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I am getting settled at a new job and starting to look into my personal finances to see where adjustments can be made. I have 7 companies I owe money to for various things like credit cards, car payments, personal loans, and phone financing - and I'm trying to find the most optimal order to pay them off to help my credit rating. I have three mini-charts that I am using to organize that information, that I will paste (a link too) below. Thank you for your time!

Screenshot of In-Out-Owed Budget Sheet

The Lighter-blue section in the Bill's column are things that haven't happened for the first time yet, as I am moving into my house next month. I don't have valid estimates for the utility payments, and only a rough estimate for the rent-a-center monthly cost to finance a washer/dryer.

  • The disparity in the Verizon bills and loan tables is due to one being specifically the phone financing amount and the other being the total due for the lines/data/financing. – danninta Jan 12 '18 at 21:02
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    Why is car insurance showed as a loan or debt rather than a recurring monthly payment? – Freiheit Jan 12 '18 at 21:11
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    @Freiheit That is an error on my part. Another page that I use shows it as having a total amount, since i'm charged for 6 months at a time and make payments on that. Besides the fact that my car insurance and Verizon payments don't show up on my credit report. – danninta Jan 12 '18 at 21:15
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    Every single question which has "help my credit rating" as part of the premise should say WHY the asker wants the credit rating to improve. Do you intend to apply for more credit anytime soon? If not, don't worry about your credit rating. What do you really want? A better credit score? More debt? Or simply less debt? Different answers for each goal. – Beanluc Jan 12 '18 at 23:01
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    I'm not sure what your plan is with the washer and dryer from rent a center, but please do the math of how much you are paying in total and how much it'd cost to simply buy the items. It is almost certainly not worth it. – Kat Jan 13 '18 at 1:05
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Let's start by looking at the factors involved in your credit score:

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So regardless of what order you pay things off in, New debt, length of credit history, amount owed and payment history will be the same, with a slight decrease in amounts owed if you focus on lower-interest-rate items first (since more of your payment will be going to principal).

So that just leaves credit mix at 10%. While

THAT SAID -

The goal should be to just get out of debt quickly, and let the FICO chips land where they may. With that in mind, paying the highest-interest-rate debt will save you some interest, while there is evidence that focusing on the smallest balances first (snowball method) gets you out of debt more quickly due to the momentum gain of knocking out small debts.

If you are working to get approved for a new loan (HOPEFULLY a mortgage and not more consumer debt), then your credit score is just one factor. Your income, debt-to-income ratio and loan-to-value are going to be significant factors as well.

So the order in which you pay things off is not nearly as important as the act of reducing debt itself. Get started, work like mad to get those debts knocked out, and don't sweat the details.

  • Paging off debts with the snowball method is slower than paying highest interest rate first. Your link does not provide evidence to the contrary. – Matt Jan 15 '18 at 16:59
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Typical advice is the "Debt Snowball". It is heavily promoted by Dave Ramsey. It is not a perfect plan for all situations but is a good plan for most circumstances.

The way it works is that you first save up $1000 as an emergency fund. A grand will cover most major car repairs, appliance breakdowns, or medical needs. Then you pay off your smallest debt first. Now you take the payment from that small debt and "snowball it" to help pay off the 2nd largest debt.

The debt snowball focuses on paying off debt. It largely ignores credit score because its driving motivation is to eliminate debt then build savings. With little to no debt and good savings, this reduces the need to leverage credit since you can buy things outright using savings. Large purchases, such as cars and mortgages are the exceptions to this rule. With little to no debt, good income, and a solid payment history your credit score should be adequate to get good loan rates if necessary.

There are some criticisms and alternatives to the debt snowball. The one main fault to the snowball is that paying off high interest debts first saves more money.

In your case you are showing $5000 of income per month and $3000 of expenses with $14000 of debt. With $2000 a month to work with you should be debt free in approximately 7 months. Since you can be debt free so soon, pick something to pay off and GO PAY IT OFF! You are in a VERY good position right now. You can have zero debt and emergency savings then start saving for a down payment on a house and maybe a little for something nice like a vacation (but don't go crazy!).

The driving idea here is to pay off the debts. I think this indirectly answers your question because by paying off debts you will inherently improve your credit score. The snowball method may not be the BEST way to improve your credit score but it is certainly a reasonable plan.

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    Thank you! That link is incredibly helpful. I was uniquely focused on credit, only because I am looking to buy a house next year and my current score doesn't qualify me for even my VA loan. But I see how focusing instead on debts as a whole could be more efficient! – danninta Jan 12 '18 at 21:33
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    The "Debt Snowball" isn't about improving credit scores, it's about eliminating debt. I don't think this is an answer to the question asked, though every "help my credit rating" question tends to have unspoken goals behind them. Some want to get more credit. Some want to reduce debt. – Beanluc Jan 12 '18 at 23:03
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There are lots of examples of the snowball method and the avalanche method. I do advise a hybrid method.

The hybrid method is to take the smallest credit card balance and pay it off. That credit card is then used only for things that you have to charge, and that you will pay off 100% each month. The reason for that is that if you are carrying a balance your new purchases don't get an interest free grace period.

Assuming you aren't late with your payments. Then getting your utilization rate down will start to make a difference. So it would be tempting to say if you have an extra $500 to pay off debts this month, all debts are equal regarding utilization rate, but once you look at the interest rate charged each debt paying the one with the highest interest rate would save you the most money.

Several things I noticed in the loans category:

  • The Verizon and the insurance payment, especially the insurance bill isn't a loan in the traditional sense. Though I do like that you do include it in the monthly bills even if the insurance payment is only a couple of times a year.

  • The bigger concern is the rent-a-center bill. It wasn't included in the loan column. That is a loan. They did a credit check, and they are charging you a high interest rate for the loan. It may be possible that they gave you a no interest payments for x months, but if they did they probably inflated the price. You may need to look at a way to pay this loan off early or to get a better deal. But you do need to put it in the loan column, and know that it is part of your utilization and credit limit calculation.

  • I like this hybrid approach because by using a credit card, but paying it off, no new debt is incurred but a payment history and a credit line are maintained. This is a more refined answer to the credit rating aspect of the question and still gets the debts paid off. – Freiheit Jan 15 '18 at 22:48
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When trying to improve your poor credit score, you need to look at the causes of the poor score. In your case, my guess is that your poor credit score is caused by two primary factors:

  • Your large amount of debt

  • Late payments in the past. (Just a guess.)

If you have late payments in the past, this is fixed by waiting and ensuring that you have no more late payments in the future.

But the number one thing you can do to improve your credit is to pay off your debt. All of it.

You are currently $14,000 in debt, and you are trying to add more debt to your life. That is the wrong direction to go. I recommend that you work to get completely debt free, (which will improve your credit) and then think about buying the house.

If you are planning on paying off all debt and aren’t going to take on new debt until everything is paid off, then it really doesn’t matter which order the debts are paid. Your score will be the same in the end no matter which route you take to get there.

Having said that, your smallest debts (and likely highest interest rates) are your three credit cards. Stop using those cards, and knock those out first as fast as you possibly can. Once you do that, you’ll have an additional $85 a month to put toward your bigger loans. Pay off the car last, as it is your biggest loan (and probably lowest interest rate).

You are paying over $1000 a month on payments for your debt, and a good chunk of that is interest. Won’t it be amazing when you have that debt paid off and $1000 per month more in your pocket? That is the goal you need to keep in mind as you work on this. It absolutely is worth it. Get there as fast as you possibly can. You can find ways to cut your expenses and get there faster. For example, you may want to drop cable TV or martial arts temporarily until you get out of debt; either of these moves would get you out of debt even faster.

Financing a washer/dryer from a rent-a-center is probably one of the most expensive/worst ways to purchase these items. Instead, look at buying a used machine from someone on Craigslist, or visit a laundromat until you have enough money to pay for what you want in full.

If you want more motivation on the benefits of getting out of debt and help on how to get there, I recommend the book The Total Money Makeover by Dave Ramsey.

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