Cards with a balance or get a loan for better FICO?

[masscredit]

I know we say finance over FICO but I've been wondering about this. I have a friend who has a few cards with balances. Her credit limits total to just under $70K. She owes just over $10K. The balances are mostly spread between two cards with zero interest offers so utilization is around 70-80% for them. She's paying $500-$1K per month to hammer the cards down. She asked me if I think she should consolidate them into a loan.  Her cards will go back to AZEO so she'll gain points back from that. She has an auto loan so she doesn't need a loan in the mix. If she gets one, the balance will go down quickly. Her plan has been to pay all this off by next May. Drawback is she'll pay interest on the loan. 

My advice to her from a finance standpoint was to keep doing what she is doing if she doesn't see a need for new credit in the near future. Spread payments between the cards that have high utilization. Scores will rebound as the balances decrease.

So... in general for scoring, would a person be better off consolidating their card balances into a loan or let them ride on the cards?

[ktm]

IF the goal is to maximize credit score, consolidating into loan is better for credit score. A loan won't count against your total revolving balance, so by getting a loan, the cards can be paid off and then credit card utilization will decrease - resulting in increased credit score.

[Varsity_Lu]

@masscredit 

So, what's the point of using 0% credit cards if she is going to get a loan and pay interest on that loan to pay off the 0% cards?  Sure, a loan should be lower interest rate, but it still seems silly to me to get a loan a year in advance of the 0% offer running out.  I'd suggest she just keep hammering out the payments on the cards and try to get them knocked down before next May.  Financially, that would be her best move.  Utilization score component will snap back instantly, so her scores now are really irrelevant.

[FicoMike0]

Ditto @Varsity_Lu 

Dont pay interest if you don't have to.

As the 0% cards are paid, scores will rise.

[JoeRockhead]

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@masscredit wrote:

My advice to her from a finance standpoint was to keep doing what she is doing if she doesn't see a need for new credit in the near future. Spread payments between the cards that have high utilization. Scores will rebound as the balances decrease.

So... in general for scoring, would a person be better off consolidating their card balances into a loan or let them ride on the cards?

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You gave her good advice, and as mentioned above it makes no sense to pay interest on a debt that's currently  being carried at 0%.  Unless she needs to raise her scores for a big purchase, she's much better off financially just continuing to pay down the debt as she normally would.  

Just for clarification and a word of caution in regards to PLOCs.  Unless a line of credit is reported, and listed on reports as a loan (which isn't very common),  it will be counted in revolving utilization (and count towards 5/24 status for Chase) as the vast majority of PLOCs are reported as revolving accounts.

[FlaDude]

If she doesn't have any scorable inquiries or other new accounts in the last year, her score will take a hit for each of those if she gets a loan.

I would stick with the 0% balances. I know this is a sunk cost, but she might also have paid a BT fee to get those balances on those cards.

Edit: If she were to get a loan from So-Fi, Prosper, Lending Club, etc. that would likely add a CFA ding to her score too unless she already has one of those on her report.

[FICOdawg]

This is actually an easy answer.  Pay off the cards.     I have direct evidence with my own situation of having ONE card with a balance of the 3 CCs and it's bascially the ceiling to my score as I watch FICO go up as I keep paying it off.    The 70-80% utilization even on an individual card brings out the FICO sledgehammer to your score.

If she is paying off sub 10k in CC debt and is hitting $1k/month payments, stay the course and her score will jump once those cards go below 29% and 9% utilization.    If these are zero interest CCs with balances, even more reason to pay them down quickly before you face any interest headwind. 

[pizzadude]

Individual cards with utilization > 70% will definitely result in a large score ding, so it's possible there could be a few FICO points to gain from consolidation, once the inquiry / AAoA reduction kick in for the new loan account. 

As as she already has an auto loan then wouldn't be any FICO points gained for just adding an installment loan.

I agree with the other posts above that I don't think it's worth a short term FICO points gain ( if any ) just to consolidate at an interest rate > 10% - most likely rates for good / average credit, would result in her paying hundreds ( or more ) in interest

[Thomas_Thumb]

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@masscredit wrote:

I know we say finance over FICO but I've been wondering about this. I have a friend who has a few cards with balances. Her credit limits total to just under $70K. She owes just over $10K. The balances are mostly spread between two cards with zero interest offers so utilization is around 70-80% for them. She's paying $500-$1K per month to hammer the cards down. 

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She needs to step up those payments to over $1000/month. Otherwise her plan is good. Deal with the debt. A lowered score should be a constant reminder to pay off the debt before the 0% promo periods end. 

Score relief should start kicking in once all card UTs drop below 49%. A bigger boost should be expected when total reported revolving debt falls below $6300 (9% AG UT) and when card UTs are all less than 29%.

[Realist]

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@masscredit wrote:

I know we say finance over FICO but I've been wondering about this. I have a friend who has a few cards with balances. Her credit limits total to just under $70K. She owes just over $10K. The balances are mostly spread between two cards with zero interest offers so utilization is around 70-80% for them. She's paying $500-$1K per month to hammer the cards down. She asked me if I think she should consolidate them into a loan.  Her cards will go back to AZEO so she'll gain points back from that. She has an auto loan so she doesn't need a loan in the mix. If she gets one, the balance will go down quickly. Her plan has been to pay all this off by next May. Drawback is she'll pay interest on the loan. 

My advice to her from a finance standpoint was to keep doing what she is doing if she doesn't see a need for new credit in the near future. Spread payments between the cards that have high utilization. Scores will rebound as the balances decrease.

So... in general for scoring, would a person be better off consolidating their card balances into a loan or let them ride on the cards?

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It depends on what your goal is.  You are already sitting on a pathway that makes financial sense, if you pay $500-$1000 per month towards payment with zero percent, as a solution.  Max 20 payments, if we go by the $500 per month method to pay off $10k.

Or, you can take advantage of opportunity.

The difference in interest saving is almost negligable if you run the calculator.  I've paid off 0% interest loans, becuase I acquired more, to do so.  You have to look beyond that simple transaction.  So instead, secure a personal loan, or consolidation loan, even at a higher interest rate, still at a short duration.   Immediately your FICO credit score will either offset the balance or shoot higher due to lower utilization.  Secondly, it provides an additional fixed loan to newly enter onto the credit profile.    Building out a credit profile, it's not a one and done thing.  It takes a lifetime to build, and here you have a perfect opportunity to add to your credit portfolio.   Let the financial institutions earn their pennies.  Thes pennies will translate into dollars, hundreds or thousands to you later.

At the end of the day, it's not always about the percentages.  It's about the terms, and what you can acquire, that you couldn't do easily otherwise.  I would personally consolidate, free up the utlization, add to the credit profile thickness, and then when it settles, determine if there's room for further efficiency utilizing your new, upgraded FICO score.  This is chess, not checkers.  You should be looking at what you can do forward looking, and not only at what is currently occurring.  Think five moves ahead of the focal point you see today. 

What you see as saving a few hundred dollars today, may cost you thousands of dollars later.  But, what do I know.  I at times, do things differently from many others here.  I also achieve different results at times.