Mdthbs

Little bit about my situation-

Bought a car with cash about 5 years, at the time it was a year old. That car is now a total loss and I’m receiving about 5k for it from my insurance. I’m now in need of a car and thinking about putting the money back as a down payment and financing a new car. The only issue is my credit score is at 590 (coming out of college). I don’t want to put the money back into an old used car that will cost me money in repairs.

Should I pay off all of my credit cards with the money back from my insurance (it would cover all of my credit card debt) and save for a down payment for a few months (while borrowing a friend’s car in the meantime). This would boost my credit score and possibly put me at a better chance of getting a lower interest rate

OR

Should I use the money for a down payment and finance a 1-2 yr old car? My only worry with this option is having higher interest rates due to my current credit score

CC debt is My Hair Is On Fire!! debt, because the interest rate is so high.

So... yes, you should pay that off first (unless you like subsidizing my 1.5% Cash Back Rewards and "Fat Cat Bankers" while slowly impoverishing yourself).

You're asking several related questions - about credit scores, how to use cash, and how to buy a vehicle.

If we break them all down and start with what to do with your $5k in cash - it makes sense to use that to pay down credit card debt, since it's likely costing you an arm and a leg in interest right now. Even if you decide you need a vehicle badly, and can afford monthly payments on a vehicle loan, paying down the credit card debt and then immediately borrowing money will mean you're paying a low-interest auto loan rate instead of a high interest on the credit card.

The good news is, paying off your credit card debt will likely have a big, positive impact on your credit score. In a comment, you mentioned that your utilization is around 97% right now. That's going to make a huge impact on a credit score. Utilization is one of the heaviest-weighted factors in typical models, and 97% effectively puts you in the worst-scoring bracket. The good news is, utilization is memoryless so within a month of you paying off your balances, your score will instantly pop up as if that high utilization had never happened.

While on the subject of credit scores, it's worth getting information on your credit report to understand why it's so low. As mentioned, utilization is likely a big impact, but since it sounds like you're young and don't have a long (10+ years) credit history, there may be other factors influencing your score as well. Use a free service like creditkarma, or request a free report directly from the major bureaus. If there are things you don't understand in your report, ask specific questions here. Now - while you're young - is a good time to establish good habits.

Finally, you've asked about buying a vehicle. These questions are a little hard to answer because there will always be some subjectivity and personal preference. Some people will be risk-averse enough that buying or leasing a cheaper new car (and the warranty that comes with it) will be a benefit over paying cash for an old used car. Still other people will want a certain vehicle, or certain features, or will want to change vehicles more or less frequently. Really, before you decide on buying old, financing to buy new, or leasing, you need to decide what's important to you in terms of the vehicle you want, and what you can afford in terms of down payment and/or monthly cash flow, and then you can pick the best approach to getting yourself there.

97% credit utilization is definitely driving your credit score down significantly, utilization accounts for 30% of your credit score. More importantly though is the high interest rate of credit card debt. The ideal is of course to pay off that credit card debt as quickly as possible to minimize interest. If you can get around without a car by using public transportation or a bike for a while then you should embrace the inconvenience and get rid of the credit card debt. Then save up for a car purchase.

Counting on borrowing a car doesn't seem like a good solution. If you absolutely need a car then a good compromise is probably reserving enough for a 10% down payment on a relatively inexpensive used car and using the rest to pay down credit card debt. Even if you don't get a very good rate on your car loan, you'll be saving money compared to your credit card rates. Much better to pay 6% interest on a car loan than 18% on credit card debt.

All cars will have repairs, and newer cars almost always cost more to insure than older cars, so it doesn't necessarily make sense to focus on a 1-2 year old car. If I were in your situation I'd go for an older car known for reliability, there are plenty of quite old cars that don't necessarily look great or have many features that still run reliably. Years ago I got a ~15 year old car and drove it for 5+ years with very little maintenance cost. Certainly lucky that it lasted so long, but I see plenty of older cars driving around every day. Thanks to the internet you can likely tackle a lot of little repairs yourself to save even more.