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Paying off Credit Cards - High Rate or High Utilization?

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Anonymous
Not applicable

Paying off Credit Cards - High Rate or High Utilization?

I recently received some cash ($9200) and am wondering if I should pay down my account with the higher rate or higher utilization. These are the only revolving accounts I have with balances. I’m looking to qualify for a mortgage this year so I’m looking to reduce my debt and improve my FICO

I have $9,200 to pay down my debt.
The two accounts with balances are both with USAA:

$26,387 Balance with $27,000 limit at 11.4%

$11,235 Balance with $15,000 limit at 16.4%

Thanks!
Message 1 of 12
11 REPLIES 11
Anonymous
Not applicable

Re: Paying off Credit Cards - High Rate or High Utilization?

By paying down the $11,000 balance down to $2000, you’ll help that card down to below 30% utilization, thus helping your score and you’ll pay less interest. Win win

By paying off the higher balance, you’ll remain above 30% until on both cards and have paid off the card with a lower interest rate. Lose lose
Message 2 of 12
CH-7-Mission-Accomplished
Valued Contributor

Re: Paying off Credit Cards - High Rate or High Utilization?


@Anonymous wrote:
I recently received some cash ($9200) and am wondering if I should pay down my account with the higher rate or higher utilization. These are the only revolving accounts I have with balances. I’m looking to qualify for a mortgage this year so I’m looking to reduce my debt and improve my FICO

I have $9,200 to pay down my debt.
The two accounts with balances are both with USAA:

$26,387 Balance with $27,000 limit at 11.4%

$11,235 Balance with $15,000 limit at 16.4%

Thanks!

You need to pay down that $26,387.   You are at 97% on that card which is considered maxed out.   Anything over 90% of limit is considered max and you pay a substantial additional penalty in your score.   I would pay that card down below 80% (about $6K) and then put the other $3200 on the higher interest rate card.   You get no benefit for having one card below 30% when you are getting killed by having the second card maxed out.   It would not be wise to use the money to pay down the card that's already at 75% of limit while another card is over 90% utilization.

Message 3 of 12
Adkins
Legendary Contributor

Re: Paying off Credit Cards - High Rate or High Utilization?


@Anonymous wrote:
I recently received some cash ($9200) and am wondering if I should pay down my account with the higher rate or higher utilization. These are the only revolving accounts I have with balances. I’m looking to qualify for a mortgage this year so I’m looking to reduce my debt and improve my FICO

I have $9,200 to pay down my debt.
The two accounts with balances are both with USAA:

$26,387 Balance with $27,000 limit at 11.4%

$11,235 Balance with $15,000 limit at 16.4%

Thanks!

I'd put $7K into the $26,387 balance to bring it out of maxed out territory. The remaining money I'd throw at the other account. I'd then pay off the higher interest rate account first. 


Last HP 08-07-2023



Message 4 of 12
Anonymous
Not applicable

Re: Paying off Credit Cards - High Rate or High Utilization?


@AnonymousBy paying down the $11,000 balance down to $2000, you’ll help that card down to below 30% utilization, thus helping your score and you’ll pay less interest. Win win



Taking that card under 30% utilization won't do anything for his score, as FICO scoring looks at your highest utilization card after looking at aggregate utilization.  Having a maxed out (>89.9%) utilization card would be the OPs constraint here as far as score improvement, so paying that down if he's looking to improve his score makes sense.  Of course paying less in interest is King to credit scores IMO, so if the OPs goal is to save as much money as possible (at the expense of a lower credit score) paying the lower balance card is the way to go.

 

I like the idea of putting money toward both.  Take the maxed out card to about 87% utilization (buffer for interest) and throw the remainder at the higher interest card to sort of find a best of both worlds situation.

Message 5 of 12
wasCB14
Super Contributor

Re: Paying off Credit Cards - High Rate or High Utilization?

My thinking is to focus on the higher APR to minimize interest.

How realistic is it to expect a mortgage on decent terms with that kind of revolving debt, though?
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Message 6 of 12
SouthJamaica
Mega Contributor

Re: Paying off Credit Cards - High Rate or High Utilization?


@Anonymous wrote:
I recently received some cash ($9200) and am wondering if I should pay down my account with the higher rate or higher utilization. These are the only revolving accounts I have with balances. I’m looking to qualify for a mortgage this year so I’m looking to reduce my debt and improve my FICO

I have $9,200 to pay down my debt.
The two accounts with balances are both with USAA:

$26,387 Balance with $27,000 limit at 11.4%

$11,235 Balance with $15,000 limit at 16.4%

Thanks!

I would put it all on the 27k card. That one's your biggest red flag to a mortgage lender.


Total revolving limits 710800 (590300 reporting) FICO 8: EQ 712 TU 710 EX 710

Message 7 of 12
Anonymous
Not applicable

Re: Paying off Credit Cards - High Rate or High Utilization?


@wasCB14

How realistic is it to expect a mortgage on decent terms with that kind of revolving debt, though?

Not realistic at all and I'd always recommend anyone with "on the cusp" type scores to wait another 6-12 months in such situations.  Waiting 6-12 months can literally be the difference in tens of thousands of dollars in interest over the life of a mortgage at a crappy rate verses an ideal rate.

Message 8 of 12
CreditCuriosity
Moderator Emeritus

Re: Paying off Credit Cards - High Rate or High Utilization?

Also another thing to consider if you are mortgage shopping and you have 9k to put towards CC's approx will you have any remaing for the down payment and all the fun fees associated with a mortgage as they are not cheap by any means whether FHA or conventional with the money you got to bring to the table probaby pale in comparison to the 9k you just came across.  Just my 2 cents on the mortgage aspect and prior to mortgage one should have fairly low CC debt overall < 10% certainly IMO as this all factors into DTI and their are ratios on mortgage depending oh what a DTI can be some are more forgiving that others

Message 9 of 12
longtimelurker
Epic Contributor

Re: Paying off Credit Cards - High Rate or High Utilization?


@CreditCuriosity wrote:

Also another thing to consider if you are mortgage shopping and you have 9k to put towards CC's approx will you have any remaing for the down payment and all the fun fees associated with a mortgage as they are not cheap by any means whether FHA or conventional with the money you got to bring to the table probaby pale in comparison to the 9k you just came across.  Just my 2 cents on the mortgage aspect and prior to mortgage one should have fairly low CC debt overall < 10% certainly IMO as this all factors into DTI and their are ratios on mortgage depending oh what a DTI can be some are more forgiving that others


Right!  Paying PMI is expensive...    But as others have said, these high debts are going to be red flags for getting a mortage (at least at a good rate) in the short term.   But remember that mortgages generally use older versions of FICOs so some of the exact utilization rules being discussed here might not be exact.

Message 10 of 12
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