What to pay off

[un4givn]

I will be coming into some cash in the upcoming year and I was wondering if anyone knew which is better to payoff/paydown for maximum score boost:

I have a car loan @ 10.9%, simple interest, no prepay or a revolving line of credit @ 7%. The credit line is closed so no chance of adding more debt.

I may not be able to pay these off in one shot but will likely take about 3-6 months off my repayment plan on either item. Currently the car will be paid off 4/07 and the CC in 3/07

I owe aprox 4800 on the car and 10500 on the credit card. I currently pay 65/week on the car and 25/week on the cc direct to company + 587 monthly thru CCCS.

[Anonymous]

Always pay higher interest items first.

That would be your car since your CC is on a reduced CCCS rate. Besides the sooner you can have title in hand, the better. You could for instance drop insurance to PL/PD and save money that way, assuming the car is your ordinary car, and likely in the event of a crash it'll be "totalled" just on cost to fix vs. vehicle value.

Just an interesting tidbit on insurance and such: I knew a fella that rolled his car. Had only PL/PD on it so insurance didn't pay of course. So he gutted the car of any usable parts - stereo, airbags, trim pieces, etc. and put them on eBay. He sold them and got more doing that than he would have received if he had full coverage and took a payout on his car's totalled loss. Now you have to be mechanically inclined to do this and hassle with selling the stuff on eBay but he thought it was worth it.

[Radio_Guy]

Dear Un4given,

First, GrimRepo is right.

From finanacial standpoint, GENERALLY it is better to pay off the higher interest items first.

From a Cash Flow standpoint, it better to pay off your smaller balance TLs first (for moderate differences interest rates,) because;

1. Then you can apply your payment for the smaller TL towards the TL with the larger balance.

2. You have one less payment to make and all the interest that would normall go towards one TL can now be applied to the outstanding balance of the larger TL, regardless of the interest rate this will pay off your debts faster IF YOU HAVE CONSISTANT RE-OCCURRING CASH FLOW (i.e. a regular salaried paycheck. )

Both of these strageties support paying off the Auto loan first.

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But you have asked about the affect on your scores, not finanacial management strategy.

Here are of couple of questions to consider.

1. You stated you are paying thru CCCS. Do either of these TLs have late payments being reported? If so this may affect your strategy.

2. The CL is closed so you can't receive any boost to the Utilization portion of your credit score by paying the balance down. If this is a charge off or a TL with lots of late payments then removing it from your list outstanding accounts will improve your score, and lower to debt to income ratio.

3. However, the Auto loan is an open TL so as a rule, open TL's that are current increase your credit score.

Since you are in CCCS then both these accounts are probably negatively affecting your score, anything you do to get out of CCCs and pay these off will help you. Since both TLs will be paid off in a few months then any immediate score increases are going to be small, long term though the Auto loan could increase your score more. Because;

If you have late payments on an open TL and then show a bunch of on time payments after your last reported late BEFORE the TL is paid off looks better to a potential new creditor and will boost your score long term.

(In two years the only payments showing on the TL details section of your CR will be on time payments, and your score will increase a small amount as a result. Once all the late payments are seven years old, they will drop off completely and only positive payments will show on the TL details so this will turn into a positive account and increase your score until the trade line listing also drops from your CR.)

Sorry for such a long winded post, these are just some thoughts to consider. Good luck-

[un4givn]

Radio Guy:

Auto loan has a perfect payment history. It was obtained 1 yr post CCCS entry.

CC has several late pays from 4 years ago before I entered CCCS.

My ultimate goal is to buy a house in 2007. So I've been reading up about front and back end ratio's.

Leaving CCCS is not an option MBNA would jack up my rate to 25%.

Grim:

Thanks for the Ebay tip- I hadn't thought about parting out the car. I repair medical equipment so taking a car apart is no problem. I'm in the process of trying to get a job with a company car since I do field work- If that happens I'll either sell the car or part it out.

Thank you both for your input I've been analyzing this to death.

[Radio_Guy]

Dear Un4given,

Based on your new info, I would pay down on the CC account. Get that puppy off your CR as soon as you can. Once its paid off you can start disputing it sooner... (Remember this strategy is for improving your score only, otherwise Grim is right - pay off the auto loan for better financial mangement.)

The auto loan is a positive tradeline and stretching out its payments will ensure that it says on your credit as a positive TL longer.

Leaving CCCS is not an option MBNA would jack up my rate to 25%.

I misunderstood your last post, I assumed that once you paid these 2 TLs off you would be out of CCCS.

Final thought, once the CC is paid, can you exit CCCS and still keep the car loan?

The reason I ask is because an open installment loan that is less than 50% LTV adds points to your credit score... So if you keep the car loan until just before apply for a mortgage if might help you., once its paid off you can not reopen it to get your points back.

Good luck,

[un4givn]

Radio Guy:

Once MBNA is paid I am off CCCS it is the only account still in the program.My CR doesn't indicate anything about CCCS at this point but since a mortagage lender would check my bank statements they would see a monthly CCCS debit which would obviously impact my chances du to the high payment. Besides I don't want to take on a house with this debt hanging on me so from an affordibility standpoint I will not buy a home until both the car and MBNA are paid. I've had the experience of being house poor when I lived in NY and would rather not go there again.

For now I just want to make sure I get the best possible score I can.

[Radio_Guy]

Once MBNA is paid I am off CCCS it is the only account still in the program.

Great !

My CR doesn't indicate anything about CCCS at this point but since a mortagage lender would check my bank statements they would see a monthly CCCS debit which would obviously impact my chances du to the high payment.

When the CCCS account is paid, it is no longer a monthly obligation, hence it has no affect on your Debt to income ratio. Now on a mortgage loan credit report they verify all sorts of extra stuff. If you are a few months out of the CCCS then it would be harder for them to discover this and list it, especially if all the concerned accounts are paid off, but it could show up.

You stated that you want to buy in 2007, yet you will be all paid off in April 2006. So I don't see how any of this would affect your Debt to income ratio. You only need to furnish the last three months of bank statments to prove your savings balances and it is unusual to provide checking account statements with a mortgage application unless you are self employed.

Besides I don't want to take on a house with this debt hanging on me so from an affordibility standpoint I will not buy a home until both the car and MBNA are paid.

I've had the experience of being house poor when I lived in NY and would rather not go there again.

Good thinking... however you COULD pay off your auto loan closer to the time you wish to buy a home to help your score IF this fits into your overall plan. Again this would not affect your Debt to Income ratio on the mortgage app because it would be paid prior to obtaining the mortgage.

For now I just want to make sure I get the best possible score I can.

If this is truly your primary goal, and since the auto loan is perfect and a positive TL, I would put all your extra money into the CC so you can begin disputing this account to get rid of those four lates. Besides, The difference between 7% and 10.9% is not that much.

You are taking the shotgun approach to your debts, you need be a sharp shooter and target the worst (and highest balance,) with all your extra cash first AND GET OUT OF CCCS sooner, thereby reducing the chance that the CCCS notation will show up in a full mortgage CR. Once this CC is paid you can then put all your money towards the Auto Loan and pay it off in short order.

Best wishes and Good luck.