What to pay off first

[Anonymous]

Hi everyone,  I am a lurker and it's my first time posting. 

First of all, thank you to all of the forum regulars who share their wisdom and experience so generously!!  For the first time in my life, I feel like I have a strategic approach to managing my finances, instead of an emotional one.  It took me 20 yrs to figure out that hope was not a strategy, but I think I can see the light now!!

I am embarrassed to admit that I've gone through life not worrying much about credit or my credit score.  I was always able to buy what I wanted when I wanted, and have never given a second thought to what price I was paying - financially and emotionally - by being in debt.  Now I have a situation where I need to move and my credit score is a shocking 614 (TU)!  I don't even qualify for FHA!!  My length of credit history and payment history is good - excellent... what's killing my scores, I believe, is high utilization.

I never knew that carrying a balance was negative!! I thought the cc companies wanted you to carry a balance! LOL!!  So I've never attempted to do anything but pay my minimums plus a little (rounded off to the nearest $50 so I didnt have to do any hard math!).  Now I need to pay down my revolving debt and quickly.

Here is what I owe:

BofA Visa ($5000 limit):             $4,923.59 at 11.24%
Target ($1000 limit):                    $953.36 at 23.24%
Mastercard 1 (2500 limit):           $2,430.99 at 29.99%
Mastercard 2: ($2900 limit):        $2,780.24 at 28.99%
CapOne Visa ($500 limit)            PIF today at 22.90%
Nordstrom ($2500 limit):             $1,899.53 at 27.90%
Beneficial ($15K limit):                $14,758.18 at 25.00%
JCPenney ($300 limit):               $0 balance / never use this

I have looked at snowball plans and avalanche plans and I know the smartest thing, financially, is to pay off the highest interest first.   But what would have the greatest impact on my FICO?  I will have 2 out of the 8 PIF, $0 balance as of today (yay!) and have an extra $1000 a month that I can put toward reducing my debt (now that I have the knowledge and the discipline!)

Would it be better to spread the extra payments out on all the TLs or would it be better to pay off one of the $2-3K balances first, then move to the next TL?  Or does it even matter when my total util. is so high?

Thank you!

[Travis-84]

First off, do you need the improved fico score anytime soon, (for a mortgage, or auto payment)?

If not, then I would worry about paying if off as quick as possible.  I would start at the one thats 29%, and Pay it in full, then move to the next one.

You will be working on that benefical card for a while, so when you get to that, I don't see a problem with paying off target, just for the peace of mind, and one less bill to pay, but I wouldn't even think about touching that chase card beyond the minimum monthly payment.  I don't think a short term fico score improvement is worth more in interest payments, if you have no plans to apply for any major credit in the next two years.

[Anonymous]

Welcome to the forums!

In terms of FICO scores, I don't think it will make much difference which you pay down first.  I think overall utilization is the most significant factor for you, based on what you've written.  So whatever will get overall utilization down the fastest might be the way to go.

IMHO, those interest rates should be criminal.  In The Inferno Dante had a special spot in Hell for usurers.  Not hot enough, in my opinion, at least for those interest rates.

Those interest rates are so high that, by my calculations, your monthly interest payment is over $500.  That really weakens the debt-fighting power of your $1000 a month.

It looks to me like your first goal should be to figure out a way to get those interest rates down.  Some thoughts might be to look for a balance-transfer credit card deal (probably unlikely), ask your creditors for a better interest rate, look for a line of credit, borrow from a relative, borrow from a 401(k), sell some stuff, get a second job, something.  And, if you have to move, maybe you should consider renting for a year to minimize expenses.

If you can manage to reduce the interest rate on even a portion of that debt it will give you more debt-fighting power, which will help you reduce your overall debt the fastest, which will help your utilization.

A credit union might be a good place to get some advice.  They might have some decent credit card deals, they might have a personal loan or line of credit, they might be able to advise you on the mortgage situation.

All of this may sound bad, but the good news is that you’re looking the problem head-on.  For me, that was the first and hardest step of starting to get control of my finances.

Good luck!

[RobertEG]

In my opinion, I agree that from a purely financial point of view, all of your cards except one have approx the same int rate of 25%-29.99%, so overall interest payed each month wont be highly dependent on which you pay first.

There are many different payment strategies, and I offer my view on how I would approach it.

I would also be concerned about future impacts on your cards as part of my strategy.  

The Beneficial card concerns me most, and thus the one I would first concentrate on paying down.  It is you highest CL card, and thus the most important in your overall % util scoring.  It is already near its max interest rate, indicating there were probably some prior lates on the account.  It is also your highest until card at over 98%.  Based on those two factors, I would be concerned that continued high util might result in a future decrease in your CL by Beneficial.  You want to protect its high CL.

Similar concerns exist for your two master cards, and your BOA card, but all have much lower CLs to protect.  Since the BOA card has the lowest interest rate, that might drop it down a bit on my list for financial reasons, but on the other hand, would be the quickest to show substantal % util reduction.  It is your second highest CL card.

Paying idown the balance quickly will probably require substantial monthly payments.  If you do the math, at your current total balance of $27,700 and aprox monthly average, combined interest rate of approx 24%, you are probably currently paying approx 2% each month, or approx $540, just in interest.  Thus, your first $540 or so each month wont go to reduction of overall % util.

[Anonymous]

Thanks for everyone's advice.  I'll answer the questions I saw...

• I am applying for a mortgage soon which was how I became aware of my score in the first place.  I must move in the next 3-6 mo. (unexpectedly due to a highway being built near us -  the highway project is impacting a salmon stream that runs on our land so the state is taking the land, bulldozing the house and making all of it a protected area... another story for another day - it's complicated.)  We are working for a settlement on our land that includes some means to help us pay off some of this debt, but can't be sure that will happen, so I need to start making progress on my own.  We can't rent (must buy a replacement property) because we would forfeit the majority of our settlement from the FHA.

• I have no lates on any of my cards, ever.  The only derogatory thing I have is a medical collection that I didn't even know existed until I pulled my credit report last month.  I immediately called and paid it.... but I didn't know enough to ask for a PFD.  (Should have visited here sooner!!!)  It was a bill for my daughter that was not paid by our insurerer and we moved... both the provider and the insurer only had our old address, and by the time it was going to collection I had moved and transitioned to a new job (the reason for the move).  I called and the collection agency has refused to remove it from my report.  Also, since I paid it so recently, it is showing up as a more recent activity.

• The $1000 is in addition to the minimums. I have never had a budget, so I am just getting a handle on my cashflow.  There may be more $$ to put toward debt that I haven't found yet. 
• The 15K Beneficial is a line of credit...  it was used to do some remodelling on our current home.  They haven't increased my interest rate - it's just that it was set up to make min. monthly payments.  Clearly, that's not making any impact on the total owed, and I see that now.

Thanks for the helpful advice! I am looking forward to being debt free soon.

[Macroman]

With the upcoming mortgage app you should probably focus on cleaning up the small accounts first. Having a few cards report PIF will give you a short term score boost of a few points and every little bit helps. Don't expect to get a bunch of points this way.

If you need to get a lot of points see if you can borrow from a relative, a 401K, or HE line which would take this debt out of the very damaging revolving category. Don't look at these ideas as a long term solution, however. Make sure you get the finances under control or you'll be in a worse mess in a few years.

[thrasher865]

Purely in the interest of your FICO score, you would want to pay down the lowest balance first and then move on to the next lowest.

Purely in the interest of your finances, you would want to pay down then highest rate cards first.

I'd suggest leaving the BofA since its substantially lower than all the others, and starting from the lowest balance, i.e. the one you could pay off the quickest.  The scoring model is concerned with three limit utilization percentages, total, percent for each account and percent of accounts that carry a balance.  So you would want to get the larger accounts at least down to around 80% by the time you apply for your mortgage, but in the meantime, it would be in your best interest to pay off as many accounts as possible.

[Macroman]

Excluding your LOC from Beneficial, which I believe would be considered an installment loan, you have 88% utilization.I suggest that you verify this. Paying off $1000 extra per month, however distributed, would take you through the following path:

month UTIL

0 88%

1 81%

2 74%

3 68%

4 61%

5 54%

6 47%

In your situation you are best served by deferring your loan application as long as you can. Also when it comes to submit your application you can pull your report beforehand and verify that recent payments are updated on your report. Find out the reporting cycle of all your cards. In the last month prior to your app, maximize payments that will be reported on the CR that will go with your application.

Generally I believe that having several paid off cards will be the most favorable situation that you can achieve here, but there may be some benefit in getting all of the cards below a threshold like 80% or 90% of the line. This is likely to vary by the CR used. If your lender uses EQ or TU you can get a good idea of what that shows herre at MYFICO.

When you go to submit  your mortgage app you can consider bringing some proof of your debt reduction progress along to a meeting with your loan officer. 50% or 60% util may look better when you show the progress that you've made. Of course this will work only if you can develop a rapport  with the loan officer. You'd need to explain how you got yourself in this hole and your plans to make sure it does not happen again.

[Anonymous]

The important thing is that you are willing to change.  That said, you've recieved some good advice here so far but I wanted to give you more specific suggestions.

I'm sorry to hear you have to move so swiftly and hopefully they will compensate you for some of that!  However, pretending that won't happen, here's my advice:

1. Pay off the Target (that'll give you 3 0 balance cards)

2. Pay off the Nordstrom (that'll take 2 months and will give you half of your cards with no balance)

3. Pay off the MC 1 (that'll take 2 more months since you can add in the payments you were making to the first two cards and will mean you have only 3 accounts with balances)

So in 5 months, you'll be in fairly good shape, since you'll have less than half your accounts with balances and you'll have freed up more money to pay down the other cards.  That should also give you enough of a boost to get to 620.

After that, keep trying to pay down as much as possible (my suggestion: MC2, BoA, Benef.) and hopefully within 1 year from now, all you will have left is Beneficial and that will be gone in one more year.

Also, if you haven't been late on anything, try calling the companies and asking them to lower the rates.

Finally, with the medical collection you mentioned, you can do a HIPPA letter to have it removed (there's info on the fourms about this) since it has been paid.

Good luck!

[Anonymous]

This month I paid off both the Cap1 and Target cards.  I will focus my efforts on the remaining high interest cards and LOC (which is revolving, not installment).  It feels good just to have two TLs paid off!!!

Can I have the medical collection baddie removed if I paid the CA, not the provider directly? I called and asked them to remove it after I paid, and they said it would remain on my report for 7 yrs.  The date of service is 2/2008.