Pay off credit cards in one lump sum, or spread over a few months?

Question

I am doing a refi + cash out on a rental home. The cash out is to pay off ~24K in credit cards. I am aware of secured debt/unsecured debt and how it is often not a good idea to refinance a home to pay down credit card debt. I have done the math and it makes sense for me. My question is:

Should I allow the credit cards to be paid out of escrow in one lump sum? Or should I take the cash and pay the cards down over a few months. I have heard that it is better for your credit score to pay them down over time. Will it make much of a difference?

Edit in response to questions: All of my cards are around 13%. I have 3 cards with balances of: 11K (out of 12K), 9K (out of 10K), 4K (out of 6.5K). I am looking at a ~60K 30 year loan (yes, my principal is currently very small) I am going for a 30 year loan (rather than a 15) as I want some breathing room on my payments.

Answer 1

Should I allow the credit cards to be paid out of escrow in one lump sum? Or should I take the cash and pay the cards down over a few months. I have heard that it is better for your credit score to pay them down over time. Will it make much of a difference?

Will the money you save by increasing your credit score (assuming this statement is true) be larger than by eliminating the interest payments for the credit card payments over "a few months" (13% APR at $24,000 is $3120 a year in interest; $260 a month, so if "a few months" is three, that would cost over $700 - note that as you pay more principal the overall amount of interest decreases, so the "a year" in interest could go down depending on the principal payments).

Also, on a related note regarding credit score, it doesn't look good to have more than a third of a credit line available balance exceeded (see number 2 here: http://credit.about.com/od/buildingcredit/tp/building-good-credit.htm).

Answer 2

Pay them off immediately. But, as I note in my article Too Little Debt?, a zero utilization is actually a negative hit. So you want to just use the cards to get over 1%. i.e. if the lines add to $38K, just charge say, gas and some groceries, $100/wk. Pay in full every month. It's the amount on the statement that counts, NOT the amount carried month to month accruing interest, which, I hope is zero for you from now on.

Answer 3

I have heard that it is better for your credit score to pay them down over time. Will it make much of a difference?

I have never heard that, however, the financial institutions (who are charging you an amount of interest which was at one time in the not so distant past classified and punishable in state criminal codes) really enjoy you thinking that way.

You are clearly capable of doing the math yourself. While I don't know the exact numbers, I am totally confident that you will find in about 5 or 10 minutes (if that long) that eliminating debt of any kind in your life will pay an immediate return that beats the great majority of other investments in terms of risk/reward. After the immediate financial return, there is a quieter, subtler, and even greater long term benefit.

Basic principle: Highest Rates First

Perhaps this decision could be considered slightly less important than deciding not to smoke during your youth; but I would put it as a close second.

You are already in a position where you can see the damage that your prior decisions (about financial debt) have produced. Run the clock back to the time in your life when you were debt free. Now, pay off that debt with the big check, and start from zero. Now, turn on your psychic powers and predict the same amount of time, in the future, with the same amount of money (don't even try to adjust for inflation; just use flat dollars) WITHOUT losing the money which you have given to the financial institutions during this previous part of your life.

Do you now see why the financial institutions want you to think about slowly paying them off instead of waking up tomorrow without owing them anything ?

Answer 4

it is better for your credit score to pay them down over time.

This is a myth.

Will it make much of a difference?

You are paying additional interest even though you have the means to pay off the cards completely.

Credit score is a dynamic number and it really only matters if you are looking to make a big purchase (vehicle, home), or perhaps auto insurance or employment.

Pay off your credit cards, consolidate your debt, and buy yourself a beer with the money you will be saving. :)