Windfall decisions

[Anonymous]

So I posted in the student loan section earlier but I have more info. Basically my uncle passed and I’m coming into some money. It’s supposed to pay off my student loans, and I thought my grandma was going to pay my lender directly. Apparently not, I’m getting it wired.

I have credit card debt about equal to my annual income. Yikes, I know.

So although I can rationalize 1) that my uncles intent is to help me become more financially stable and paying of credit cards is the smart way to go, 2) technically I can argue that not having student loans to begin with would have prevented me from using credit cards, and 3) I’m a glutton for punishment and paying down credit cards every month for the next 4.5 years teaches me how much it sucks and never do this to myself again.... I am determined to pay my loans off. I also don’t want to admit to my poor grandmother that her granddaughter got herself in such a hole.

BUT

I don’t know enough about personal loans. Would I be able to use the wired money to take out a personal loan of equal value? The student loan payoff is around $50k, which thankfully is more than my credit debt (not much, but it is more) and should be in my account tomorrow or the next day. I guess I’m asking if it could be “collateral.” But I can definitely see how a large sum of brand spanking new money in a checking account of someone past their eyeballs in debt just doesn’t scream “credit worthy.” I guess im hoping they’ll see I have the money and am not just blowing smoke up. I was going to stop by my credit union tomorrow or when the wire transfer is complete, but want to know if anyone thinks it would be a waste of my time. Even if I can only get a couple racks more I’m sure the credit union’s rates are much less than the 16-19% on most of my cards. I know they don’t really see it this way, but I’ll be trading one debt (high interest) for another (low interest) not adding more debt.

Oh, and my FICO 8 is between 699-701 depending on where I’m checking it, and my vantage 3.0 is 660. My utilization is around 65%. The only late payment is a card I’m an authorized user on, but I know that still counts. I applied for an AmEx today and got approved for $2k (wanted to get something before my scores potentially dropped after the loans go away, and figured it wouldn’t hit a credit report by this week.)

Thanks in advance!

[iced]

I'm not sure I understand what you're asking. You received a $50k inheritance and you want to know if you can use it as collateral to take out a $50k loan, and then use it to pay off the student loans/credit cards? Or are you asking if you can get a lower interest loan to pay off the credit cards, using the cash as collateral, then use that same collateral cash to then pay off the student loans? The problem is it's not really collateral if you're just going to liquidate it right after getting the loan.

Either way, it doesn't make much sense to do. If you are determined to get out of debt, the best approach is to pay off the highest interest stuff first (likely the CCs) then work your way down. As you pay off each balance, you'll have that much more available to toss at the next debt, so each subsequent debt gets paid off faster and faster. Some call this the snowball method.

The only thing that should stop you from taking this approach is that you respect your uncles wishes. If the money was specifically stipulated to be used only for student loans, then you should use it only for student loans. This should still help considerably since you can then divert all of the funds you were using to make monthly student loan payments to instead make additional CC payments. Chances are you're also already in the territory where you can get a smaller personal loan or a 0% intro offer on a basic CC where you can shove some of the higher interest debt into lower interest places while you continue to pay off the remaining high interest debt.

The key in all of this, though, is that you must not accrue any new debt while paying off your existing debt.

[Anonymous]

A few comments/questions in blue below:

---

@Anonymous wrote:

Oh, and my FICO 8 is between 699-701 depending on where I’m checking it, and my vantage 3.0 is 660.

You can ignore your Vantage score, though it's fine if it's improvement as your cards get paid down makes you feel better.  We can tell you about free tools where you can get regular reports and free FICO scores.

My utilization is around 65%.

You could be in worse shape.  Would you mind listing all your cards with the balance and credit limit of each?  Like this?

Card 1.  Balance = ____   Limit = ____
Card 2.  Balance = ____   Limit = ____
Card 3.  Balance = ____   Limit = ____

Add a note next to any card that is a charge card (like Amex Platinum, Amex Green, Amex Premiere Rewards Gold, etc.) rather than a true credit card (Amex Delta Gold, Chase Freedom, Citi DoubleCash, etc.).  Make a separate note if a card is an AU card rather than a card in your name.

We'll assume that any card without a note is a true credit card in your name.

The only late payment is a card I’m an authorized user on, but I know that still counts.

Are you certain that your only "derog" anywhere on your reports is that late on that one card?  Derogs include lates, collections, chargeoffs, liens, judgments, public records, etc.  Ignore Credit Karma if it tells you that you are derog free.  Karma has been known to ignore derogs older than a few years in its front-end summary page (e.g. a late payment from 5 years ago).  The only way to know for sure is to pull full reports and go through them with a fine tooth comb.

If indeed that card is the only item on your report with a derog, you should ask the owner to remove you as an AU, even if you like the card or its removal could cause your utilization to go up.  You should be very interested in having a completely clean report, if that is easily managed.

I applied for an AmEx today and got approved for $2k (wanted to get something before my scores potentially dropped after the loans go away, and figured it wouldn’t hit a credit report by this week.)

In much of your post you discuss the idea of getting a loan.  Amex offers loans.  Do you mean a loan from Amex or a card?

---

The issue of whether to use the money for loans or not is chiefly an ethical one (rather than one about credit scoring) and is not clear cut.  If I were you I would use the overwhelming bulk of it for the loans, since you'll know you were acting in accord with the wishes of your benefactor and you will sleep easier.  Moreover, if you were to pay off the cards and then run them up again you'd feel like you had done a double betrayal of your benefactor.

I have some specific recommendations which I will make in a little while.  I have to step away from my PC but should be back shortly.

[fuzzle]

I see no point in paying tens of thousands more in interest: pay off the CCs, use the rest for the loan, build an emergency fund, and cut up all cards except one with a very small CL in case Amazon has the best price on ramen

[Kree]

I believe an important questions are:

what are the student loan balances?

What are your student loan minimum payments?

Wha type of student loans are they?

Will you need additional student loans in near future?

Op mentions running up CCs due to the student loans. I assume this means that OP is not financially stable due to minimum payments. Paying off CCs will not help if they end up being needed for basic living expenses again.   Alternatively if the Minimum payments of the student loans are higher than the CC's minimum payments. Paying off these loans could help OP stabilize opself.  

[Anonymous]

in RED

A few comments/questions in blue below:

@Casak wrote:

Oh, and my FICO 8 is between 699-701 depending on where I’m checking it, and my vantage 3.0 is 660.

You can ignore your Vantage score, though it's fine if it's improvement as your cards get paid down makes you feel better.  We can tell you about free tools where you can get regular reports and free FICO scores.

Good to know about Vantage… I’m new(ish) at this heavy credit monitoring gig.

My utilization is around 65%.

You could be in worse shape.  Would you mind listing all your cards with the balance and credit limit of each?  Like this?

Card 1.  Balance = ____   Limit = ____
Card 2.  Balance = ____   Limit = ____
Card 3.  Balance = ____   Limit = ____

Add a note next to any card that is a charge card (like Amex Platinum, Amex Green, Amex Premiere Rewards Gold, etc.) rather than a true credit card (Amex Delta Gold, Chase Freedom, Citi DoubleCash, etc.).  Make a separate note if a card is an AU card rather than a card in your name.

We'll assume that any card without a note is a true credit card in your name.

Please be kind lol. These are current, live balances, not from a credit report.

JC Penney Mastercard (26.99% apr) $0 / $6,000

Lowes *Store card (26.99% apr) $0 / $7,000

Discover (opened for a balance transfer, 0% interest now, but 23.99% apr after Dec statement) $2585 / $4,500

AmEx (just opened yesterday, don’t know APR yet but 0% apr for 15 months according to offer) $0 / $2,000 ($1,500 BT limit)

Barclays Visa (19.49% apr) $7,909.68 / $8,000

Chase (16.74% apr) $14,210.77 / $15,500

Capital One Mastercard (16.65% apr) $4,287.41 / $5,000

Capital One Mastercard (16.65%) apr $1,566.04 / $2,500

Sears Mastercard (16.24% apr) $8,305.34 / $10,000

Nordstrom *store card (14.90% apr) $0 / $750

Bank of America Visa (12.00% apr) 5,544.44 / $6,600

---(total of my own cards above) $43,589.68 / $67,850

Authorized user on (all my dad’s cards):

AmEx (the one with the late payment) balance of $2,074 / ??? limit

Citi Shell $0 / ???

Chevron $0 / ???

I have some closed accounts, and some of my loans are already closed (I think they got refinanced?)

The only late payment is a card I’m an authorized user on, but I know that still counts.

Are you certain that your only "derog" anywhere on your reports is that late on that one card?  Derogs include lates, collections, chargeoffs, liens, judgments, public records, etc.  Ignore Credit Karma if it tells you that you are derog free.  Karma has been known to ignore derogs older than a few years in its front-end summary page (e.g. a late payment from 5 years ago).  The only way to know for sure is to pull full reports and go through them with a fine tooth comb.

If indeed that card is the only item on your report with a derog, you should ask the owner to remove you as an AU, even if you like the card or its removal could cause your utilization to go up.  You should be very interested in having a completely clean report, if that is easily managed.

I am positive it is just the 1 late payment. It’s Citi Shell card I’m AU from my dad. I thought about being removed, but the late payment is 30 days from 2015, and the account has been open 37 years (I’m only 29). I left on due to the credit history length. (my responsibility does say terminated, but I’m not sure what that means. The account is open.)

I applied for an AmEx today and got approved for $2k (wanted to get something before my scores potentially dropped after the loans go away, and figured it wouldn’t hit a credit report by this week.)

In much of your post you discuss the idea of getting a loan.  Amex offers loans.  Do you mean a loan from Amex or a card?

The issue of whether to use the money for loans or not is chiefly an ethical one (rather than one about credit scoring) and is not clear cut.  If I were you I would use the overwhelming bulk of it for the loans, since you'll know you were acting in accord with the wishes of your benefactor and you will sleep easier.  Moreover, if you were to pay off the cards and then run them up again you'd feel like you had done a double betrayal of your benefactor.

I have some specific recommendations which I will make in a little while.  I have to step away from my PC but should be back shortly.

The AmEx is a credit card (see above). I didn’t know if the loan payoff would harm credit score so I opened it yesterday with the idea of a balance transfer.

I honestly don’t think running up credit cards will happen. Now, my loans are $761/month total ($585 state/$176 fed IBR) with a mix of both subsidized and unsubsidized, interest between 6.5-7.2%. my credit card minimums are $984/month now. I don’t want or need for much now… rent, electricity, and phone/internet are my only bills. My car is paid for. The rest goes to gas and groceries. I have around $4,000 in savings account now. I do have a 401(k) started with my new company at 3% match but it only started this year, and I have about $18,000 in a retirement plan from my last job.

I want to use the money for the loans as intended. I just don’t know if I can make it work for me in any other manner than turning it over to the loan companies.  I also don’t know if closing my loans will affect my score—I have an “excellent” mix of accounts, but with the student loans gone, the only type of debt I will have is credit cards (no mortgage, auto loan is already paid off)

I know the “smart” thing (mathematically) is to pay high interest first. I definitely made a LOT of financially mistakes. I paid for most of my living expenses on credit cards in college. I was also out of work for 5 months a while back and my new job started lower than the one I left (it was a hostile work environment—I couldn’t mentally take it and was wanting to drive my car into a semi on the way into work by the time I left). I also stupidly let a friend use a credit card…or two…. With promises of repayment, which of course hasn’t happened yet. Soooo that’s not really a concern. Trust me, I can think of 984 reasons a month why this was horrible behavior!!!

[Anonymous]

I believe an important questions are:

what are the student loan balances?

$31,079.83 state and $21,162.14 federal

What are your student loan minimum payments?

$585 state and $176 federal (income based) total of $761/month. my income hasn't significanly changed from 2017 to 2018 so I would expect about the same federal payment next year.

Wha type of student loans are they?

each loan is broken down more--there are 5 state and 4 federal i think in a mixture of both subsidized and unsubsidized. my interest rates are between 6.5% and 7.2% with an .25% reduction with autopay, which I use.

Will you need additional student loans in near future?

Not in the forseeable future.

Op mentions running up CCs due to the student loans. I assume this means that OP is not financially stable due to minimum payments. Paying off CCs will not help if they end up being needed for basic living expenses again.   Alternatively if the Minimum payments of the student loans are higher than the CC's minimum payments. Paying off these loans could help OP stabilize opself.

Yes. the minimum payments are killing me with both, but paying off the loans, or the credit cards, or a mixture, will stop me from either charging gas and groceries or using savings. that's about all i spend my paycheck on other than debt, so i don't have a shopping addiction or anything like that. just financialy stupidity.

[Anonymous]

yeah part of me feels like my uncle would have wanted me finanically stable, not necessarily student loan free. but i think without the student loans, much of that debt wouldn't have been.

[Anonymous]

OK. So worth observing for the rest of us: our OP has made a decision to honor his uncle's wishes and use the money primarily to pay off the loans. That decision has been made so everything else we advise him should probably be made in that context.

That said, I think you would still be being true to the letter and certainly spirit of your uncle's wishes if you considered a compromise: where you paid all the loans down to a small amount (7% of the original balance) but still left them open. You may find that the student loan handler will respond by pushing the "due date" of the next payment for each loan far ahead into the future (perhaps years). If so, you can cancel any "auto-payment" that you have set up. You will discover that your FICO 8 scores will go up (that widely used model loves it when you have loans that are mostly but not entirely paid off).

The remainder of the windfall could be used to pay down any credit cards that are over 87% utilized (a good scoring move). If you have money left over after that, you could either place it toward the highest interest cards or toward getting all cards at under 67% individual utilization.

I think your uncle would very much approve of this approach and it would enable you to improve your scores quickly, reduce your debt, and sharply reduce the amount of interest you were paying to the student loan handlers.

A crucial part of any plan is creating for yourself a very strict budget wherein you spend less than 70% of what you regularly take home. The rest should be spent on paying off CC debt and then (when that is finished) put toward savings (emergency fund and retirement).  You seem to be totally on top of that piece, and nobody is giving you grief for making mistakes in the past -- most of us have been there.

[Anonymous]

I think the above advice is excellent.

That said, paying off your credit cards would save you much more money than the student loans.  You're paying  ~ $7,000/year in interest on the credit cards and ~ $3600 /year on the student loans (despite the fact your student loan balance is ~ $8600 higher).  Knocking out the credit cards would save you much more of your money and allow you to then attack your student loans in full force.  Also, student loan interest is deductible on your taxes, credit card interest is not.  That said, I understand it's your grandpa's wish that it goes towards your student loan debt.  Financially, this is a big enough difference that I would at least consider it.

You might want to consult with your grandma and parents on this, even though I know you might not want to disclose your credit card debt to them.  That said, this is a huge decision and I think it would be well worth it.  Discuss with them your dilemna and why you would be financially better off attacking the credit card debt while also addressing that you want to be mindful of your grandpa's wishes.