Improving The Credit Score with Available Cash

[Anonymous]

Good day to all.   I am looking for any feedback that you may have concerning improving one's credit score.    If you have access to "x" amount of cash, is it better to reduce your debt in lump sums or distribute that cash over 6 to 9 months to show consistancy of payment?   

[MidnightVoice]

In terms of credit cards, assuming you are carrying a balance:  It makes financial sense to pay of high interest loans as quickly as possible.  It will also reduce your utilization on your credit cards.

In terms of installment loans it also makes sense.

In terms of score, that depends on what your score is!  But reducing util on CCs is usually good for score

[fishbjc]

Bofo....I paid off about $7k in a lump sum and only gained a few points.    Still, I was happy to save that interest.  Personally, I would still pay the lump sum because $$$ in my pocket was important.

According to the Score Simulator, they recommended paying the $7k off over time.  $$$ trumped score in my case.

[Anonymous]

How big are your balances?  Is your cash position enough to pay them down entirely?  You can pay them down with today's money and then pay off the reduced balances over time. 

[marty56]

IMHO I dont think paying off an account over time boost your FICO score other then not showing late payments.

Charging $1 each month and PIF is the same effect in paying off say a CC at 9% .1% at a time assuming your minimum payment is .1 % of balance.  FICO doesnt remember past balance other then the highest.  Paying on time and activity is what it wants to see.

[Anonymous]

Bofo, I'm in the exact position you are. I have a lump sum and my financial advisor tells me that paying down balances gives the greatest increase to a credit score. Having a good payment history is also important but does not require a standing balance to get. Only time can give you that. His recommendation is, if possible, pay all cards off and then continue to use them for small things each month (go out for pizza was his example), but pay them off to avoid interest. That way you get the larger and fairly quick score bump for "low credit/limit ratio" but continue to build the score increases for "good credit utilitzation" and "credit history".  If you can't pay them all off at once then spread the money out so that each balance is lowered rather than paying one off in full and leaving the other near it's limit; 2 cards at 50% of their balance is better for your score than 1 card at 0% and 1 card at 90% of balance. However, the best credit score bump is given for being below 20%, whether it's 19% or 0%, you get the same score.

I plan on playing off all my highest interest cards first and then spreading what is left between the other cards. (I have a LOT of credit card debt:-(!

Good luck!

Message Edited by lydiafre on 01-13-2009 02:58 PM

[Junejer]

Hi lydia, welcome to the forums. Finally, a financial advisor that has advised something credit-wise that makes some sense. The one thing that members, including yours truly have found is that the ideal util is 1-9%. 0% gets you dinged a few points and 10% or higher gets you dinged. Try to have a balance reporting of 1-9% and less than half of all open accounts showing a balance. Again, members have found that allowing one card to report a balance yields the largest gains. Once again, welcome aboard.

[Anonymous]

ByrdMan,

Excellent, thanks for the welcome and the clarification! So you have found that rather than paying off all balances completely and avoiding interest all together, the best credit scores are gained by letting a very small balance (<10% of limit) remain unpaid on less than 1/2 of your credit card accounts. That does make sense. It seems you would also want to rotate the usage between your accounts somewhat, ensuring you don't let any cards lapse into dormancy. And of course keep the balances VERY low so as so pay as little interest as possible. You said just so long as some remain above 0%, correct?

Takes a little extra effort but giving yourself the very best credit score possible can be worth it, especially in the upcoming finacial times when our credit scores will mean more than ever!

Thanks again for the quick and warm welcome!

Lydia

[Junejer]

Actually, you don't have to pay any interest at all. What you do is, pay your balances down a few days (3-5) before your statement cuts. Then, on or before your due date, you pay the remainder off. That way, you pay NO interest. Yes, you want to make sure that you rotate your cards through, every few months to avoid inactivity. It does take some effort, which is why I use all of the cards that I really care about monthly (even for a small charge ,$10) and then PIF the way I described above.

[haulingthescoreup]

What people are seeing with the sims, where it looks like you benefit by dribbling your paydown over time, is actually the combination of reducing util + the aging of accounts.

So if you have $1000 available to pay balances, you can either drag it out over 6 months, incurring some interest expense in the process, OR you can pay it in a lump, keep your balance at $0 or wherever you paid it down to, and wait 6 months.

The scores in the end should be the same. Lowered util + healing power of time.