Paying off debt

[Anonymous]

I am going to receive a small (very small) settlement for retro-active pay.  I have a variety of credit cards and other debt (dr. bills, education loans, etc.,) I am just not sure how to go about tackling my credit cards. The balances range from $900 to $10,000. It is so tempting to tackle the small ones first since they would then be paid off, however, I think the larger ones have higher interest rates. Is the rule of thumb to pay off debt according to the interest rate no matter what the balance is?

[llecs]

Two trains of thought: pay off the higher APR first or pay off the low balance CCs first.

While I see the merits of paying off the higher APR cards first, IMO, there are more advantages to the lower balance payoff. One is that FICO likes to see open $0 balance CCs. In fact, ideally 1/2 of your CCs need to report $0. So, paying off the lower balance while paying the minimums on the rest helps your score faster. Another advantage to paying off lower balance first is purely psychological. If you have 10 CC payments and all 10 are a stretch, paying off half right away will make you feel a whole lot better. Finally, I'd argue it is more economically feasible to pay lower balance CCs first. You always have to pay a minimum payment. Paying down the lower balance CCs first eliminates that minimum payment and give you the opportunity to make a larger payment to the others a lot quicker.

[Anonymous]

As I read the last posting, I realize I have probably made a big no-no.  As I have paid off accounts, I have closed the account, so as to not tempt me to re-use the cards.  Tearing up credit cards has not helped as I learned how easy it is to enter a store and ask them to look up my credit account and use that to make purchases, so eliminating plastic has not helped me.  So, from what I am reading, by closing accounts I am damaging my FICO score.  Since I have so many accounts---8 visa/mastercard/discover, do I really need to keep these accounts open?

[llecs]

Unfortunately when the account is closed several things are happening. First, it is no longer helping your mix of credit if closed. A lack of a CC credit mix can really tank your scores. Also, if you have balances on a closed account then you put yourself in a position to be charged-off or sent to collections, even if you are making payments, which is of no help to your scores obviously. Ideally, you'd want to keep them open. Finally, closing cards will not hurt your history, now, however the 10 yr clock starts and when they are removed 10 yrs from now off your CR, your AAoA will tank as will your future score.

They can usually be reopened.

Impulse buying is an addiction. I'm coming clean here and am admitting that DW and I racked up over $20,000 in CC debt this past year to year and a half. It wasn't all at once and we didn't buy stuff we didn't need but we slowly overextended our budget and went out to eat more, bought more clothes for us and the kids, went to the movies, over extended our Christmas shopping on '07, etc. Moreover, I took a two month temp. pay cut and supplemented with our CCs. We realized in this past August that things were getting way out of hand and paid down over 25% of it already, but isn't fast enough. However we are about to pay off a car and that will free up over $600 per month.

We made the decision to stop using our CCs. We never cut them up, but we did shelve them. I don't carry CCs at all and leave them at home. DW does the same. All we have is a debit card and if there's no money in the bank then I don't buy anything. Mentally, I associate pain with spending. Watching our FICO scores plummet was an instant cure for me too.

You have to do what is best for you. My wife has a Psych degree, but she uses that to figure me out. Wish I could offer more advice. One thing I'll say is do whatever it takes to prevent future damage. That may include cancelling all of your cards if things can get out of hand. You can get a 600+ FICO score without the use of CCs.