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natale1980
12-17-2008, 12:47 PM
So I am hoping to get a second opinion.
We are going to put our tax refund towards our debt. But should we pay it toward a credit card (right now the min payment is $100) or should we put it toward the car payment (payment is $350). We have another 11 months on the car loan - So I was thinking our tax refund will take that down to about 5-6 months. Less if we continue to pay more then the minimum.
OR is it better to pay off a credit card?
What do you think? :confused3

We are going to be applying for a home loan this spring. What one will help our credit score more. We don't really 'NEED' help - we have clean credit... but in this economy I am hearing that you need almost PERFECT credit to get a home loan.

-nat

asoko
12-17-2008, 01:10 PM
I would pay down the credit card first, but leave the account open. First I'm assuming the credit card interest rate is higher than the car loan. Second having an established installment loan open and current will help your credit score. Your credit score will actually go down after you pay and close the installment loan. This is also why I say to keep the credit card account open. Having room between the balance and credit limit on a credit card will help your score by having available credit and a low % of used credit, when you payoff an installment there is no available credit left since they close the account.

After I sold my house and paid off my mortgage, my credit score went down because I didn't have a mortgage or car loan anymore. About 6 mos after we bought our new house with a new mortgage, the score increased dramatically.

Bren's Mom
12-17-2008, 01:13 PM
Keep the car loan, pay it of course but don't pay extra on it. You don't want to pay it off before you buy your new home.

Bring down the balance on the credit card as much as humanly possible, and if you do happen to pay it off definitely do not close the account.

Good luck!

JCJanko
12-17-2008, 01:15 PM
With just the information you gave, it makes sense to pay off the car first, and it has to do with your future home purchase.

When you go to apply for a mortgage, one of the most important factors is debt-to-income ratio (DTI). If you only owe $100 per month on the credit card, you'll only be knocking down your monthly debt by $100. Paying off the car knocks off $350.

For example, if your monthly gross income is $1000 per month, right now you are paying $450 in debt (pretending this is your income and no other debts). Banks will not give you a mortgage for more than, and this is pushing it before the housing crisis, 55% DTI including the mortgage. Therefore, if you are even able to get funded (which would be unlikely using these numbers), you could only get a house with a mortgage of $100 per month using these numbers. Paying off $100 per month gets you a home with a $200 per month mortgage, paying off $350 per month gets you a $450 per month mortgage.

Now, if you make enough money where DTI is not an issue (let's say right now you DTI is 10%), then you could either:

-Pay off the car payment to save monthly income and use the extra to pay down the credit card OR
-Pay off the higher interest rate account to save interest paid

Let me know if this makes sense!

__________________________________________________ _

After looking over your post again, if you absolutely MUST get a house BEFORE paying off in full either account, pay the credit card down. Paying the car loan down but not off will NOT help your credit score, nor your DTI, unless the bank takes into consideration the car loan will be paid off soon and doesn't include it. Paying the credit card will absolutely raise your score immediately.

prncess674
12-17-2008, 01:23 PM
After looking over your post again, if you absolutely MUST get a house BEFORE paying off in full either account, pay the credit card down. Paying the car loan down but not off will NOT help your credit score, nor your DTI, unless the bank takes into consideration the car loan will be paid off soon and doesn't include it. Paying the credit card will absolutely raise your score immediately.

Consumer credit card debt always brings down you score more than secured debt such as the car loan! Pay donw the credit card ASAP!

JCJanko
12-17-2008, 01:26 PM
Oh, a few more things. It's a fallacy that you need "perfect credit" to get a home loan today, or any kind of credit. I just opened a credit card with a $7000 limit without even a credit pull, 7.9% APR. The things that have tightened are high-risk loans, no income verification loans, no money down, etc. If you are going for a traditional mortgage with 20% down and average credit, you shouldn't have any problem at all, unless you're looking in an area hit hard by the housing crisis.

chemysterygal
12-17-2008, 01:26 PM
Isn't utilization of credit (how much is used versus how much you have) actually a huge factor in FICO scores? That being the case, personally I'd go with paying down any credit card debt, especially if the interest rate on that is higher than on the auto loan. JMHO, of course!

JCJanko
12-17-2008, 01:27 PM
Consumer credit card debt always brings down you score more than secured debt such as the car loan! Pay donw the credit card ASAP!

Right, I noticed that after. But if she can pay off the car, that may be better due to DTI. But as I said, if DTI is not a factor, always pay the revolving debt first.

For some reason, in today's climate, I assume DTI will be a factor. ;)

In other words, if her DTI is too high, FICO means squat. If her DTI will be over 55%, she could have an 800 FICO and not get a loan.

It's too tough to tell without specifics. If her FICO right now is over 700 median, the car may be the best to pay.

prncess674
12-17-2008, 01:31 PM
I work for a large accounting firm and frankly some of the financial advice I have seen given here on the budget board is some of the most disasterous financial advice I have seen. I think the OP needs to seek out help from trained professionals verses anonymous Mickey Mouse advice.

DTI is a factor but your thinking is wrong. Paying only the minimum towards a high interest credit card and dumping big bucks against a secured loan is just crazy wrong advice. I think you need to go do some research on how DTI is calculated.

ruadisneyfan2
12-17-2008, 01:32 PM
Consumer credit card debt always brings down you score more than secured debt such as the car loan! Pay donw the credit card ASAP!


I agree 100%!!! They know that soon your car will be paid off. The same can't be said for cc debt. Also like a mortgage, most interest on your car loan has already been paid. If you have less than 1 yr. left on your car loan most of what your monthly payment is right now is principal. As time goes on, payment amt. stays the same but pricipal amt increases while interest payment decreases.

disneysteve
12-17-2008, 02:00 PM
You should pay debt from highest to lowest interest rate. I'm guessing that would put the credit card ahead of the car loan. That's what will save you the most money.

PrincessAlina
12-17-2008, 02:04 PM
Error

JCJanko
12-17-2008, 02:05 PM
I work for a large accounting firm and frankly some of the financial advice I have seen given here on the budget board is some of the most disasterous financial advice I have seen. I think the OP needs to seek out help from trained professionals verses anonymous Mickey Mouse advice.

DTI is a factor but your thinking is wrong. Paying only the minimum towards a high interest credit card and dumping big bucks against a secured loan is just crazy wrong advice. I think you need to go do some research on how DTI is calculated.

Except that I have been in banking for 4 years (in 2 languages) and have financed 3 mortgages of my own in that time. I also have raised one client's FICO on the side 100 points in 6 months.

If you don't know how DTI factors into buying a home, then YOU have no right to be giving your bad advice. I gave a perfect example using numbers how DTI works. If you care to refute the 55% DTI max or anything else, please do so. Otherwise, I apologize that it was over your head. Please stop bashing other people's advice when yours is the garbage she should not be looking at.

JCJanko
12-17-2008, 02:13 PM
Again, IF DTI is going to be a factor, THEN the car loan needs to be paid first to lower DTI (but it needs to be paid off in full to affect DTI).

IF DTI is NOT a factor and all you are trying to do is raise your FICO, pay down the REVOLVING DEBT.

IF your FICO is above 700 median, your credit is fine, and you probably want your DTI as low as possible to give you the most buying power.

IF your FICO is high enough and your DTI is low enough, pay down the highest APR loan to save in interest and keep revolving debt ratio low.

That is simple advice, all based on fact. I do work with people on their credit on a daily basis.

JCJanko
12-17-2008, 02:25 PM
PLEASE let me repeat something that this other poster does not understand at all:

If your DTI is too high, you CANNOT get a mortgage regardless of your FICO. It's that simple. You'd think someone who works for a "large accounting firm" would know this, but apparently not.

Once you've determined if your DTI is going to be a factor, go down the list I made. You see, I was in your situation just a few short years ago. We were expecting our 4th child, and needed a house big enough to fit us all. I had high DTI, high FICO (730+ median), but no one would give us a loan. We had to get the DTI down before anything else. I'm not sure if that's your situation or not with what you've given, but in some situations it IS better to pay a large installment bill off first.

My personal advice would be to wait until fall to buy, but if you MUST buy now and need your DTI knocked down, the car loan is the way to do it (as shown by my example). If you need a quick boost to your FICO, pay the revolving debt.

JoanneNC
12-17-2008, 02:26 PM
Regardless of buying a house or not, you should concentrate on paying off the CC's first. They still can change your APR at any time and that $100 min which could take you 4-5 years just to pay off a small balance could easily go up.

prncess674
12-17-2008, 02:52 PM
Seroiously, the OP should seek out the help of a professional and do research on credit analysis outside of Disney Vacation bulletin board for sound financial advice. Just because some anonymous person espouses something on an internet bulletin board does not make it sound advice. I work as an accountant with multi national clients and would never direct them to the disboards for financial advice. The OP should really consider the source.

DTI takes into account the total debt owed not just the minimum amount due on a credit card. You are looking at the micro month level verses the total unsecured debt to income level.

natale1980
12-17-2008, 07:32 PM
Thanks everyone for the "anonymous Mickey Mouse advice" :hug:
I wanted to get a second opinion. I was just wondering what everyone else would do. I'm leaning toward paying off the credit card - but loosing a $350 payment now sounds like a GREAT idea!
We want to buy before July 2009 to get that First Time Home Buyer Tax Credit. Plus we really need a place of our own, we are currently staying with my parents.
Thanks again for everyone's comments.
But for those of you who may think so - I'm not an idiot. :laughing: I really do plan on researching my options. I just wanted to see if anyone out there had a similar experience.

:disrocks:
Thanks!
natale

aka-mad4themouse
12-17-2008, 07:56 PM
Either way, I suggest that you should snowball the payment you no longer need to make on the paid-off debt into your monthly payment on the other debt. So, if you decide to pay off the car, take the $350 you no longer need to spend on the car payment and add it to the $100 you're already paying on the CC. You'll pay off the remaining debt all the faster.

natale1980
12-17-2008, 08:40 PM
thats what I was thinking. Getting them both paid off by next fall.
-nat

disneysteve
12-17-2008, 08:43 PM
OP, I have a different but related question. How much of a down payment will you have saved by the time you are ready to buy? If it is less than 20%, it might make more sense to forget paying extra to debt and instead use the tax refund to boost the down payment. That might save you more money in the long run by giving you a lower monthly mortgage payment and possibly avoiding PMI.

Golf4food
12-18-2008, 10:14 AM
We want to buy before July 2009 to get that First Time Home Buyer Tax Credit.

You mean the first time home buyer loan - it has to be paid back. They tout it as free money but it is not. No interest, but still must be repaid. That said, we are building but currently own a home and are not eligible, but if I were and they wanted to give me a $7,500 interest free loan I'd take it! ;)

Regardless of what you choose to pay off, step #1 should be going into your work HR office and changing your W-4 withholding so you stop getting a big refund back, have more in your paycheck each month, and use that extra to pay down any other debt NOW instead of waiting 12 months giving the government an interest free loan on your tax money while you keep on paying more interest on your debt! :wizard: :teacher:

disneysteve
12-18-2008, 11:31 AM
You mean the first time home buyer loan - it has to be paid back.

Yes, I was going to say that, too. It is a loan, not a tax credit (even though they call it that). So don't forget to factor that repayment into your budget.

natale1980
12-18-2008, 11:41 AM
We are looking to put 5% down. So saving the money for the down payment wouldn't help. We still would not be close to 20%.

I meant loan. But you pay it back over 15 years at 0% interest! So I will gladly take it!

The W-4 with holdings is something I have been thinking about. Right now we claim zero. We like the 'bonus' at the end of the year.
I'm starting to think we need it now. But we don't want to end up owing money at the end of the year. :confused3


-nat

disneysteve
12-18-2008, 02:56 PM
We are looking to put 5% down. So saving the money for the down payment wouldn't help.

The W-4 with holdings is something I have been thinking about.
We like the 'bonus' at the end of the year.
I'm starting to think we need it now. But we don't want to end up owing money at the end of the year. :confused3

A larger down payment always helps because it allows you to borrow less, thus having a lower monthly payment for the next 30 years.

Getting anything more than a small tax refund is a bad idea. You can go to irs.gov and use their calculator to figure out what you should be claiming. You can always withhold a little extra to avoid owing in April.

gilby
12-18-2008, 10:03 PM
I feel you should pay off the car loan and once you pay the car loan, use the350.00 you spent on the car loan and pay it on your cc, instead of paying 100 a month you would be paying 450.00 therefore you will pay off the cc faster. It is important to stick to paying the 350.00 on the cc and not spend it elsewhere. We have always paid our loans off early.