My $1500 albatross.
March 27, 2013 8:07 PM   Subscribe

My credit cards have been sitting at close to 100% utilization for...a long time. Should I pay them off right now? Also, how will this change my life, credit-wise?

Due to being unemployed or underemployed for most of my adult life, I've unfortunately had to carry a balance on my credit cards to cover essentials. Luckily two of these cards are low interest (11.9% and 6.75%; the other is 19.99% APR) so I've gotten pretty complacent about the cost of borrowing. I'm in my late 20s, but have the same credit limit (think about $1500 over a few cards) that I started out with over a decade ago. I'm quite aware this is bad; I have a good sense of personal finance, but being broke means you can't always do what's best.

My credit history is otherwise okay, but being close to maxed out on my revolving debt is probably hurting my credit score significantly. I've had a good job for the past while and have managed to save over $15k in the past year. With that amount in savings, does it make sense to finally kill this debt? Should I wait until I have more in savings?

As well, If I start using my credit cards the way financially responsible people do (i.e. charging them up a bit and paying them off in full each month), will I start to get credit limit increase offers? Might my bank actually give me overdraft eventually? I know people with similar incomes to me who have credit limits around 10k, and even in college most people I knew got offers in the mail, but I've gotten a mailed credit offer perhaps once in my life, and my bank has never pre-approved me for anything credit-related. I'd really like to have a higher credit limit so that doing things like buying round-trip plane tickets isn't so much of a hassle.

Note: I do have other debt (a student loan, specifically), but because I'm in grad school full-time in addition to working full-time it's currently in deferment.
posted by anonymous to Work & Money (29 answers total) 4 users marked this as a favorite
Having 15k in savings and carrying $1500 in credit card debt makes no sense at all. It's very clearly foolish. You are costing yourself money and hurting your credit for no reason at all. Pay them all down to zero, yesterday.
posted by Perplexity at 8:10 PM on March 27, 2013 [74 favorites]

Kill it with fire. Destroy the debt. Regardless of credit score, you won't be paying the interest and that's money you could be putting back into savings.

I don't know much about how credit scores work but I think paying off a small balance each month will be better than making regular payments on an open balance. Part of your credit score calculation is how much debt you carry vs. your income, so less debt is better.
posted by natteringnabob at 8:12 PM on March 27, 2013 [5 favorites]

Wait. If I'm reading this correctly, you have a chance to spend a 10% of your savings and eliminate your credit card debt. If this is right, DO IT! Like, yesterday.

Then, ask your existing cards to raise your limits (assuming you trust yourself with the extra freedom).
posted by Betelgeuse at 8:13 PM on March 27, 2013

You don't have to pay it all off at once, but if you can, do it now. Don't wait.

Do you know what your credit score is? Find that out.

Once you've got it under control, and start buying/paying off monthly, your score will increase, you'll become less of a risk by the agencies' various algorithms, and they'll start increasing your limit (or when you ask for an increase, they'll happily give it to you).

I suggest taking a personal finance class/reading a book on personal finance before you start making any grand purchases (or, just do it anyway) -- what you don't know *can* hurt you.
posted by eenagy at 8:15 PM on March 27, 2013

You should have paid it off when you had $1500 in savings. The only thing you're doing by keeping it is paying more money toward interest and hurting your credit further.
posted by DoubleLune at 8:15 PM on March 27, 2013 [9 favorites]

In many other cases, I would recommend paying some but retaining some savings, but in this case the total of the credit cards is only 10% of what you have saved. I would pay them off at once.

An interest rate of 11.9% is not low in this economy. A rate of 20% is outrageous - must be a department store card.

Look at it this way: If you wanted to invest $1,500, you might be able to get 2% or 5% return. Paying off these cards gives you a return of 12% to 20%. Where else can you get those returns?

Paying off balances, or large parts of them, typically results in credit limits being increased.
posted by yclipse at 8:15 PM on March 27, 2013 [3 favorites]

Or keep about a 7 percent utilization on them for maximum credit score effectiveness
posted by couchdive at 8:16 PM on March 27, 2013 [1 favorite]

... And running 80 to 90% of the credit limit on a balance is a definite impairment on your credit rating.
posted by yclipse at 8:18 PM on March 27, 2013 [1 favorite]

Would you take out a $1,500 loan at 12% to increase your savings from $13,500 to $15,000? Because that's essentially what you're doing right now. It's worth paying it off and understanding that debt is debt, no matter how much you have in savings or how good your credit score is. Part of your savings currently belongs to someone else. // I.e., if you had the chance to borrow $40,000 at 11% interest so you could put it in a savings account where it'll earn 1%, would you do it? Would you feel more secure? I wouldn't.
posted by rubberfish at 8:33 PM on March 27, 2013 [9 favorites]

Are you aware that paying off debt is equivalent to investing? If not, no shame - I know a lot of smart, educated people who just never think about finances for some reason.

Here's why: think of your debt as negative saving. An unpaid debt with an interest rate of 10% is enough to offset an equally-sized investment that appreciates at a rate of 10%. Paying off that debt is like making a risk-free investment at a 10% rate of return.

I suggest looking into the current interest rate in savings accounts, and average rates of return in the stock market. Good news: the rate you'll earn by paying off this debt is significantly higher than both!
posted by ripley_ at 8:36 PM on March 27, 2013 [2 favorites]

You're paying about $150/year in interest on these cards, if the balances average to 11%.
posted by jacalata at 9:05 PM on March 27, 2013 [1 favorite]

Also, you should probably talk to a financial advisor about what to do with that money. That's quite a bit to save, and you should be contributing to an IRA, 401k, etc. If all of that is just sitting in a bank account you are throwing away money in two ways right now (in interest on your credit cards, and in potential investment income).
posted by empath at 9:08 PM on March 27, 2013

Just a back of the envelope calculation here. Assuming you pay off your credit card and invest the remainder into a stock market index fund that returns just 6%, in five years, you should expect to have over $18,000 in savings -- without you contributing another dime. (a net gain of $5000)
posted by empath at 9:16 PM on March 27, 2013

Just pay your bills.

Don't even THINK of carrying balances for the sole purpose of trying to game your FICO score.

Just pay your bills.
posted by grudgebgon at 9:46 PM on March 27, 2013 [3 favorites]

Think of it this way. If you buy a $20 shirt while you have money in debt at 20% interest, and you keep that debt for another year, your shirt will have actually cost you $24. Two years, and the shirt cost $28.80. Three years, $34.56. Four years, $41.47. Five years, $49.76.

Is $50 for a $20 shirt worth it? No? Then pay off your debt instead.
posted by celtalitha at 9:47 PM on March 27, 2013

I'd really recommend you talk to someone about credit counselling. You can fix the immediate problem tomorrow by paying off the debt, but you need to figure out why you let yourself get into and stay in this situation.
posted by no regrets, coyote at 10:01 PM on March 27, 2013

Oh my god, please kill it. Immediately. With extreme prejudice.

I have a PERFECT credit history EXCEPT for high credit utilization, and it tanked my score 150-200 points. Rid yourself of it!!!

(As an ex-loan clerk, this is a huge part of credit considerations for things like personal/signature loans, so yeah, bfd! It's just a drop in the bucket for you, so I'd do it ASAP.)
posted by stoneandstar at 10:02 PM on March 27, 2013

Pay them off.

posted by pompomtom at 10:02 PM on March 27, 2013

I've had a good job for the past while and have managed to save over $15k in the past year. With that amount in savings, does it make sense to finally kill this debt? Should I wait until I have more in savings?

Does it make sense to pay interest when you don't need to? No.

Pay it all off now. This is a no-brainer. You are paying interest for absolutely no reason. Pay it all off, then in future pay off any credit card purchases you make each month.

I'm in my late 20s, but have the same credit limit (think about $1500 over a few cards) that I started out with over a decade ago.

If you are in a position to save $15K in one year, then you could probably qualify for a higher credit limit if you wanted one and were minded to apply. You don't have to wait for someone to offer one to you. Do some research, find a credit card with a low interest rate and a long interest free period, and apply for it.
posted by His thoughts were red thoughts at 11:16 PM on March 27, 2013

anonymous posted">> With that amount in savings, does it make sense to finally kill this debt? Should I wait until I have more in savings?

Look, it's totally a smart thing to protect yourself by having savings -- but not at the expense of paying unneeded interest on old credit card debt! Wipe that shit out. Kil it with fire. After that, your ability to save will be blissfully unburdened and you can build your nest egg right back up, easily, just like you've been doing.
posted by desuetude at 11:35 PM on March 27, 2013

A finance guy I met at a party once explained it to me this way - I asked him if I ever got a big chunk of money, whether I should put it into a savings account of some sort, or pay off credit card debt. He said to consider the interest rates on both - a savings account usually only pays 2 or 3 percent interest at most, while a credit card charges much more, about 11%. So paying off the credit card debt is much more of a return on your investment, because you're no longer being charged that 11% interest.

Pay off the credit cards.
posted by EmpressCallipygos at 4:21 AM on March 28, 2013 [2 favorites]

Pay off the cards, obviously. Now. Savings are important, but you're at a level where you can easily afford it. Why would you pay 10% to carry this balance when you don't have to?

And yes, it will probably help your credit score.
posted by J. Wilson at 4:39 AM on March 28, 2013

In general credit score companies like it when you carry a little bit of regular credit card debt, and also pay it off regularly. (On time and at least minimum payment.)

In general, they do not like it when your credit cards are constantly maxed.

These credit cards are not "low-interest." Yes, you should pay them off. If not 100%, then start at 50%. (People are saying your debt in proportion to your savings is 10%; I understand that you're carrying $1500 or so on each credit card, so it's more like 20 or 30%.) Still, the amount of interest you're paying on such a relatively small amount of money is silly.

And yes, then you will likely see changes in solicitations from financial companies.

It's bizarre that you don't have overdraft protection. You need to actively ask your bank for that.

Get your credit report.
posted by RJ Reynolds at 4:57 AM on March 28, 2013 [1 favorite]

When you said 12% was low, I was asking myself "what rate does he fund at?!" Pay it off since you have the cash - no reason to keep paying the banks interest. Should be the other way around.
posted by pravit at 5:09 AM on March 28, 2013

Paying off the credit cards is a no-brainer. A few months of paying them off monthly should make you eligible for a higher limit.

Also, this wasn't part of your original question, but if you are still saving money every month, consider making some kind of payment on your student loans. Even in deferment they are likely to still be accumulating interest that will be capitalized (added back to the total amount owed) at the end of the deferment period. Obviously if your cash flow doesn't allow it you can't do that, but if you're really positive by 1000+ per month it will save you money in the long run.
posted by The Elusive Architeuthis at 6:10 AM on March 28, 2013 [3 favorites]

I would pay them off instantly, but also take one additional step--now take the monthly amounts you are putting towards your current monthly credit card payments and pay those same amounts into your savings plan.

Ideally, do this via automated monthly payroll deductions.
posted by flug at 6:34 AM on March 28, 2013 [2 favorites]

Pay off the cards now. Then, pick the card you've had the longest, and put one or two of your regular bills on autopay on it--your cell phone bill, cable, etc. Pay it off, in full, on time, every month. I can virtually guarantee you that you'll see gains in your creditworthiness (and thus offers of higher limits for when you need them). Just remember that, from now on, you have to use a credit card like an extension of your bank account: don't ever put more on the card than you can afford to pay off at the end of the month. You sound like a responsible guy, so just keep an eye on things, and you'll have your savings back up to where it was, and beyond, in no time at all.
posted by decathecting at 7:06 AM on March 28, 2013

Pay them off. What's the point in not doing so? Having some cash to fall back on is great. However, what's the difference between that and having $1500 less cash to fall back on, but also $1500 in available credit?

If you can learn to live within your available finances, then you can use your credit card for daily expenses. A long history of responsible choices will generally result in banks wanting to lend you money, though the exact things to make that happen tend to vary from lender to lender and over time.
posted by jgreco at 7:14 AM on March 28, 2013 [1 favorite]

It sounds to me like you still think of yourself as an unemployed loser with bad money habits and a bad credit score. But looking at the progress you've made over the past year, we on the internet think you're doing GREAT. Now you need to put some steps in place to move forward. From a strictly financial perspective, it absolutely makes sense to pay off your credit cards right this minute, but if we're correct that it's $1500 on each card (3 cards? 4?) that seems like a REALLY big chunk to pay all at once, so it's psychologically hard to watch all your hard work of savings be demolished all at once.

If the big payoff is too scary, then make a plan to move in slower steps. Maybe the Debt Snowball process that Dave Ramsey preaches would work for you.

Whatever you've been adding to savings each month for the past year, let's pay that instead to that 20% card. Make a spreadsheet showing how many of that payment you will need to pay off that card in full (still making minimum payments on all the rest). Watch every month as that balance gets lower and lower. Pat yourself on the back for taking steps toward eliminating your debt.

After a few months, as you start to feel more confident that you ARE a responsible person with your credit cards (you're not adding to them anymore are you??) then you might feel comfortable taking money out of savings to pay some of them off. Having that much in savings, you could definitely take $1000, and I would say even up to about 5 thousand out and it wouldn't make a big difference in your daily life - you'd still have a huge 10,000 in the bank, and your debts would be a LOT lower. Look at your spreadsheet to play with different scenarios to see how soon/late each one could be paid off depending on how much you are willing to let go out of savings.

So, yes, paying them off right now makes the most financial sense, but if you're not psychologically ready to do it, then take smaller steps and make a plan and they'll be gone before you know it.
posted by CathyG at 8:05 AM on March 28, 2013 [3 favorites]

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