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Which Debts to Pay Off / Pay Down First from a Lump Sum of Money?

Your FICO® Scores can impact your loan interest rates, terms, approvals and more.
Established Member

Which Debts to Pay Off / Pay Down First from a Lump Sum of Money?

Hello all, 

I took on a decent amount of debt while starting my business and I'm now finally seeing some decent income and finally approaching the surface of the water. I have a net payment coming in of $28,000 and I'd like to know which to pay off (or pay down) first to quickly improve my scores. Unfortunately I don't have the full amount to pay everything off all at once but from what I've read, I may be best served to NOT pay everything off right away. I know taking on the unsecured loans and maxing out credit cards is not the best way to start a business but I've learned from this and now, the returns will pay off the majority of this debt. I will soon be swimming above water as long as I keep the income going and not get into any more debt. I've broken down my debt below. What would you pay off or pay down first? 

 

Installment:

- Unsecured Business bank loan: $13,000 balance, $300/month payment (I had this high on the list to pay off due to the $300/month savings and high APR). High rate of 19%. Loan opened in 09/2017

- Unsecured business loan with my credit union: $5,500 balance, $230/month payment. Opened in 05/2017. Rate is high at 18%. (also had this high on the list to pay off due to the monthly savings and high APR)

- Unsecured business loan with another credit union: $3,300 balance, $148/month payment. Opened 9/2017. 14% APR. (was thinking of keeping this one open for the time being but make larger payments going forward and pay off this year)

 

Revolving (all close to maxed out):

- Barclay card: $2,350 balance 

- Barclay card: $2,951 balance

- Capital One: $1,000 balance

- Capital One- $1,100 balance

- Comenity Bank: $1,500 balance ($2,000 limit)

 

Line of Credit:

- Paypal: $2,000 balance

 

After setting aside money for future taxes and business supplies (no more debt), I'm left with $28,000 to pay down or pay off most of this debt. What is the smartest way to pay off these debts and boost my scores? My FICOs are around 600..never late on anything, its mostly due to opening new accounts in a short time and of course the high utilization. My goal is to be at 700 by April. Paying off these revolvers should help get me halfway there pretty quickly.  Thanks in advance.

Message 1 of 11
10 REPLIES 10
Senior Contributor

Re: Which Debts to Pay Off / Pay Down First from a Lump Sum of Money?

First, what are the interest rates for your credit cards and PayPal credit?
2nd, the two loans with the highest interest rates are the definitely the biggest priority to pay first.







Message 2 of 11
Established Member

Re: Which Debts to Pay Off / Pay Down First from a Lump Sum of Money?

They're ridiculously high...23-26% between all the revolvers.  

Message 3 of 11
Senior Contributor

Re: Which Debts to Pay Off / Pay Down First from a Lump Sum of Money?

Ouch! Definitely pay the 2 higher interest loans, plus the 2 Barclay cards. I’m not sure which ones next. I’m thinking the comenity next.







Message 4 of 11
Moderator Emeritus

Re: Which Debts to Pay Off / Pay Down First from a Lump Sum of Money?

Financially: pay off your highest APR debts.

 

Score-wise: pay off the revolvers (optimal leave a little on one revolver but that's what grace periods are for anyway).

 

If your credit cards are north of 20% APR and your loans are south of 20% (regardless of the fact that they're high APR's), this is easy: pay off the cards first and then work on the loans after.




        
Message 5 of 11
Frequent Contributor

Re: Which Debts to Pay Off / Pay Down First from a Lump Sum of Money?

I'd suggest paying off all the cards plus the 13k loan first. That will stop most the hemoraging.

 

I wouldn't worry about them all being zero the first month. You'll be hit with enough carryover interest that you can pay off the next month and decide which card(s) you actually want to let report a balance.

 

After that, I'd seriously consider stashing most of the balance in an emergency fund. Yes, I know you still have two pretty high interest loans, but they'll be a lot more managable once the other payments are gone.

 

What are the chances you'll see another good size payment(say enough to pay off one of the loans) in the next 3 months?

 

Edit: For a business, interest is a cost of doing business. Also, congrats on getting the business going. I've failed at a 3+ so far.

2017-09-09 FICO 08: EQ 677, TU 640, EX 705
2019-04-05 FICO 08: TU 730
2019-04-21 FICO 08: EX 748
Gardening again until... soon(I need to replace my car)
Message 6 of 11
Community Leader
Super Contributor

Re: Which Debts to Pay Off / Pay Down First from a Lump Sum of Money?

Certainly the right thing to do is pay off the cards and the LOC as soon as possible.

 

As far as what to do with the loans, that depends in part on whether any of the loans appear on your personal credit report.  You describe them as business loans.  Business accounts (e.g. business credit cards) often do not appear on a personal credit report. 

 

If the loans all appear on your personal credit report, you may want to pay each loan down to (say) 47% of the loan's original amount.  You stress several times that you care chiefly about improving your score.  Paying loans down but not off is a better move (as far as your credit score) than is paying one loan off entirely (with your remaining loans having balances still fairly close to the original loan amount).

 

I like the other fellow's recommendation to keep some cash in an emergency fund regardless.

Message 7 of 11
Established Member

Re: Which Debts to Pay Off / Pay Down First from a Lump Sum of Money?

 


@Ardecko wrote:

I'd suggest paying off all the cards plus the 13k loan first. That will stop most the hemoraging.

 

I wouldn't worry about them all being zero the first month. You'll be hit with enough carryover interest that you can pay off the next month and decide which card(s) you actually want to let report a balance.

 

After that, I'd seriously consider stashing most of the balance in an emergency fund. Yes, I know you still have two pretty high interest loans, but they'll be a lot more managable once the other payments are gone.

 

What are the chances you'll see another good size payment(say enough to pay off one of the loans) in the next 3 months?

 

Edit: For a business, interest is a cost of doing business. Also, congrats on getting the business going. I've failed at a 3+ so far.


Thank you!

I'd expect roughly $3,000 - $4,000 per month going forward. I received the larger sum of money for a large deal but the $3k-4k is more realistic and a larger deal will fall in my lap here and there. This is supplemental income as I have a day job as well. With the 2 incomes, I should be able to continue to pay down or pay off a lot of the remaining debt within 6 months. The larger deals will certainly be stashed into my business savings account.

Message 8 of 11
Established Member

Re: Which Debts to Pay Off / Pay Down First from a Lump Sum of Money?


@CreditGuyInDixie wrote:

Certainly the right thing to do is pay off the cards and the LOC as soon as possible.

 

As far as what to do with the loans, that depends in part on whether any of the loans appear on your personal credit report.  You describe them as business loans.  Business accounts (e.g. business credit cards) often do not appear on a personal credit report. 

 

If the loans all appear on your personal credit report, you may want to pay each loan down to (say) 47% of the loan's original amount.  You stress several times that you care chiefly about improving your score.  Paying loans down but not off is a better move (as far as your credit score) than is paying one loan off entirely (with your remaining loans having balances still fairly close to the original loan amount).

 

I like the other fellow's recommendation to keep some cash in an emergency fund regardless.


They do appear on my personal credit. Since my business was less than 1 year old when I opened the loan accounts, I couldn't use the business credit or LLC for the loans. 

It looks like I'll take this advice and pay off the credit cards and pay down the loans. What's a realistic score increase I can expect? I'm never sure if these simulators are accurate. It says I should see an increase of 48 points if I pay off the credit cards and pay down the loans. 

Message 9 of 11
Community Leader
Super Contributor

Re: Which Debts to Pay Off / Pay Down First from a Lump Sum of Money?

The cards you list in your initial post are your only cards -- is that right?

 

If so, then you should get a huge scoring bump, much more than 48 points.  Your goal should be to have all cards reporting $0 except one, with the remaining card reporting a small positive balance.

Message 10 of 11