I have three 3 personal credit cards and 2 business cards (I am part owner of 2 businesses, both are for 1 small and somewhat struggling business).
When I bought a new car last year I had credit scores rangng from 680 - 740 from all 3 bureaus. They went with the middle one. When I bought my house 2 years ago, my lowest score was 720 (and not from the lowest now reporting agency). I think my scores are suffering from late payments by the business, having my credit card limits chopped in half (I was at 15-20% balance for all 3, which effectively doubled my utilization rate), and being somewhat over-leveraged with a new house and car payment.
Let’s say that I have ~30k in business and personal debt (mostly business credit cards, I didn’t qualify for a reolver without a personal guaranty and I didn’t want that risk). I have $5k laying around. Do I:
a) pay it all toward debt;
b) take out a loan and pay/secure it with the 5k;
c) put into a secured credit card that earns 4%, minus a $29 processing fee?
d) some combination of all the above.
I need a high credit rating to qualify for a low interest rate on a big purchase. I plan on making this purchase in 2 months.
What is the quickest way to boost my credit score?
Creating new debt at this point is pretty unlikely to improve your score. While it might have a small impact on utilization, the recent inquiries and newly granted credit will easily cancel that out. Plus, having too much credit can be a hindrance; the idea being, if you have access to a ton more credit than you’re likely to be able to pay off, you’re a credit risk. Don’t close off any accounts now, though!
What kind of purchase is it? The reason that I ask is because if it is a mortgage, there are special rules involved. In normal circumstances, you’d likely want to pay down some of the debt (and of course avoid any late fees between now and then) to boost utilization really quick.
Also, you could try disputing any debts that aren’t valid or can’t be verified. In particular, get a credit report and check for any debts which are wrong or partially wrong, or any that have aged out (typically after 7 years). Getting bad debt removed will also boost a score pretty significantly. For an example, I disputed an old account that was paid off but showing late payments due to some wrong information; even though I had made payments late, the company didn’t want to bother to verify it, so the whole line of credit was removed and my score jumped. Also, make sure your total credit line is being reported correctly – some cards, like Capital One, only report the highest balance, not the actual credit limit. If you can max it out with purchase you’d make anyway (such as funneling your regular living expenses through it for a month) and then pay it off right away, the higher displayed limit will decrease your utilization.
Now, if it’s a mortgage, credit score alone won’t determine your rate. I have a fantastic credit score but was told I didn’t have enough cash on hand. They don’t want you to spend every cent because there are likely to be costs when you move into a new home, such as repairs. I was already getting a gift of money from a family member, and I was told it was better for me to put that in savings than to partially pay down a debt for a car loan (though fully paying it off would have been better still, since I’d no longer have that monthly obligation to pay). You’ll want to consult with your lender.
I would recommend keeping the cash on hand for the following reasons:
Your credit score doesn’t go up by that much in 2 months no matter what you do.
In this economy and credit market, survival has to be your highest consideration. If you pay off a credit card and they drop the limit, your debt utilization still looks crappy but now you have no liquid assets and no accessible debt. Keep cash as cash.
Most big purchases are easier to finance if you’re putting some of your own money down. Having cash on hand may be more important than your credit score.
If you’re getting financing through a lease or bank, they’ll want to see your business financial statements. One of the things they look at is the current ratio (cash compared to short-term debt). Going from $5k assets / $30k debt to $0 assets / $25k debt will hurt you.
One local bank tells me that they’re not using credit scores at all for business lending decisions right now.
By the way, business credit cards only show up on your personal credit report when there are problems. If you keep those payments on time, they won’t be included in your personal credit at all. So, going forward, that’s the most important priority - keep business cards current at all costs.
Recent lay payments are devastating to a score and can barely be overcome by lower balances and lower income:debt ratios.
As late payments get older, they have a reduced, albeit still significant, impact.
You might get a mild/underwhelming increase in your score by paying down debt, but compound that with opening new accounts that you don’t use and the boost might be noteworthy.
Do not close any open acount (credit lines, credit cards).
Recent late pay on more than one account results in scoring model saying, “Holy crap… this guy is going into a tailspin!”
Thanks for the reponses so far. I’m saving up to buy an engagement ring before my gf beats me to death with her biological clock. I’m planning on having the ring financed, as I had not been saving for it. Rigt now, I’m trying to qualify for 12 months 0% financing. The monthly payments are not a problem as I was told my ratios were still good to qualify for a mortgage on investment property that I have been fantasizing about.
I’m also trying to plan my honeymoon (I haven’t had a real vacation in 18 months and I have 3 weeks of PTO burning a hole in my pocket. My extra cash was going to my businesses: my side law firm with clients that rarely pay on time or even 30 days (I pay out of pocket when receiveables come up short); and my toy shop with no customers (I own a very small single digit percentage, but the inventory which I chose to buy is still on the shelf (soon to be donated or to go to eBay). I can cover all of this with my stock, but I’m only now making gains after last year’s horrific meltdown. I’d rather stay invested. My late payments were almost a year ago, and they were only like 2 weeks late on the business line. I was hoping to quit my job at megacorp and work a one of these two businesses, but it just makes more sense to take the steady pay check and jockey with the other office monkeys for a promotion. I was hoping that opening another line along with disputing would give a temporary boost.
Since you’ve had a bunch of very good answers already, can I ask a question? Now I admittedly can’t figure out if reolver is a word I’m not familiar with or, failing that, what word you meant if it’s a typo. But are you saying you haven’t personally guaranteed your business credit card debt becaue you didn’t want that risk? If so, then in what sense is it impacting your credit score?
I have an Amex business credit card that’s a company card only in the sense that they printed my company’s name on it. The credit limit is based entirely on my credit and all charges are unconditionally guararnteed by me.
On the other hand, we have about $1.5mm in debt that’s actually been loaned to my company. There’s no personal guarantee by any of our partners and it doesn’t appear anywhere on my personal credit report.
So did I misunderstand what you said about not wanting to personally guarantee your business debt or otherwise why is it negatively impacting your credit?
I took out a personal loan secured with my first car. I took the money and used it as capital to start my business. I believe it was this show of assets that made it possible for me get the business credit cards.
To balance the month-to-month operational expenses, I wanted a revolving line of credit (i.e. the revolver) to make up the short falls from lack of customers or lack of clients paying on time. However, my month-to-month isn’t a lot and one bank said that they don’t run revolvers that low. They offered another installment loan, but I didn’t want a fixed payment. However, right now, I’m running earnings from the businesses to pay down the original loan, not from my regular income (which I’m not budgeted for).
I agree that none of the loan / secured credit card options are going to do anything to boost your score in the short term. If you were to take those loans, and pay 'em off immediately, then a year from now maybe things would be better than if you hadn’t done it… but in the short term, recent new credit of any sort will really shoot you in the foot.
Just keep your payments all up to date, maybe pay down some of the existing debt a bit, avoid any new debt or unnecessary inquiries, and your scores will start creeping up.
And for the unsolicited advice: I think spending a fortune on an engagement ring is a good investment only for the diamond companies, especially if you don’t have the cash put aside. A more modest ring now, with plans for something nicer later when you and she can afford it, would be a better financial plan. Ditto the concept of debt for a vacation. You’ll be every bit as married if you wait until the business situations sort out and you can really afford those things.
f) Buy $5K in lottery tickets and hit the Powerball. Instant credit score increase; Black AmEx card; then chuck your business and become a Man of Leisure.
Thanks for the replies. I really did think about buying a bunch of powerball tickets, particularly when it was $300+M. I have 4 months salary saved up now as my emergency fund. I was up to around 12 before buyig a new car and house over the last three years, and starting the businesses. I just don’t like debt. As for the ring, my gf firmly believes in the 2 month salary rule and I don’t want to take another hit to my emergency savings. With the economy killing my portfolio, another year of no or limited bonuses, and possible layoffs (despite my division doing well), I don’t want to take the risk. 12 months free financing, however, isn’t that big a hit to my cash flow.
