“Dear Steve,
Hi, I have a question about the finer points of manipulating your credit score. I’m a pretty financially savvy guy and I was doing great until the great recession hit right after I had financed an expansion to double the size of my small business. Although I fought hard, it was no longer a going concern and I filed bankruptcy and liquidated it in 2010.
I know that to reestablish my credit, I have to use credit and use it in the right way. I was able to get an auto loan for my wife’s car on a special student/recent grad offer made by Ford in spite of the prior bankruptcy. After a few months of making timely payments, my credit score had improved to 640 and I started to get credit card offers in the mail again.
I slowly opened 3 credit card accounts, about 4 months apart from each other on average. Each one has higher limits and better terms than the last. I don’t use them at all except for putting 1 day’s worth of regular expenses on each card once a month and then paying it off immediately. (I do that to keep them from being canceled for inactivity). Thus my utilization on the CCs is 0% on $5300 credit available. My auto loan is now down to $15K on an original $24K note with 3 years remaining in the 6 year term. All of this has improved my credit to now about 670.
My question is about the finer points of how to use these offers to maximize my credit score. I want to get my credit above 700 before I make a new car purchase (for myself this time) in June of next year, and above 750 before my wife and I buy a house in 2017. But the pace at which my credit score is increasing has slowed. I’m wondering if it would pay dividends to open more accounts?
The messages I get from the automated “score analysis” that comes with my scores says that main factors for my score are #1 the bankruptcy, which I can do nothing about until it scrolls off in 2020, #2 insufficient credit lines available, #3 too few accounts reporting as paid on time (I only have the auto loan and 3 credit cards, all of which are paid on time but apparently 4 isn’t enough), and #4 length of credit history from open accounts is too short
Of course if I open more accounts, I would take a short term hit from the inquiry and recently opened account. But I’m now qualifying for $3000+ credit lines, so 1 or 2 more accounts could double my available credit lines. It would also give me more accounts reporting paid on time.
So would the larger available credit and more on time accounts outweigh the inquiries and newly opened accounts to have a positive overall effect on my credit by June 2015?
Alternatively, what about self lending at a site such as selflender.com? Would I be better off to write myself a $10K note on Self Lender and pay it off between now and next May?
Which path would have the overall biggest impact on my credit score?
I would also like to close the first credit card I opened, because it has the worst terms ($100 annual fee, $600 credit line) but I hesitate to close it because I am benefiting from the on time payment reports and the fact that it is the oldest one that I currently hold.
Should I wait one more year to cancel it, or cancel it now?
Thanks!
Josh”
Dear Josh,
I think you might be missing the mark with your current strategy. You mentioned you are using your current credit cards but paying the small charge off immediately. That is almost certainly resulting in the cards reporting a zero balance each month since the balance reported is not the balance charged but the balance on the date they dump the data to the credit bureaus. The better strategy would be to wait and pay the balance off after you get the statement but before the due date.
To generate some value for you, typically the cards need to show some credit bureau action, rather than you are just holding them.
As you get more into the credit game, the bankruptcy actually carries less and less weight. Time and new credit make the past bankruptcy mostly irrelevant.
As you seem to be aware, the length accounts are opened is important is rebuilding your credit. While you have a stinker of an original account, it might be better to not open a new one right now and wait before you close it till your credit score gets to where you want it and then wait till after you get the car.
Car loans do less to build your credit score than unsecured credit and credit cards. Debit cards are worthless for credit building.
When it comes to SelfLender.com or organizations like them, I remain unconvinced. With these types of loans you are depositing your money and gaining access to it over time. With a secured card which is a proven way to rebuild credit you get to use your money as credit, immediately.
The other day I contacted SelfLender.com to ask them for any evidence they had that would demonstrate a self-funded loan was better in rebuilding credit than a secured or unsecured credit card. They have not responded and others I have talked to about this are ambivalent as well.
Interestingly, the SelfLender.com website does not list the actual credit bureaus they report to so there is no way to know how effective such an approach is.
Following a bad credit event the secret to rebuilding credit has always been to review your consolidated credit report to make sure any item included in the bankruptcy is reported that way, to get three secured or unsecured major credit cards that report to the credit bureaus, to use them and keep balances below 30%, and to let time pass.
in fact I even wrote a guide on this. Read How to Easily Rebuild and Repair Your Credit After Bankruptcy, Foreclosure, or Repossession.
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Josh, thank for asking your question about SelfLender.com. I think my answer will surprise you.