Pay Down CC or Save...

[Anonymous]

So I have a military star card with a $5k limit. It currently has $2800 charged on it. Would you pay it down to 5% ($250) usage OR pay $500 a month and put the rest of the money into savings? I've paid $2000 on it in the last month (yes it was almost maxed). The goal is to buy a house here but I'm wondering what would be the best route to take. Thoughts? 

[K-in-Boston]

The answer really depends on a number of factors. 

How soon are you going to be buying (i.e. when will a potential mortgage lender be pulling your credit reports)?  Is the scoring penalty for the higher utilization enough to possibly cause you to be approved for a mortgage with a higher APR?  If your scores are borderline, over 30 years on a $500k loan, you'd pay about $100k more in interest for a 4.5% loan than a 3.5% loan, so it might not make sense to save the money now.

If scoring isn't the factor, then it really just comes down to math.  Is this a promotional APR where you aren't paying interest?  IIRC the standard APR on that card is around 10% or so.  If the APY on your savings/investments would be greater than the amount of interest you'd pay on the card and it won't cause any issues with your mortgage rates, then by all means save it.  Otherwise, it's probably better to just pay the card off.

[Anonymous]

Very good points! We are actually buying the house that we've been living in for 15 years (from my mom) - hopefully by the end of the year. It looks like the high usage on this card is causing us some issues and I have the chance to just pay it off (or at least down to 5%) - plus I'll still have some to throw into savings. Just wasn't sure if paying $500 a month on it was the best way to go or if it would be better to just pay it off. I think paying it off makes the most sense at this point. 

[chiefone4u]

Interest and utilization would suggest paying off the credit card before saving in most instances. 

If you will be required to put money down (down payment) for the house (most loans require it)... you'll need to make sure that money has been parked in the same bank account for at least 90+ days covering three statements.

Without allowing your down payment to season, you'll have more hoops to jump through to verify where the money came from.

[joltdude]

Both... Dont care if its just a pittance thrown into savings, ... Id emphasize paying down the balance , but id throw a little into savings regardless... If you do this repeatedly it will add up and might even save your bacon... It took me awhile to wrap my head around the concept of Pay yourself first but it has come in handy ..... sometimes it rains.....

-J

[SouthJamaica]

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@Anonymous wrote:

So I have a military star card with a $5k limit. It currently has $2800 charged on it. Would you pay it down to 5% ($250) usage OR pay $500 a month and put the rest of the money into savings? I've paid $2000 on it in the last month (yes it was almost maxed). The goal is to buy a house here but I'm wondering what would be the best route to take. Thoughts? 

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Pay it off.

[Anonymous]

I DO already have some in savings and I'll be adding about $2700 to savings even with paying it down to 5% usage. Just wanted to make sure. My loan officer said to keep making strong payments like I'm doing but I think it's going to be better to just knock it out while I can.

[TheRedHat]

Look at it this way. If a bank offered you a savings account at the cost of whatever you are paying in interest per month on your credit cards, would you sign up? If the answer is no, pay off your cards. 

[nzbgsf]

Consider paying down your card to reduce your credit utilization rate to below 30%. However if you're applying for a mortgage most lender guidelines require a borrower to have at least 6 months in mortgage reserves held for a minimum of 90 days, in addition to your downpayment funds. Most important going forward.. have a vision for your financial goals, create a plan, take action on your plan and frequently reassess.  

[Citylights18]

You need the 6 months to cover the projected mortage/insurance/taxes payment. If that for you is $1000 then you need to have $6000 in youre checking account for at least the previous 2 statements. 

Here is another thing I would consider on the credit/savings debate; if you haven't owned a home in the past 3 years or more you qualify as a first time home buyer. That entitles you to take advantage of first time homebuyer programs for the downpayment. If you can cover the downpayment with a first time home buyer program you might just want to focus on tackling the card, or even trying for a few BT offers to expand your utilization and lower your score. Without interest taking a BT offer you can pay it off quicker.