Impact of paying down cc debt?

[jnc]

History of our credit scores:  We had really good scores, in the 700s.  Foreclosed on a house almost 4 years ago and settled on an unpaid cc debt shortly after.  Our scores plummeted down into the low 500s. Over the last four years, with time and some work, our scores are back into the 650-670 range. Other than those two negatives, the only thing reporting negative on our credit reports is one 30-day late payment on a Kohls card from 3.5 years ago).

Now we seem to have hit a plateau. Other than more time, I imagine the only way to inprove our scores is to pay down debt.

We have about $15k in credit card debt. Most of it was racked up during a year of unemployment (also the reason we ended up with a foreclosed house!).  But in the past four years, we've not managed to pay down this debt. We pay some down and then use the cards again.

But we are ready to get serious about it this year so we can hopefully get back into a house at some point.

Now, my question is. How much of a score increase can one expect from paying down such debts?  I have crunched the numbers and I figure, if we are really careful with our budeting, we can get more than half of the debt paid off this year!  I'm just really curious as to how much that will help with our scores.

Any info would be greatly appreciated. Thanks!

C & J

[user5387]

There are several basic factors in CC utilization scoring: (1) overall utilization, (2) utilization per CC, and (3) proportion of CCs reporting balances.

Some of these factors you can address without paying down, for example by shifting balances to the CCs with the highest CLs, and isolating debt on a single CC.

As far as the impact of paying off the CCs, it depends on what the current utilization (overall and per CC) looks like, and then the relative hit of such utilization as compared to the derogatories on your reports.  It might be helpful to post the details of your CCs, including CLs and balances.

Another point here is that you can possibly roll the CC balances into an installment loan, and make the utilization issue disappear entirely.

[jnc]

Thank you for your response.

I have 4 cards with balances on them:

Kohls:  $650 of  $800 limit. 

Sears:  $650 of  $1100 limit

CareCredit:  $500 of  $1800 limit

BOFA:  $14,000 of $14,300 limit. 

I'll have the Sears and Kohls card paid off within the next two months. Then I need to tackle the scary one   I don't really have room to move things around unfortunately. But the majority of my balance should be left on the bofa card only within a few months.

I am not sure how much total credit I have available. I was a member of equifax online last year and if I remember correctly, they seemed to think I had about $24,000 available in total. I am not sure exactly where the rest of that credit would be coming from though.  What I listed above only appears to be about $18,000 available credit.  And, looking at my credit report, I have a lot of cards listed but most have been closed within the last 5 years so I cannot imagine where the other $6k in available credit exists.

I'm also not in a huge hurry to raise the scores. I was just trying to get an idea of what improvement I will see as I work on this. I'm hoping to be in a position to purchase a house in a couple years. So, unless an installment loan would save me on interest, I'm not too worried about moving the debt around. Just getting rid of it!

[user5387]

You're at 88% overall utilization.

The term "maxed out" is kind of vague, but typically refers to a CC with 80%+ utilization, so the Kohls and especially the BOFA cards qualify.

Also, if 4/4 cards report a balance, then that hurts you as well.

I expect that the overall cost of this situation is quite high, based on what I know about the impact of high utilization.

I don't know what your APRs are, or your options, but you can check with CUs and Lending Club and similar kinds of alternatives.

I'd also suggest getting the BOFA down immediately, because there's a risk of going over limit, and because it's a huge red flag to other creditors.

[jnc]

BofA card has an APR of 9.99% .. its the lowest of the cards (aside from Care which is 0% for the current balance).  I'm not so sure I'd qualify for a lower rate anywhere with the less than perfect credit at the moment .. this rate has carried over from before our financial issues. I feel fortunate that they have not tried to raise it!

I have carefully used the BofA card for years now.. always hugging the limit but never exceeding it.  I'm not too worried about going over, especially considering that it is our plan to stop using it for now.

As of last month, the Sears card was hugging the limit too. But I've paid it down $500 so far this month.  I'd like to zero it (and Kohls) out before I attack the BofA card. Then I can throw everything at BofA and get the balance down as quickly as possible.  I also plan to hand my tax return over to BoFA too.. that should put a decent dent in it!

My goal is to stop using all the cards entirely this year.  We shall see how that goes, as I have no 'emergency fund' built up. But I figured, I'd rather pay down high interest cards first. I'm quite determined not to use them so they will only be touched if there is a true emergency.

I played around with the fico estimator to try to determine what benefits I'd see with a significantly lower balance on my cards. It only seemed to bump me about 15pts, which was somewhat disappointing. I'd really like to try to hit 700 before I even attempt to look into getting a mortgage.  I imagine another year or two of 'time passed' will help matters as well.  I guess I won't see any serious boosts until the foreclosure falls off, which is still another 3 years away.  Oh well, every little bit helps!

Thanks again,

J & C

[user5387]

In my personal experience, I've observed around a 50-point swing, with relatively high scores and no derogatories, based on whether one CC with a high CL is carrying a 50% balance or not.  I believe that the effect of negatives like high utilization goes down somewhat as the score goes down.  The same is true of overt derogatories; if a person with an 825 score declares bankruptcy, then watch out below!

It's hard to give a magic point value, because it depends on many factors.  The various aspects of a FICO score are interdependent, and there are multiple "score cards" that are used to categorize individual situations.

Another issue here concerns manual reviews.  Even if you don't care about scores, an underwriter may not like what they see.

Also, there's the DTI angle to consider when applying for credit, independent of scores.

[jnc]

Well, hopefully, given another year or two to fix things up here, the mortgage companies will be alright with what they see!

The other reason I'm trying to get this debt paid down is so we don't have the monthly obligations weighing against us when determining the mortgage we'll qualify for.

If I can combine no outstanding debts with a score of 700 or more, I think I'll be in a good position for buying. Now if house prices and interest rates would just quit going up for me!

I guess I will just have to play the waiting game and watch what happens

Thanks again!