Yes, you can raise your credit score by paying down card debt, but you don’t want to get upside down on a car loan in the meantime.
Dear Credit Guy,
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?