Pay off installment loan or 4 credit cards

[Anonymous]

I started working a part time job and I have some extra money coming in. I would like to be approved for a home loan next March. However,  I have a mountain of debt and need to pay it down. The problem is I don't know if I should focus on my DTI or my credit score for the greatest impact and in order to get approved for a home loan of about $300,000 which is needed here in Northern VA. Which should I pay down first to achieve this? Thank you for your help.

Installment Loan-$505 a month, 27 months remaining, 12% interest

Credit card 1- balance $7300, 21% interest, minimum $110, limit $9000

Credit card 2-balance $7100, 23% interest, minimum $79, limit $8500

Credit card 3-balance $1400, 24% interest, minimum $49, limit $4500

Credit card 4-balance $1300, 24% interest, minimum $29, limit $6500

I've also been saving for a down payment so I have $5100 in savings but I would hate to use this to pay down debt even though I know it's a better use of the money. So hopefully a scenario where I won't have to tap into this.

[Anonymous]

You don't indicate the credit limit for each card, which is crucial before anyone can advise you.

We also need to know whether these four cards are your only revolving accounts.

[Anonymous]

OP, it looks like you have around $17k in revolving debt and $5k that you can put toward it (or any debt) currently.  When it comes to utilization and score impact, only a specific point in time matters.  If you're going for a home loan around 10 months from now, so long as you have everything paid off/down to idea levels within 8-9 months you'll possess the same score [with respect to utilization] as you would if you paid them all off today.  My question for you is when thinking realistically, how much of that debt do you believe you can pay down in the next 8-9 months?

CGID asks a very important question regarding the credit limits of your revolvers.

[Anonymous]

I added the info. Thanks for the heads up. And yes these are my only revolving accounts with a balance. The other two are store charge cards with $0 balances. 

[Anonymous]

I'm bringing in an extra usually $2500 a month, no less than this but sometimes $100 -200 more here or there. I've been working now 3 months so that's how I saved the $5100. I feel like I should save some for my down payment as it comes in; so save $1000, $1000 towards debt and the rest as extra spending money? Correct me if I'm wrong for this thinking. 

[601flyguy]

What % of the loan is paid? I'd focus on the cards first. I would pay off cc3, cc4, and pay some on cc1 or 2. That would lower cc util some and the interest being paid.

[Anonymous]

Continue to make all payments for all accounts on time.  Put some of your extra money into an emergency fund (savings account) to ensure that you never are in a situation where you have to be late on a payment.  You already have 5k so you are set there.

That said, make no extra payments on the loan.

Do, however, make payments on the credit cards. Always make more than double the minimum payment on every card, given that your cards have such high balances.  Making more than double will send a message to your creditors that your are serious about paying down your debt.  Making only the minimum can be construed by a creditor as a person who is high risk.

You should develop five different plans.  I'll call them plan 1, 2, 3, 4, and 5.  Plan 1 focuses almost all of your extra money on paying off your CC debt.  Plan 2 focuses most of your extra money on paying off your CC debt, but still saves some of it toward your down payment.  Plan 3 splits it 50/50.  And with Plan 5 you are only making double the MP and saving mostly toward the down payment.

Compare all five plans and see how much CC debt you have and how much money toward the DP at the end.

I will tell you know that you should scrap plan 4 and 5, but you should still sketch them out.  If it turns out that you need to implement plan 4 or 5 to have enough DP money, that's a sign that you shouldn't buy a house.

My personal bias will be a plan that succeeds in getting all CC debt paid off (with one card showing a small positive balance).  But you need to crunch the numbers to see what is right for you.

All of the cards have a similar interest rate so there is no advantage to paying one of sooner right now (more than the other).  But eventually you want all cards at $0 with one card showing a balance of < 29% of its credit limit.  Better still would be all cards at $0 with one showing a small positive balance (like $15).

[Anonymous]

Thank you so much to all the contributors and an extra special thank you to Great Guy in Dixie for taking the time to give me the plans and options. I at least know for sure not to focus on the installment loan which honestly that's where I was going to start before the advice. You're right about probably not being ready for a home but with rent at $1850 I assumed it would be a better use of my money. However, I listen to good advice because if I knew all the answers I wouldn't be on here so I honestly need someone to be tough and honest with me.  I will start with plan 1 and begin with credit card 3 and 4 which should take a month and a half then do as you said and double my minimums on the other two. Then start on card 1. I feel like you have saved me. Thank you ALL for time and help! 

[Anonymous]

Good for you, pal!  You'll know the best plan as you work it out.

For what it is worth, I'd advise right away making a little more than double the minimum payment on every card.  Don't adopt that later -- do it now.  Here's own advise about priorities:

(1)  Pay the double the minimum payment + one dollar on every card.

(2)  With whatever you have left over, attack all cards that have an individual utilization of > 87%. 

(3)  When all cards are at < 87.00% then work on getting them to < 67.00%

(4)  After that you can pay them down, however you like. 

Final goals.... all are decent options:

      (a)  All cards at $0 except one, with the remaining card reporting $15.

      (b)  All cards at $0 except one, with the remaining card < 28.00%.

      (c)  All cards at $0 except one, with the remaining card < 48.00%.

      (d)  All cards at $0, except two, with the remaining tw0 < 28.00%.

(A) is the best for your score.  C and D are decent places to strive for, and they may be what you settle on if you need to save more for the downpayment.  If you conclude that you cannot reach any of the four, then the home purchase may be wrong.

[SouthJamaica]

---

@Anonymous wrote:

I started working a part time job and I have some extra money coming in. I would like to be approved for a home loan next March. However,  I have a mountain of debt and need to pay it down. The problem is I don't know if I should focus on my DTI or my credit score for the greatest impact and in order to get approved for a home loan of about $300,000 which is needed here in Northern VA. Which should I pay down first to achieve this? Thank you for your help.

Installment Loan-$505 a month, 27 months remaining, 12% interest

Credit card 1- balance $7300, 21% interest, minimum $110, limit $9000

Credit card 2-balance $7100, 23% interest, minimum $79, limit $8500

Credit card 3-balance $1400, 24% interest, minimum $49, limit $4500

Credit card 4-balance $1300, 24% interest, minimum $29, limit $6500

I've also been saving for a down payment so I have $5100 in savings but I would hate to use this to pay down debt even though I know it's a better use of the money. So hopefully a scenario where I won't have to tap into this.

---

1. I don't understand your point about DTI vs credit score. Any payments you make toward paying down your debt will help both.

2. Your mortgage scores will benefit most from moving all but one of your credit balances into the zero balance column. So the first thing to do is get rid of the balances on credit cards 3 and 4.

3.  Then concentrate on getting credit cards 1 and 2 down to 28% or less.

Perhaps you're not ready to buy a house. Just because you can be approved for a mortgage doesn't mean you can afford it. Nowadays banks make loans more readily because they then 'securitize' them -- i.e. sell them off. They take no risk. So it really doesn't matter to them if you default down the road or not. My advice is to wait until you're sure you can afford to buy a house.