how to apply windfalls?

[Anonymous]

Beginning in about March 07 my situation changed for the better and I am on a 1-year mission to improve my (current) ~565 to a mortgage-worthy score. I had late payments in Nov. and Dec. 06 but since then have been paying on time, and as often as possible paying extra. I have a large student loan (~$46,000) and a large "revolving" consumer loan (now ~$9500, from $11K originally loaned) and a minor credit card (currently $600 on a $950 limit). By working through Consumer Credit Counseling Service I majorly reduced the interest rate on my "revolving" loan but the open-credit aspect of it was shut off (it is no longer "revolving"). I am a freelance copy editor and about every other month get a nice contract from a book publisher that amounts to a windfall of anywhere from ~$800 to as much as $3000. Would it be best to apply these windfalls to the student loan, or to the consumer loan? I believe a lender would take my total debt versus my income into consideration, so maybe it would not even matter, since the extra payment reduces my overall debt. One thing that is ruining my score is a high "utilization" rate--is this applied only to things like credit cards and revolving loans, or are they talking about my student loan, also (which has not been reduced by very much)? thank you!

[Anonymous]

What is the interest rate on each of the three items?

What is your best estimate for the total amount of "windfall" income you expect to receive during the next 12 months?

[Anonymous]

Thanks for the help -- I do understand about paying down the highest-interest debts first but am wondering about the effect of paying down the student loan vs the consumer loan on my FICO score. I do need to reduce the credit card as soon and as much as possible and intend to do so. It is at 63% util, at 21% or so interest. The consumer loan is 9% and the student loan is 5.625%. My theory is that focusing on the consumer loan (after the credit card) would be best, because it had an 11K limit, whereas the student loan did not really have a "limit." It also of course is the higher-interest loan, but the amount owed on the student loan is so great that the interest is huge. You asked how much I expect to get in these extra payments in a year, I think it will be about $10K net in 2007.

[Anonymous]

them thar' student loans....defer 'em, forbear 'em, keep 'em in good standing, and die with 'em cause they die with you!

[Anonymous]

It appears to me that the best financial approach would also be the best FICO approach. Pay the minimum required on the student loan (or zero if payment can be deferred) and apply all extra funds to paying off the credit card first and the consumer loan second. In 12 months, both of your revolving items would be paid off (or very close to it) if your income projection is accurate.

[Anonymous]

I agree with the last poster. Defer your student loans and pay off your consumer loan. This will benefit you the most because you will be keeping your student loans in good standing as well as keeping your consumer loan in good standing while paying it down over time and hopefully be finished with it after a year. A paid account that was always paid on time looks great and reflects well on your FiCO. MAKE SURE to defer your loans or at least pay the minimums because one late on your fed's is bad news....

good luck

PS - i'm pretty sure the "utilization" rate only applies to revolving credit accounts and not installment loans. I could be wrong. I know it doesnt apply to Mortgages and i'm pretty sure it doesnt apply to my car loan. If you're looking to improve your score for mortgage purposes, lenders will look at your debt/income ratio as well so as long as your accounts are "open" and not closed, it doesnt matter which installment loan you pay first. Always pay down revolving credit first...

this is my modest understanding of FiCO... yay.

Message Edited by phorts on 07-09-2007 10:33 AM

[Anonymous]

well, I took a forbearance on the student loan for 6 months and could NOT BELIEVE how much interest had accrued and how my monthly payment had increased (I was not in good shape then and could not even keep up with the interest). I used a loan calculator to figure my payment to pay it off in 15 yrs instead of 30 after my situation improved, but after reading the advice here I will apply that extra money to the consumer loan instead and make minimum payments to the student loan for a while. From what you're saying, my high utilization rate must be figured only on my credit card (I do also have a small Target card which has a very small balance, less than $100), which will be fairly easy to correct. Thanks for the advice!