To pay, or not to pay?

Question

Hello friends!

I recently lost my job due to COVID, and I had a work history with a good income for 4 years. Now that I decided to chase what I really want which is Rental Investment, I've come across this roadblock. My credit is poor, I have closed credit cards debt that equal $11,580 (from when I made bad choices), however, I keep my current 3 credit cards with no balance and my only monthly debt is rent, food, and utilities and necessities ($1700). No loans or car loans. I was planning on keeping my savings account ($19,000 on 401k) to cover the downpayment in 6 months after I get a job and steady income again, and at the same time pay down my debt with the cashflow from that job. However, if I do that based on a $17 an hr job, my debt to income ration will still be over 50% after 6 months since my credit cards limits are so low. So what I'm thinking is withdraw $10,000 to pay down debt right now, and save my extra cashflow for the downpayment instead.

Any ideas from the experts?

Thank you!

Matt M. · Answer

@Karlo Bodu

Not to be rude... poor credit, no job, charged off debt, a small 401k as savings. Not the time at all to be thinking about investing in my opinion. Get a job, or two, save every penny and pay off as much debt as you can and raise your credit score. Investing should be the end goal, not a thought now.

Kyle J. · Answer

@Karlo Bodu No offense, but I wouldn’t do anything until you understand credit reports better because you don’t even seem to understand your own and if you do the wrong thing here you can actually make yours worse.

First, you keep talking about DTI ratio as it relates to your FICO/credit score. However, your FICO/credit score doesn't even factor your DTI ratio (the scoring model has no idea what your income is).

Second, at one point you said your credit card debt was “charged off” and you had no other debt. However, in other posts you said these old accounts were just “closed”. Then in your last post you said your AmEx account goes down every month (which it wouldn’t do if it was charged off, or even if it was closed unless you were making required payments on it, which would be a debt).

So this is all extremely confusing. But if your accounts were truly charged off, they’d eventually fall off your credit report after a period of time (negative info usually comes off after 7 years per the FCRA). An exception to that could be if you made a payment on an account that was charged off or in collections that you didn’t have to make, because that could “refresh” the timeline and essentially start that 7 year clock all over.

Point is, before you do anything, you need to understand your credit better and exactly what type of debt this is.

Good luck to you.

George Blower · Answer

Keep in mind that in order to take a distribution under the CARES Act you must have been impacted by the virus in one of the enumerated ways & your current account provider must allow you to take a CARES Act distribution. The IRS recently provided guidance regarding eligibility under the CARES Act and specified that a qualified individual includes an individual who has a reduction in pay (or self-employment income) due to COVID-19.Distributions:

If so, you can take a penalty-free distribution (as well as waive the 20% withholding requirement) from your 401k (assuming that the employer allows it) anytime between 1/1/2020 and 12/31/2020. You may avoid the taxes if you deposit the funds in an eligible retirement plan (which includes anIRA) within "3 years and a day" of the date of the COVID-19 distribution (note: compare to a 60-day rollover). Please note that the account into which the funds are deposited must be the same type of account from which the funds were first withdrawn (e.g. withdrawal of pre-tax funds from a 401k could be deposited in a pre-tax IRA but not a Roth IRA - "like to like").

Jaquetta T Ragland · Answer

@Karlo Bodu just wanted to add their are a lot of remote positions available so apply for as many of those as you can.

Theresa Harris · Answer

If you are carrying a balance on the credit cards, pay them off.  you are normally charged interest on the total amount unless you pay it in full.  No idea what your interest rates are on the cards.

Angelique Diaz · Answer

@Karlo Bodu pay everything off that is still on your report and no where near coming off (7 to 10 year mark).  It will take about 30 to 60 days for it to be removed, then your credit will jump up.

Karlo Alamo · Answer

@Caleb Heimsoth

Its been almost 5 years, so I’ve decided to pay everything off and worry about the downpayment ewhile it goes up.

Thank you everyone again!

Caleb Heimsoth · Answer

@Karlo Bodu how long has it been closed/charged off? It’ll stay on your credit report for 7 years until it rolls off.  I am pretty sure that’s how it works.  If that’s the case, you can do some other things but your credit will usually be mid 600s until that happens

Karlo Alamo · Answer

@Kyle J.

Thank you! if I would've known the difference at the beginning, I would've said that all of them were closed as charge off. So ill make sure I pay all of it, and in the meantime, while it goes up, ill learn more about credit and rental investing while at the same time save for the downpayment.

Thank you!

Kyle J. · Answer

Charged-off accounts and closed accounts are not the same thing. For example, a closed account isn’t a negative thing, but a charged-off account is.

It’s still not entirely clear to me what the status of these accounts are. However, they are almost certainly contributing to your “poor credit” if they’re carrying a balance because they’re still going to factor into your overall credit utilization. And your credit utilization is weighted heavily in determining your credit score.

Here’s a graphic to give you an idea of what you should aim for:

Lastly, I still think it would be a good idea for you to learn more about how credit scores are calculated if you want to work on improving yours. Here’s somewhere you can start that’ll give you a bit of an idea of how different factors are weighted when calculating a credit score: What's in my FICO Scores?

Lastly, if you want to know how paying off certain debt (or doing other things) might affect your score, you can use a app/service like Capital One CreditWise (you don’t need to have a Capital One account). It’s a free app that lets you check your credit score, but the benefit to you might be their Credit Simulator where you can simulate what your score might be after paying down some debt. Could be something worth looking into.

To pay, or not to pay?

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