What debt to pay off first.

Question

Hi All,

I am trying to improve my credit score as quick as possible I currently have a credit card which has a max of $1000 and I currently owe $900 on it so my utilization is very high. I currently also hold a car loan which I owe $750 on and then I will be done paying and will free up $400 a month. Would it be better for me to pay the credit card down or the car loan? I have an option to skip a payment on the car loan which I could then use to pay towards the credit card I have read that after you pay off a car loan your credit may actually drop any truth to this? My goal is to get approved for a mortgage a soon as possible I feel like I am throwing my money away renting at $810 a month when I could be using that to pay on a property that could create cash flow for me in the future. Thanks in advance for advice on this matter.

Mark Elliott · Answer

well, you have some good advice here alex. but there is more to the story. not only do you have to get your credit score up, but you also need to set it in a position that allows you to do what you want to in REI. first, what is your score? where do you want it to be? paying off the car loan helps with the debt to income ratio, but if your score is low now, no one is going to loan you money anyway so what would the debt to income ration matter anyway? second, raising your debt limit on that credit card will help increase your score by increasing your avalible borrowing limit, true, but you could do the same thing by paying off a smaller portion of that debt. you do not want to pay off the card entirely because a lender will see you as not being willing to use your avalible money and that actually hurts your credit score too. the magic number is about 30%. here is what i would do. if your score is good enough to get a loan now, go refinance your car, use some of that money to pay down on the credit card, not all the way down, just down by about half right now. then, go get an increase on that credit limit on that card. that will make your usage level at about 30%.  then, on that new car loan, make sure that you borrow no more than about 30% of the value of that car. some credit agencies will look at that in the same way the credit cards are rated.

go to annualcreditreport.com. dispute ANYTHING negative on your credit reports, all 3 credit reports. it doesn't matter if anything negative is true, dispute it anyway. i will tell you why. when you dispute something, the credit agency is required to contact the creditor associated with the reported account. that creditor has 30 to 45 days to respond back as to whether or not it is true. if they do not report back, then that account is removed from your credit report as though it never existed. that will also boost your credit score. this is how the credit gurus do it. its not " dorky little ways" that they use, it is something that YOU can do yourself. whats " dorky" about it is that people will actually pay someone to do this for them when they could do it for themselves. good luck in your adventures, and let me know if i can help further.

Joshua D. · Answer

@Alex Ortiz

First off I think it is awesome that you are wanting to get rid of some personal debt before you jump in the game of REI.  It builds in the skill set of living on less than you make that is vital if you want to grow a good portfolio.   Secondly the numbers you throw out there seem rather small (but I do not know your income) but I would challenge you to have them paid off in the next 2 months. Find some extra work, sell some things, drastically cut spending. And then buy your first house (duplex I hope)

As far as what to pay first, if you do kick these in the face in 60 days then it won't mater. Internet is basically irrelevant. Just commit to getting it done. Don't ask yourself IF you can... Ask HOW you can!

David Dachtera · Answer

Hi, @Alex Ortiz,

It's true that reviewing your own credit does NOT result in an inquiry appearing in your file. It's called a "soft pull".

How much paying your car loan off will effect your credit score may depend on which account is older: the credit card or the car loan. You "average age of accounts" will be effected either way because you have fewer accounts from which to calculate an average age - it could shift upward, it could shift downward.

The car loan is an installment loan. Thus, it does not effect your utilization  of revolving credit.

Depending the last time you opened a new credit card, you could even help your total credit profile by opening a new account. Your overall utilization will go down even though that one account will remain near max. You'll take a hit for opening a new account, and your average age of accounts will go down a bit, but those go impacts reduce over time.

A big part of your score calculation is payment history. Carry a small balance on the new card (1% to 5% will do) and make timely payments. This will support a higher score, even with the one high utilization account.

Alex Ortiz · Answer

Thanks for all the great advice I will put it to good use.

Brett Youngster · Answer

Sign up with CreditKarma.com and follow their recommendations to improve your credit score. It's free and they have some good advice. I joined about 2 weeks ago and have already bumped up my score. Personally, I would call the credit card company and get my limit increased, then apply for one or two of the recommended credit cards.

Mark Elliott · Answer

that is true, joel, it will NOT hurt your score to use annualcreditreport.com. by federal lawy, you are entitled to once free copy of your credit report from all 3 agencies per year. using annualcreditreport.com is a means of getting that credit report for free. beware, not all websites are free, but this one is.

Alex Ortiz · Answer

@Joel Bowen I was just on the Equifax web page doing some research and things like credit karma and annual credit report are considered different types of inquries that do not hurt your score.

Joel Bowen · Answer

Is it true that is I check my credit score on something like annualcreitreport.com that it will actually hurt my credit score?

Steven J. · Answer

Your credit score is affected by your utilization of credit as well as open accounts. Ideally, you should be around 30% utilization of your available credit so I would suggest to pay down that chunk of money to a lower number.

Potentially, the payment of your car loan could lower your score. I may be wrong so I'm hoping someone else will chime in but when an installment plan is paid off it comes off your score which you think would be good but the credit score is affected by your ability to make good payments, not necessarily pay off debt. I'm guessing your car loan is a lower interest than your credit card so I would suggest to pay down the credit card first.

Dorky little tricks that the gurus will suggest include calling your card company to raise your limit (that does decrease your debt utilization as your borrowable money goes up). I've done this in the past and was shocked when I asked 'what's your lending authority'. The gurus pitched this to me, I didn't believe it, but they did move me up to the next ranking manager and I did get my line increased. I've been good enough lately that they have been just raising my credit without me asking, too!

What debt to pay off first.

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