What to do?

[New Guy]

After months of preaching to my wife, I have finally convinced her to wait for the market to become more in our favor. We are both agressively saving so that when the time is right, we’ll be ready to buy. I hope to wait it out until 2009 or so.

My question is this: What should I do with the money I have in terms of investing? I am considering paying off my car loan which has 3 years remaining. I would then boost my monthly savings by what I would have paid to the bank on my car loan. In addition to saving on interest charges (@ 6%), my fico score would see a boost.

Another idea I have is to pay off my auto loan with my rewards credit card and then immediately pay off the balance.

By paying off my car, it will virtually force us to wait to buy since it will take a long time to boost up the down payment savings fund.

Thoughts? Alternative ideas?

[Diego Mamani]

What is your car loan interest rate? If the rate is higher than 5% and you do have the cash to pay off the balance, then go ahead. But you just mentioned using your rewards credit card? That I wouldn’t do. You are proposing to change bad debt (car loan) into the worst debt (credit card).

Part of your house buying strategy should be reducing debts to a minimum. Credit card debt is the first one that must go. Then car loans, then student loans. If you think you’ll need a new car in the future, consider buying a used car for cash.

(I bought a brand new Camaro in 2001 for 16K after taxes. My brother just bought a used Camry with only 57K miles on it, for less than $5.5K; I think he got a much better deal. New cars are a expensive indulgence.)

Finally, don’t deplete your cash reserves for the sake of paying off the car loan: if an emergency arises, it’d be good to have some cash on hand.

[SD Realtor]

I think they were gonna put it all on the credit card and then make the payment all at once. (is that correct?) The strategy being to collect a bunch of rewards points then pay it all off in a single payment.

I am not a authority on credit cards. I have been told however that even exceeding 33% of your credit card limit in a payment cycle can have adverse affects on your score. I say this only as a comment that may be TOTALLY false. I am trying to recall who told me that. You may want to call your credit card company and ask them about that.

Agreed about not depleting your cash reserves. We have alot of cash we are saving for our eventual purchase and while it was tempting to pay off my wifes student loan, we are just making large chunks each month.

Anyways hope that helps.

SD Realtor

[Anonymous]

Keep in mind that you will need active and open tradelines to qualify for a home loan. Do you have other debt aside from the car and credit card? Student loans, maybe? Installment debt is better than revolving debt. Your credit score can be adversely affected by not having any debt at all. Ironic, isn’t it?

[RottedOak]

Having too much of your credit in use at present can adversely affect your credit score, but I’ve never heard of high credit use in the relatively distant past having such an effect. They are talking about buying in 2009, so if they pay the car off now using a credit card it shouldn’t be an issue. As long as they stick to the plan of paying the card off right away (an important caveat), the rewards card approach should be a good plan.

I’d also suggest targeting any other high-interest debt for early repayment. Basically anything with an interest rate higher than what you would reasonably expect to earn from normal investments. That typically means credit cards, personal loans, and the like. If you have any loans with unusually low rates, such as student loans, it is probably better to invest the money rather than use it for early pay-downs.

[New Guy]

The credit card/rewards thing was just an idea I had. I have no credit card debt at all, my schooling has been paid off, and my wife and I are currently renting. My intent was to pay off all my debt and possibly gain the rewards points in the process.

I am in a position where I could pay off my car loan which carries a 6.25% interest rate and still have a substantial savings. However, it makes sense to not deplete my savings too much. Maybe the best thing to do is to pay off my car loan in the next 12 months with 4 large quarterly payments.

[CardiffBaseball]

I’d recommend using your rewards card a lot, but not using it to pay off the car.

Car loans or any installment loans are merely a tradeline on your credit score and thus paying off the car loan early really doesn’t mean much one way or the other. If the interest rate is high and you have cash pay it off, because a car loan is neither helping nor hurting you.

On the other hand if you use the credit cards sparingly such that small balances do show up on your credit report (cycle different from paying it off) that will help improve your score.

One of the factors that helps is outstanding credit available. Another is that you keep balances to less than 10% of the total credit available. If 10% is too hard, 30% is much better than say 50%.

You have a lot of time. If you want to get into the 800’s you need to use credit cards at some point, you just don’t need to carry a balance.

[sstearns2]

What kind of a car is it? It might be worth selling and buying something economical, like a 3-4 year old honda or something. You might save a lot on insurance and registration.

I agree with using your credit cards and paying the balance. I just started doing that. I was at 780 and am hoping to get over 800. I know, I think it’s stupid too, but you have to play the game.

Scott

[Happy renter]

Option 1:
I suggest you to pay off the car loan that is with 6% interest rate:
Unless you can use the money to invest something else like, stock that can generate more than 6% return. If your return is 10%, you make 4% profit. The 10% is taxable, but you still make profit. However, the future stock market will be very volatile. If you are not sophisticated investor, you better don’t touch it. If you put money to CD, the max is about 5.5%. So, you lose 0.5% to carry the loan, plus the 5.5% CD profit is taxable. So, you actually losing 0.5% + tax.

Option 2:
I don’t suggest you to use the reward credit card to pay off your car loan:
You did not mention the interest rate and reward % of your rewards credit card. So, it’s hard to compare. But I know the max reward % is about 2%. Sometimes, credit card offers very low introductory rate, but it will go up tremendously, like over 20%!

[recordsclerk]

I get a lot conflicting information on how to raise your credit scores. I made a down payment on a car with my rewards cards. I don’t think it made a difference with my credit score. I like the idea of paying off your car loan with a rewards card as long as you pay off the balance at the end of the billing period. Make sure your card does not charge you anything and also the auto loan company does not charge you for using a credit card. You can qualify for a larger home loan if you have less monthly obligations.

[Happy renter]

recordsclerk,

I use my cash rebate c/c a lot, but I pay off everything month. I tried to buy a car using c/c and planed to pay off right way. But the dealer said NO! It’s what I could imagine. If I used c/c, the c/c company would charge the dealer 3-5%. That’s why the c/c company could give us 2% rebate!

If the dealer let you to use c/c to pay, they had to make sure they needed to charge you 3-5% more in order to cover the c/c company’s charge. So, you were the one who actually paid the 3-5%. Even after the max 2% rebate, you still over paid 1-3%. Unless, the dealer was willing to pay the 3-5% additional cost.

The dealer told me if they let me to use c/c, they had to charge me 5% more since they quoted me the cash price! They have already gave me good deal, there was no room for them to eat the 5% cost! I totally agreed with them since they needed to make their living.

Everything has a cost!

I have very high credit score, but my score was not a lot lower before I sold & paid of my 2 houses. The loan of my 2 houses was much more than a car loan. Credit score needs time and payment history to build up.

[recordsclerk]

When I bought my car, it was in a newspaper add with only two available at this price type deals. After many failed attempts of negotiating a better price, free floor mats. We finalized the deal. The Dealer (Toyota) made us pay that night due to the add special. We had to finance it with them at the same rate my credit union was offering or pay cash/check. They also allowed me to make a down payment up to $3000 on a credit card. We paid the car off without penalty after a 3 month period (via check). We were very suprised that they would allow us to make a down payment with a credit card without changing the original deal or charging a service fee.

[Happy renter]

Well, the down payment was only $3K, even max 5% was only about $150. May be they have already added $150 to the price on the ad. since the dealer let you to pay up to $3K only? You still needed to finance for the rest right!

Also, the dealer took the $3K, c/c dep. to make sure you would buy the car in that night. They spent a lot of time to negotiate with you, so they did not want you to walk away and never went back.

That’s good that it seemed like both parties were happy!

[Author]

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