Debt Reduction and FICO Score

[Anonymous]

Hey guys,

I've been working on paying off $5,000 of credit card debt over the past 4 months.  I had bought a new vehicle and saw my credit card spending getting out of control, so I lowered the limits on my cards from $10,000 and $15,000 to $2500 each.  As you guessed, it absolutely tanked my credit score by around 150 points.  It was worth it to me because it helped me change my spending habits and kept my debt from getting out of control.  Slowly over the past several months I have been paying the debt off and my FICO score has been reflective of those payments.  It's up about 75 points as I've paid off about 40% of the debt.  However, with tax returns coming soon and a few good months at work, I'll be able to pay the debt off in full.  My question is this, should I just flat out pay all my cards off instantly, or should I pay it off in tiers?  Go from 60% utilization down to under 30% and then to under 10% and then to paid off?  Or just pay it all off at once?  Which would be best for my FICO score?

Thanks!

[SouthJamaica]

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@Anonymous wrote:

Hey guys,

I've been working on paying off $5,000 of credit card debt over the past 4 months.  I had bought a new vehicle and saw my credit card spending getting out of control, so I lowered the limits on my cards from $10,000 and $15,000 to $2500 each.  As you guessed, it absolutely tanked my credit score by around 150 points.  It was worth it to me because it helped me change my spending habits and kept my debt from getting out of control.  Slowly over the past several months I have been paying the debt off and my FICO score has been reflective of those payments.  It's up about 75 points as I've paid off about 40% of the debt.  However, with tax returns coming soon and a few good months at work, I'll be able to pay the debt off in full.  My question is this, should I just flat out pay all my cards off instantly, or should I pay it off in tiers?  Go from 60% utilization down to under 30% and then to under 10% and then to paid off?  Or just pay it all off at once?  Which would be best for my FICO score?

Thanks!

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It's best to pay it all off at once, but let one card report a small balance before paying it off, each month.

[Anonymous]

There is zero benefit at all in taking your time to pay off the debt with respect to your FICO scores. There are only drawbacks, such as paying unnecessary interest and keeping your scores from being as good as they could be right away.

[HeavenOhio]

Reporting a small positive balance on one of your two cards is best for your score. The "all cards at zero" penalty is about 20 points.

But erasing debt, stopping interest, and resetting grace periods are all more important than a temporary scoring penalty. The only time to consider prolonging interest for the sake of a score bump is if you're in the middle of a mortgage application. You can report that small balance once it can be done without having to pay interest.

[Andypanda]

Pay off all outstanding CC debts to avoid further intrest charges. Then on future payments do as people above said about letting somthing post so you don't have  a 0  amount owed, and then PIF.

[Anonymous]

It looks like SouthJamaica and a few others have answered your question, so I'll just add, GOOD JOB!

Reducing your credit limits and taking a pretty significant FICO hit completely goes against what most people would do or suggest. But if that's what it took for you to make the real changes you needed to make, then you did exactly right. And as soon as you finish paying the cards down, you'll get all the points back and (because your credit habits are be better) even more!

Short-term sacrifice for long-term gain. I like it!

[Anonymous]

While self-initiated CLDs are one way to prevent further CC spending, as we can see here the FICO score impact can be substantial.  This could lead to AA, something no one wants.  What I would suggest as a better alternative would be to simply cut up your credit cards, but leave their limits as-is.  Once they are all paid off, call your CCCs and request new cards and at that time self-initiate the CLDs as desired.

[NRB525]

OP congrats on taking radical action to pay down your debt.

Are these the only cards you have, and you did a self-requested CLD on each? That is a noble strategy. I would suggest if that is the case, these are the only two cards, that there is zero risk of AA in this sort. You have already defused any bank concerns by showing you did not intend to run up more debt. AA appears when the bank is uncertain of their future risk of default, unsure if the borrower will run up the entire available credit to “bust out” and default. Kudos for the strategy.

I think the advice to cut up your cards is not good advice. For many normal communication with the bank, you need that card, specifically the Security number on the back or front. The only time you should cut up a card is when it has expired and a new card is activated.

And yes, do pay off both cards to zero as soon as you can to stop that nasty interest expense, reset the grace period on each card.

[Anonymous]

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@NRB525 wrote:
OP congrats on taking radical action to pay down your debt.

Are these the only cards you have, and you did a self-requested CLD on each? That is a noble strategy. I would suggest if that is the case, these are the only two cards, that there is zero risk of AA in this sort. You have already defused any bank concerns by showing you did not intend to run up more debt. AA appears when the bank is uncertain of their future risk of default, unsure if the borrower will run up the entire available credit to “bust out” and default. Kudos for the strategy.

I think the advice to cut up your cards is not good advice. For many normal communication with the bank, you need that card, specifically the Security number on the back or front. The only time you should cut up a card is when it has expired and a new card is activated.

And yes, do pay off both cards to zero as soon as you can to stop that nasty interest expense, reset the grace period on each card.

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Good advice by both NRB and BBS.  I think their strategies can be combined.  Namely....

* Take your cards and place each in a separate zip-lock bag of water.  Freeze them and push the bags behind the frozen vegetables or whatever.  That addresses the real concern that the OP had about being unable to stop making purchases on them -- at least it slows him down enough that he'd have to thaw out a block of ice before he could use it.  And that is what BBS was trying to deal with by the cutting up strategy.

Alternatively, just cut them into two but keep the pieces, again hiding them from sight.  You'll still have the numbers (customer service number, 16-digit CC number, Exp date, 3-digit code) if you need them for some reason.

BBS is right though to home in on our OP's worry that he was incapable of stopping the use of the cards.  Removing them completely from sight and disabling them physically has a lot to be said for it.

While he is paying off the debt he can use debit cards and then figure out the best strategy moving forward after that.

He might end up deciding that the best strategy (even after the payoff) is to never have them in his wallet or within easy reach.  I.e. that he keeps his cards for the purpose of building his credit score (they can be kept active via a recurring Netflix or cell phone bill) but otherwise is forced to use debit cards for everything.  The CLD strategy is not clear to me as a viable solution, since the risk of them being regularly maxxed out remains the same (just for a lower amount of money).

[Anonymous]

Thanks for all the info and replies, everyone!  I really enjoy this forum.  If I may ask, still learning the lingo, what is AA?

As far as which cards I have, I just applied for Uber Visa which I was appoved for, but only with a $500 CL, which is fine by me.  I travel quite often for work so I typically need to have another source of purchasing power besides just my debit card.  Bank went through a period of constantly turning it off and sending a new card often due to security concerns.  I did manually request my cedit limits be decreased from the issuer a year or so ago.  

It's been very important to me to pay this debt off as quickly as I can, and have such limited my spending to very minimal amounts throughout the months.  I'm hoping with the debt paid off that I have learned my lesson, and plan to start operating primarily with my debit card and the Uber card with only a $500 CL as my daily driver.  I do realize that Uber Visa will prob raise my limit at some point here, still trying to decide what to do about that.  I have the other cards put into a "Credit Card Wallet" that sits in my backpack in case of real emergency on the road, but have successfuly not touched them or used them in months, beyond one recurring payment on each (Hulu on one and my internet bill on the other).  I think my plan is to either combine Marriott and Freedom (but maybe just keep them sock drawered so my age of credit doesn't go down) or to request a limit increase on one of them up to maybe $10,000 and just keep it as a high limit to help my FICO.

It's also worth noting that I don't really plan on needing great credit anytime soon, but would like to have it just if I ever decide to buy property.  I was able to get a good rate when I purchased my truck because it was before I manually lowered my credit limits on my Chase Cards (Marriott and Freedom).  Chase Bank gave me 2.94%.  That's sort of why I decided it was a good time to lower the limits, although I didn't quite realize the FICO hit that I would take. 

Again, thanks everyone for the great advice.  It's kind of becoming a game to me!