Todd Ossenfort has been chief operating officer for Pioneer Credit Counseling since 1998. He writes our weekly “The Credit Guy” column, answering reader questions about credit counseling and debt issues.
Dear Credit Guy,
I have two credit cards. One balance is $2,645 with a credit limit of $2,800. The other balance is $5,143.86 with a credit limit of $5,500. I have $1,800 that I was going to pay on these or pay down on a car. My credit score is 680. I pay my bills on time all the time and always more than the minimum. I was looking to buy a car within the next 30-45 days. I am wondering whether I should pay this money on one or both of my credit cards, and how much? (Which will help my credit score the best?) After making these payments to my credit card or cards, how long does it take for your credit score change to show up? I really would like to get the best interest rate when I go to buy my car. — Sharon
I believe you would be better off in the long run using your $1,800 as a down payment on your car purchase. My rationale is that if for some reason you needed to sell your car, particularly early on in your loan term (reasons you may need to sell might include getting laid off from your job, a decrease in salary or some other interruption in your income) without a down payment, it is likely you would be upside down in your car loan. Upside down means you owe more on your loan than the car is worth. In a must-sell situation, you would then be in a bad financial situation, either having to continue to pay on a car loan when you no longer own the car or face repossession because you can no longer afford the loan payments — both of which could be very expensive.
With a credit score of 680, you would qualify for a national average 48-month term loan on a new vehicle at 9.5 percent interest. If you increased your credit score to the next level or 690-719 range, the national average for a 48-month loan would be 7.5 percent. The lower rate would save you $906.46 in interest charges on a $20,000 loan over the life of the loan. I know you don’t want to pay any more for your car loan than you need to, but I would rather you plan for the unexpected.
If you disagree with my advice and would rather use the money to pay down your credit card balances, you could pay $1,245 on your card with the balance of $2,645 and the remaining $555 on the card with the $5,143 balance. Paying the majority of the $1,800 on the lower balance card will bring what you owe down to 50 percent of your credit limit and should boost your credit score. One of the elements considered for your FICO credit score is the ratio between the credit available to you and the credit you are currently using. The goal is to owe less than half of the credit available to you. You would still be over that limit on the higher balance card, but you would be bringing one of the accounts down to that magical 50 percent acceptable level.
Take care of your credit!
See related:FICO reveals how common credit mistakes affects credit scores, Best to apply cash to credit card debt or down payment?, Understanding how credit scores work, Can you really afford that car loan?
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