To charge, or not to charge

[darren.hanson]

I have just managed to get all my credit cards under their limits and will be working hard to get them paid down/off. And I understand the need to NOT keep charging blindly on them.

However, I have read many posts here about people whose limits were cut by their CC companies as the balances went down, keeping their credit utiilization maxed out and not improving their credit scores. This is apparently a real danger in NOT using credit at all.

What I was thinking of doing was this, as I pay the balances down, use the available credit to charge payments for my utilities, groceries, and the like and immediately sending an extra payment to the CC company to cover the charge. I won't fall behind in my debt reduction goal and -should- be showing enough usage to not have my balances cut every 6 months or so.

Am I crazy or am I on to something? Okay, you got me. I'm crazy. But am I on to something anyway?

[ThriftyMan]

Darren

You're not crazy. This was definitely happening a lot over the last couple of years. My impression is that it's happening a bit less now. I don't know if that changes your thinking, but it may not be as big of an issue now as it was.

I always have a hard time really knowing exactly what to say in situations like this. Luckily, that never keeps me from sharing my opinion! So here it is. There are a lot of ways to "optimize" credit cards.

• You could pay one off and then use it for spending but pay it off ever month. Theoretically, that gives you ~20 days of interest-free "float" that you could use to pay off other cards in the interim.
• You could do a no-cost balance transfer over time by using your lowest-APR card and using the money to pay off your highest-APR card. DebtGoal implicitly does this by bringing in your previous month's purchases and encouraging you to apply this amount to your "Target" account not the store, but the account you're trying to pay off).
• You could do as you say and run up spending, and pay it off quickly.

In theory, I like these, but I always recommend that people don't do it. Most of us have credit card debt because we're not 100% on top of our finances and all of these strategies require more diligence than most of us can pull off.

So my advice (which you may not like) is to keep it as simple as possible, because I think that makes it easier to take action and ultimately leads to greater progress than a complicated "optimization" strategy.

There are a couple of pragmatic reasons why as well. First, since you have balances on your cards, you'll accrue interest as soon as you charge and that can be expensive. Secondly, if you aren't applying for credit any time soon, your credit score won't matter a ton. You can see really big improvements in your credit score by making on-time payments for 4-6 months and by paying off your credit cards. If you stay really focused on paying them off, you'll reduce your line utilization pretty quickly. There are two parts to line utilization--overall utilization and utilization on each card individually. If you stay focused on paying off your target account, you'll improve line utilization on this account quickly and that can improve your score.

So my advice is keep it simple and focus on paying off your cards one at a time to improve the individual account utilization component. Again, if you aren't applying for a new loan in the next few months, your credit will come through the process just fine and will start ticking up.

Would love to hear what others think. Pls comment if you disagree or have other advice for Darren.

Good luck, Darren. We're pulling for you. Pls never hesitate to reach out for support or advice.

[darren.hanson]

You could pay one off and then use it for spending but pay it off ever month. Theoretically, that gives you ~20 days of interest-free "float" that you could use to pay off other cards in the interim.

This was my thought. I'll have 3 payday loans (I know, I shouldn't have gotten them in the first place!) 4 credit cards and 1 collection account paid off in 6 months. After that, it's another 3 years before my highest interest rate student loan gets paid off. I don't know if the student loans affect my credit utilization or not, but I'm afraid of my credit cards getting any lower limits or even being closed by my creditors. So I was going to charge utilities, groceries, etc. onto the credit cards starting in 6 months and pay them off in full each month.

The first month of doing this would also allow me to put the utility payment/grocery money into savings to start having SOMETHING for a rainy day as I'd pay those debts in month 2 while charging new expenses to be paid in month 3, etc.

Yes? No?

[ThriftyMan]

Darren

No! Not the dreaded payday loans! JK. It's OK. We're all here because we've run up debts--some worse than others. The good thing is that we all want to get them paid off.

You're right...your student loans won't impact your utilization rate.

I don't quite understand your plan for putting money to an emergency saving fund. Sounds like you're thinking about putting money that you are putting on your card into savings.

Here's my overall take on your situation. I don't know everything about your situation, so take it all with a grain of salt. Sounds like you're a thinker and will do that regardless.

I would imagine that your credit isn't great right now with payday loans and an account in collections. However, it sounds like you can pay off these accounts within 6 months. My honest take is that you're going to find that your credit score improves pretty quickly once you pay these off and your regular credit cards (improving your line utilization). Once you've improved your credit, your lenders will have no incentive to reduce your line. That's the irony of lenders--we always used to say that you really want to lend to people who don't need a loan. So once your score improves, they'll actually want to increase your lines.

One additional consideration is that your line utilization is 30% of your credit score. So working to keep your utilization high out of fear that it will get reduced may work against you to some extent--keeping it high lowers your score, actually increasing the chances that it will get lowered.

So whatever strategy you go with, as long as you're making making on-time payments and progress on paying off your debts these things will start to take care of themselves and you'll find that you don't have to worry about getting your line reduced. Then you can build up an emergency savings with peace of mind.

I hope that helps reassure you somewhat. It's hard to not have good things happen if you're paying off your debts.

[mwflutterby]

I have just managed to get all my credit cards under their limits and will be working hard to get them paid down/off. And I understand the need to NOT keep charging blindly on them.

However, I have read many posts here about people whose limits were cut by their CC companies as the balances went down, keeping their credit utiilization maxed out and not improving their credit scores. This is apparently a real danger in NOT using credit at all.

What I was thinking of doing was this, as I pay the balances down, use the available credit to charge payments for my utilities, groceries, and the like and immediately sending an extra payment to the CC company to cover the charge. I won't fall behind in my debt reduction goal and -should- be showing enough usage to not have my balances cut every 6 months or so.

Am I crazy or am I on to something? Okay, you got me. I'm crazy. But am I on to something anyway?

Hi Darren, My son, who is the money miser of all times, lives on cash. However, he uses one rewards card for all his monthly payments (groceries, utilities, gas) and pays it off before interest accrues. By doing this he accrues reward points he uses to purchase flight time for his trips. I recently checked my one rewards card and I was able to take $100.00 off my balance by cashing in points. Once my cards are paid off this is the only kind of card I'll use. Thanks for sharing!