Should I Focus on Reducing Utilization or Balances?
I've been journaling about my debt pay down journey with YNAB for some months now and I've paid off about 25% of my balances so far... $22,768 to go! Now that I've taken a few months to build up savings and true expenses, I'm ready to start putting money towards debt again. The question I'm struggling with is:
Should I focus on paying off one balance at a time, eliminating the minimum payment altogether, or should I pay down balances simultaneously to lower utilization?
The former is more satisfying, because I get to see an account's $0 balance sooner. The latter helps me build my credit faster, though, and it also makes paying down big balances a bit easier to swallow, because I'm not looking at a $7k balance, I'm focusing on getting the 70% utilization down to 49%, 29%, etc. by paying in large, but doable chunks.
For July, I'm able to either:
- Pay off my smallest and highest interest balance completely (~$1,868),
- OR, split it between the two highest interest, lowest balance cards ($1,868 and $1,925 balances), getting them both down to <29% utilization. That leaves me with two manageable balances to tackle in August (~$970/each).
- OR, I can always put this money towards my highest utilization/balance card, which could bring it from $7,205 / 90% utl down to $5,337 / 66% utl.
My ultimate goal is obviously to be debt-free. My timeline for that is end of 2022 (for these balances plus a loan to be fully paid). In the meantime, though, my priority is to get my credit score up, as I'd like to refinance my car loan. As you can see, I'm basically waffling between the snowball and avalanche methods. Any input is so appreciated! :)
I would pay off the smallest/highest interest balance in full. Not only will it give you motivation to knock that off your list, it will also add to your snowball and enable you to pay off the 2nd low balance card in full that much faster. Then you can send a shotgun blast to your highest utilization/balance card, thus decreasing both your balance and utilization dramatically. Once you have 2 cards paid in full and the 3rd one with a much lower balance, you will be more motivated to keep those other 2 cards paid off each month. Plus, by paying those 2 cards in full you will see a jump in your credit score (and probably a credit increase...don't fall for it! 🤣).
Congrats on everything you've paid off so far! That's quite the accomplishment! 🎉
You've got a lot of great advice here - one thing I'd add when considering snowball vs avalanche is how much extra effort do you need to put in when you have more accounts. For me - it was helpful to simplify to fewer accounts at times - and so I ended up paying a bit more in interest by focusing on my smaller balances vs focusing on higher interest. (But I didn't have any outlandish interest rates to contend with at the time).
I'm not sure you give the info about all your debts but mathematically you are better off financially to pay down your highest interest debt first. And I would think it isn't your car loan so refinancing it is a good idea but maybe not the one that will give you the most bang for your buck. Well, depends on balances and time to pay it off. But since you state 2022, it's not a long time frame so it shouldn't play a major role.
For your 2 first options, considering what you say, it seems they are equivalent as you would pay off both debt by August no matter what. If you can pay off the $1,868 one in July, you will most likely be able to pay off the $1,925 one in August since you have one less min. payment.
You’re on a roll! Keep up the good work.
As you said, you’re waffling between the debt snowball and avalanche methods. In that case, maybe you should consider a hybrid approach. With any approach, you should always make at least the minimum monthly payment on all your debts, especially if you’re concerned about your credit score—payment history is one of the biggest factors contributing to your scores and credit utilization ratio also is a significant factor.