high CC balances but can make a large payment (utilization question)

[Anonymous]

Got myself in a mess and need to fix it. 

Two years ago, my credit rating was high but it is now middle of the road because of CC debt.  I have high balances and high limits: 

• card 1 has a balance of $9,000 with a limit of $25,000 (36% utilization)
• card 2 has a balance of $8,000 with a limit of $11,000 (73% utilization)

Between a tax refund and selling something, I have $6,000 to put to CC debt.  How do I allocate the money?  I am MOST concerned about my credit rating rather than the less than $100 interest difference.  So how important is utilization if both CCs are high?

Option 1:  Pay all to card 1 because I am so high on utilization that it doesn't matter and I should pick based on interest rate, which is card 1.  If so, utilization would drop to 8%.  So I am left with one really high utilization and one relatively low utilization.

Option 2:   Pay all to card 2 to get down the highest utilization.  If so, utilization on card 2 goes down to 18% but I still have card 1 at 36%.

Option 3:  Split the payment to get both below 1/3.  If so, I pay $1500 to card 1 reducing utilization to 30% and card 2 gets $4500 reducing utilization to 32%. 

I think option 2 is the best but is there a magic threshold in the 30-35% utilization range that I should aim for with Option 3?

Thank you so much.

[llecs]

I zapped your post over to here from CCs because your biggest concern was your credit rating.

Revolving utilization is a big deal. I once got 125 points on EQ FICO just by bringing balances down from 89% to 1%. The fastest way to improve your credit rating and FICO score is through revolving utilization, but it's also the most painful when paying attention to your budget.

FICO likes $0 balances (assuming you leave one CC with a very small balance). Look at your FICO report. If util is listed as a ding at the #1 or #2 slot, then you stand to see bigger gains as you pay down this debt.

If I had your situation, I'd throw all of it at the $8000 balance and would continue to pay down debt after that at an aggressive pace. $6000 alone will result in an overall util from 47% down to 30%. This might result in a 10 or so point gain. No much. I bet you can squeek a few extra points if you toss another $500 or so to get your overall util below 30%. You'd start seeing some larget gains as the balance on the lower bal CC hits $0 and as util crosses 20% then down past 10%. This is all assuming that util is in that #1 or #2 slot and assuming you don't have any other CCs at play here or anything else that can factor into util like CC COs, LOCs, HELOCs, etc.

[JohnPTEX]

I may be wrong, but if you're carrying a balance on each one each month then the answer is quite simply the one with the highest interest rate.  Utilization is utilization regardless of which one you pay down first.  Although I agree that carrying a zero balance on all cards and a slight balance on one can make a huge difference in your score.  Unfortuantely I'm a firm believer in not paying anymore than you have to in life.  Apply that excess interest you save by paying down the higher rate card to getting to zero, not because you want to squeek a few points out in the short run.

[marty56]

From a FICO and DMP standpoint, I would pay down card #2 first.   Also high util could make you a target for AA so I would pay it down for that reason as well.   To finish paying down debt, pay minimum on card #1 and extra on card #2 until it is PIF and then attack card #1.  That is the so called debt snowball approach used by many DMP programs and Dave Ramsey.  You will also feel great going from 2 cards with a balance to one and then none.  I have been there and done that so I am speaking from my own experience there.

[crunching_numbers]

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@Anonymous wrote:

Got myself in a mess and need to fix it. 

Two years ago, my credit rating was high but it is now middle of the road because of CC debt.  I have high balances and high limits: 

• card 1 has a balance of $9,000 with a limit of $25,000 (36% utilization)
• card 2 has a balance of $8,000 with a limit of $11,000 (73% utilization)

Between a tax refund and selling something, I have $6,000 to put to CC debt.  How do I allocate the money?  I am MOST concerned about my credit rating rather than the less than $100 interest difference.  So how important is utilization if both CCs are high?

Option 1:  Pay all to card 1 because I am so high on utilization that it doesn't matter and I should pick based on interest rate, which is card 1.  If so, utilization would drop to 8%.  So I am left with one really high utilization and one relatively low utilization.

Option 2:   Pay all to card 2 to get down the highest utilization.  If so, utilization on card 2 goes down to 18% but I still have card 1 at 36%.

Option 3:  Split the payment to get both below 1/3.  If so, I pay $1500 to card 1 reducing utilization to 30% and card 2 gets $4500 reducing utilization to 32%. 

I think option 2 is the best but is there a magic threshold in the 30-35% utilization range that I should aim for with Option 3?

Thank you so much.

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OP- do you only have those two cards, or are they the cards you want to attack?  I am also paying down very high util.  I agree with previous poster. Attack the higher util card, then pay minimum to one card and throw everything else at the other. (This is called snowballing.)  If you have other cards (especially GE store cards) you can help your util be asking for credit line increases.

[Anonymous]

What are the differences in APR's?

I know you said #1 is higher than the other, but I think the situation might need asking if the difference is 15% to 25% or 17% to 18%.

[crunching_numbers]

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@Anonymous wrote:

What are the differences in APR's?

I know you said #1 is higher than the other, but I think the situation might need asking if the difference is 15% to 25% or 17% to 18%.

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Valid point Frug. Thing is OP is MOST concerned about the FICO's. He will eat the interest difference to get his scores up. If the interest difference is significant it would make financial sense to pay the higher one first. Unfortunately, it might slow down the upward progress of his FICO's. If he is looking to save money, he might need to sacrifice on scores for a few months, but if he is trying to get the biggest FICO hit, he might eat some interest.

[Anonymous]

I wonder what's in the OP's purchase future that he's more worried about the immediate score?

Any clarification on that, Mr. OP