28K to "spend" on credit repair

[Anonymous]

I have 28K in tax returns.  I own my own business, and I need to raise my credit score to assist me with business financing.  What advice do you have for me? Should I save some of it? Use all of it to pay down credit cards? The 28k would payoff all of my credit card debt and leave me with a debt ratio of 0% on 34k of available credit.  Will my score change significantly?  Thank you in advance for your help.

[Anonymous]

What are your cash reserves, not including the $28k (in terms of how many months expenses you have saved)?

How much of the $28k would it take to pay off all CC debt?  Would there be any left over?

Do you have any collections, charge offs or other derogs?

What amount of installement debt do you have?  (auto, personal, etc.).

All in all, paying your revolving debt down to under 9%, and limiting any reported balance to a single account would provide the best score boosts for the CC's.

But if you have any collections that you might be able to settle with a Pay For Delete agreement, you might consider some cash there.  CA's kill your score, and "paid" doesn't help them unless they are agreed (in writing) to be removed upon payment.

[kahuhipa2]

Thanks txjohn, I'm Kahuhipa's husband and am jumping in to answer your questions.

We have approximately 2k in reserve cash so it's tempting to take some of the $28k and stash it away for a rainy day.  On the other hand, we're hoping that by reducing our monthly payments and then getting some bank financing to restructure some of our business debt - we'll have the ability to save more.  The key to the latter is getting our credit score up.  That's our dilema.

There are no collection issues.  Accounts are all current.  Interest rates across four cards range from 11% to 26%.

We have two cars leased through our company - one appears on our credit score.  No personal loans apart from a mortgage.

So if we understand correctly, if we have 34k in total credit limits and 28k is used, we should pay off 91% leaving approximatly 3k on a single card (presumably the lowest rate card).  If that's correct, it would require 25k leaving 3k for cash reserves.  Is that correct?

Your opionion is very much appreciated.

Thanks!

[Anonymous]

Being that you only have $2k reserves is not good at all, especially as self employed.  Even adding $3k after your proposed pay down is only $5k.  I am presuming this would be maybe 1 month emergency funds. 

What you are talking about is the bird in hand vs. 2 birds in the bush.

Please answer the following:

1.  What is your monthly household income?

2.  What is your monthly total expenses (paid by income)?

3.  Am I understaning correct, that you have $28,000 in current CC debt?

4.  You have a tax refund of $28,000 coming?

5.  What is your FICO now?

6.  Do you have a written budget?

With this info I could provide a better input.

Message Edited by txjohn on 08-02-2009 07:46 AM

[marty56]

FPs like Dave Ramsey/Suzie Orman would say to beef up your emergency fund if you are self-employeed or dont have a secure position.

[Anonymous]

Credit problems always arise out of interruption of income or unexpected expenses without emergency funds and savings....meaning no backup plan.

Also, in today's climate comes from relying on credit as backup plan only to have credit CLD or closed or rates hiked to prohibitive levels.

Cash is king, always will be.  Everything else is dependant on it.

[kahuhipa2]

Welcome to our financial "onion".  I'll try to peel back some more layers for you.

We started a business 5 years ago under capitalized and as it has grown and needed additional infusions to sustain the growth we've had to rely on our personal savings, credit cards and even 401(k) funds at a hefty price.  We're now on the verge of profitability and the business is generating $1.1 million in annual sales with 8 employees (including ourselves).

We're now in a position where we need to consolidate a lot of debt not only on the business side but also eliminate our own personal debt - which has helped to provide fuel for the business over the last 5 years.  As our debt has increased we've seen our credit scores drop and with the higher debt load and monthly payments we were late on a couple of cc payments and one mortgage payment we've taken further hits on our credit scores.  I'm at about 600 and my wife is at 577.  The business is in her name so her score is crucial to our ability to get additional bank financing.

We feel our best option is to get our scores up so we can get financing from our banker to consolidate a lot of our business debt which will put us into a much better cash flow position and allow us to be sustainable.  The bank is very bullish about our business but has made it clear that their hands are tied until we can get our scores above 700 at a minimum.

We live in Hawaii so the cost of living is very high.  Our monthly expenses are about $10,000 and we only pull what we have to out of the company to cover that - however, some months we haven't been able to meet those expenses which has put us into the position we're in.

The business has multiple credit lines, credit cards and other debt that we want to consolidate totalling about $150,000 which will bring down our monthly payments and interest fees and put us in a healthier position.  So that's our objective.  Some of that existing debt is also affecting my wife's credit score but we didn't include any of that in the "$28,000" figure which is personal credit cards.

We have a $28,000 tax refund coming in about 4-6 weeks due to a prior year's business loss.  We're trying to determine the best "bang for our buck" with that.  We would love to put it all in to savings for a rainy day but improving our credit score is the only way we can get the financing we need with our bank.  The other piece we haven't yet explored is how much cash the bank might want to see us have on-hand when we go for financing.  Again, a catch 22.

Although our personal expenses are high it's fairly common for Hawaii.  There's no traveling our shopping going on and we're very controled in our spending.  We do have two children in private schools - which is critical in Hawaii where our public schools are the worst in the country.  Half our monthly expense goes to our mortgage.  We about 10% positive equity in our house but that's not enough for a home equity option in today's market.

So that's the big picture.  I hope it helps and thank you for all of your feedback.

[Anonymous]

Okay....the combination of heavy debt burden (balances) with recent lates is like a 1-2 punch series.  The balances are the setup punch (left jab) and the lates are a power uppercut with the right.  The combination is killing your FICO.

So, paying down debt burdens will definitely help FICO.

RISKS:

You run certain risks with this paydown plan.

What if you payoff these balances and then get a major CLD in CL's?  You won't have access to dip back into those credit reserves and your cash is gone.  I bring this up, because it is a risk and has happened to people without credit problems.

Lenders may say....hmmm, paid us back and credit is showing stress, let's pull back to limit risk.

With that said, you may want to consider the SBA Loan route.  It is not quick, but it is something you should begin working on anyway so that once you have all the components in place you will be ready to pull the trigger.

The other problem you face is that your business credit, while not on your personal CR's, will still show up when you go to the bank or lender and ask for more business credit.

If you have a bank who says they will help you, based upon a 700 plus score, then you are working toward a potential credit solution.

The problem, I don't know that you can make it to 700 from below 600 by just paying down debts.  That's a big jump usually reserved for the combination of low debt plus drop of derogs, such as a collection, late or CO.

Are you current now?  Have you attempted to GW any of the lates to get them off the CR?  If not, do so IMMEDIATELY.  Worse case is no change.  Best case you lose the late on mortgage or CC's.  If you could get a couple of the lates GW'd plus pay down CC's, you will get a much bette FICO boost

USE THE FICO ESTIMATOR in my sig line to run simulations based upon debt load, number of accounts, with and without the lates (to simulate getting GW success or not), etc.  See what elements MOST contribute to your FICO increase.

PRIVATE LOAN from family of friends.  DO you have access to any private short term loans to pay debts in addition to your tax return?  Reason:  Liquidity.  If you pay down debts, but have zero cash, then this may be another problem.

CREDIT CARD FACTORING:  Does your business do much credit card sales?  If so there are many companies that will advance capital based upon credit card sales.  Essentially they have you use their Merchant Services and they take the loan servicing payments out of the credit card receivables.  Quite often these Credit Card Merchant Sale Factoring companies don't require nearly as much credit scrutiny because they are loaning against cash flow, and if your cc sales are strong enough, they get theirs before you get yours.  The loan terms can vary and they don't take all your cash, but they take enough to make the payments and interest.

ACCOUTS RECEIVABLES FACTORING:  Do you have any receivables on net terms (you get paid 30-60 days later)?  If so, there are companies and banks who will factor (loan) against these receivables.

EQUIPMENT LEASE BACK:  Do you have much equipment that you own outright in your business.  There are companies that will "buy" your equipment in conjunction with leasing it back to you.  Basically you are taking a cash out loan against equipment structured through a lease secured by the equipment.

CASH FLOW MANGEMENT LOC:  Many banks will offer (based upon company revenues and also credit) a LOC attached to a checking account.  ALL DEPOSITS/REVENUES go into this account.  When the balances run low, it dips into the LOC (for payroll, general expenses, etc.) and when deposits come in they pay down the LOC balances and then build cash in the checking side.

Anway, you need to get to work on the GW of lates and then consider your BACKUP plan for paying down debts should any of those CC's of LOC's cut your credit lines after you pay them down.

NFCU:  Navy Federal Credit Union is a good personal credit source if you can qualify for membership.  When you pay down the debts showing lower utilization, they tend to give 2-3x times the CL's than what you get personally anywhere else.  They pull EQ.

Addison Avenue FCU:  They seem to be a little more lenient than other CU's, though there is less information about them.  They pull EX.

Affinity CU:  concorduser and others have posted success in business credit with them, with PG.

RUN THE FICO ESTIMATIONS.  Then have a backup to any possible CLD in CL's if you pay off debts to improve FICO.  See if you have access to any private short term loans.  GW lates.  Research above options and CU's.

Good luck, and don't give up.  Nothing great was ever accomplished easily.  That's what makes it great.

Message Edited by txjohn on 08-02-2009 12:47 PM