Credit Payment strageties geared toward improving FICO score

[Anonymous]

We have been agressively paying down my wife's "secret credit card life"   Her utilization ratio is down to currently 28% ($25k) but her FICO score is way low (640)  (no missed payments, defaults etc... just a high CC utilization.

We have been paying from highest interest to lowest, closing one account at a time. I know this is helping BUT I am willing to sacrific some interest expense the principal can be applied slightly differently.

From a pure FICO score standpoint (disregard interest rates) would it be better to implement a different course of action with the principal payments?

Question 1:  Should I be paying the balance on each account to 0 before starting paying down the next one?

From my reading here it appears that from a pure FICO standpoint I would be better off paying each CC down to 7-9% rather then 0%. (ie: rather then making that last 7-9% principal payment begin applying it to the balance on the next credit card)  Then pay off the remaining once all the cards have been brought down to the same utilization level.  My theory he is that FICO will look at a low balance more favorably and allowing us to move more principal to the less favorable accounts

Question 2:  should I be paying more attention to credit utilization on the account when selecting which one to pay down?

For example; my next card on the list (based on interest rate) has a utilization of 54%.  Another card has a lower rate but a higher utilization (88%)

Question 3:Is it better to pay down two cards vs one?

Does it make any difference if I pay off 2 credit cards with a $3,000 balance first  vs paying off one with a $6,000 balance?

Question 4: Utilization Ratios

Does it make any difference if I spread the principal payments across multiple cards?  (ie: lower the utilization uniformaly across each credit card monthly)

Thank you so much for your input!

[llecs]

When paying down CC debt, there are two thought process: 1) pay down higher interest first, and 2) pay down via lowest balances first. On a FICO standpoint, paying down the lowest balances first works best. FICO doesn't like to see balances on every CC, and in fact most should report $0 for more points, but paying down the lowest will get your score up faster.

The only time you should be concerned about util when paying down CCs is when you have a CC maxed out and/or a card that's about to go into collections.

You mentioned that you are closing the CCs. That'll harm the score. Once the balance hits $0, and then you close it, then FICO will ignore the balance and CL when calculating util. So, overall util will improve as you pay a card down, but then spring back up when you close it.

Now if you want to close the CC because of the risk of charging again, then that's different obviously. One thing you can try is just shred the CCs. Some will close on their own due to non-use but they'll report longer vs. closing them when they hit $0.

[Revelate]

Not to quibble much with illecs otherwise excellent post, but paying down the lowest balances first is a short-term optimization.  Unless you're planning to apply for something new in the near future, I don't personally see much point in going this route.

If you have more time, and are planning to pay everything off anyway, paying off the highest APR cards first makes the most fiscal sense and is the longer term optimization of reaching the point of everything being paid off the fastest.  Lower FICO score in the interstitial period, but it saves some amount of additional money in lower interest charges which can go directly towards paying the rest of the debt off faster and thereby saves you money compared to the quick-fix FICO route.

[Anonymous]

Thank you both for the input!

In our particular scenario we need to purchase a new home in the coming months.  Fiscally, it makes most the sense to obtain the lowest possible interest rate on the loan vs a little extra in CC interest payments.

Thanks again.

[marty56]

Don't forget also that anytime you lower your DTI, it makes you look better on a MR.