CapOne pre-approval interest rate do not reflect the paid off balances. 

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I would pay all off and leave first premier with the $50 bal. You should be at least at high 600s or low 700s with both collections removed. I would strongly recommend getting preapproved with local credit union and also try get a new card with a higher limit. Amex or if your under 5/24 Chase or Citi. I would try to get rid of those low limit cards so when you use your card it does not kill your score so much. Also try and goodwill your student loan lates never hurts to try.

[Anonymous]

In addition to the other advice given, I would add saving for an emergency fund before making a down-payment for a car.   You can pull from the fund in the event of lost income or an emergency and not rely on credit cards.