Advise on next step

[Anonymous]

First off what a great wealth of information this site is! We are currently rebuilding our credit after several rough years and I have a question about which way to proceed. We have 2 CO's, one settled for less(3/13) and one still making payments with 7300 balance. Two current CC's one at 9900/14000 (perfect payment history) and the other is a new QS(3000) that I am using to pay all bills and PIF each month. I am estimating that it will take approximately 2+ years to pay down the debt.Current FICO is EQ-641 TU-649 EX-628. Friday I received a alert that my TransUnion  score had changed +1. I still am not sure what caused the change because noting has posted, but I'm not complaining. In the alert notice the following was listed:

• The following represents the factors most impacting your FICO Score
  • Serious delinquency.
  • Too few accounts currently paid as agreed.
  • Time since delinquency is too recent or unknown.
  • Proportion of balances to credit limits on bank/national revolving or other revolving accounts is too high.

I am thinking about refinancing my home mortgage around October(when I have 1 year of no late payments) and taking additional $20000.00 cash out so that I can pay off all debt and build a rainy day fund to ease month to month pressure. Having said that based upon the above information what do you think is the best way to proceed? Thanks for your advice!

[Anonymous]

If I am leaning toward refinance  and trying to raise my FICO is it best to stay on course with existing CC's and just focus on paying down debt or would it be more advantagous to get another Cap One Platinum and advance it up to another QS and the combine? Not really sure what the best way to go...

[tufa4311]

Few points:

- I would not consider applying for a new cc (doubt you would even be approved with your history, and if so, not to the amount you'd need to cover your current balances.)

- second, be honest with yourself in terms of your financial needs in the near future, the last thing you'd want to do is consolidate you debt then begin building it up again on the cc's you just cleared the balances on

- take a close look at what a refinance would do to you finacially long-term. Very simply, if you didn't touch your mortgage what would be the total cost of you mortgage at its completion, then do the same for the refinance where you add 20K. How much will that really cost you?

- next, if you did refiance, and take out $20k - you say to completely pay off you cc debt. I see over 30K in cc debt (9900K,14K, 7300K,3K) where's the 10K+ coming from, what am I missing?

My highest concern, which should be yours as well, many people refinance to dig themselves out of a financial grave, but they don't change the circumstances that got them there in the first place. Thus, over time, they dig another hole, and now they have the new cc debt as well as the new higher mortgage from the refiance. After refinancing, seeing zero balances across the board can be intoxicating and lead to a false sense of security. Remember, you will not be getting rid of any debt whatsoever. You will be just shuffling things around - and be paying huge amounts more for that 20K you are taking out than if you just left it out of your mortgage:

Total cost of 20K at an average mortgage rate over 30 years:

20K; 30 Yrs, 4.75% interest = 38K (give or take)

You could be paying an additional 18K over 30 years to pay off that 20K.

Now, that indeed may be better than the current interest you are paying on your cc debt now, but that all is determined by how long you take to pay it off - I doubt you'll take 30 yrs.

Examine your situation as a whole.

[Anonymous]

Thanks Tufa, I see your point and certainly agree with you. Left me clarify a few things from my first post.

Total Credit Cards:

GMAC                Feb 2002       Open                  9900/14000       71%             was 12,500 in November

Cap One QS       Dec 2015       Open                    50/3000          1.6%           Opened as Platinum 1000SL -  2000 CLI 3/13/2106 -                                                                                                                                      PC to QS 3/15/2016

Chase                Apr 2004    Closed Feb 2015       7300 bal.                           was 18,000 2 years ago

No car loans since 2010.

I totally agree with you about the refi being the easy way out and that it can also lead to future similar situations. Currently we have a balance of 259,000 in year 11 of a 30 yr mortgage of 325,000 at 5.25%. If I was to refinance I would only look at a 20 year loan and if I can get my FICO score a little higher over the next 6-8 months I believe I should be able to get a little lower rate than my current status. From the figures I have run it looks like my mortgage payments would remain the same as what I am currently paying factoring in the $20000 additional cash. Home is worth about $450,000. 

As you can see we have been paying down our debt as quickly as we can and have made good progress. Several rough years being self employed in the construction industry took its toll on our finances and credit. We have been on a strick budget and I have made a career change to a more stable occupation which has allowed us to get our feet back underneath us.Previous credit history was in the high 700's and it is frustrating for me to be where we are at now. 

I was mainly asking what would be the best way to get our FICO scores higher in the immediate future. With the recent credit update and showing "to few accounts currently paid as agreed" I didn't know if it would make sense to get another CC strictly for building my credit. Capital One has been very good to us and for what its worth it shows that's I have been prequalifed for a Platinum or QS1(realizing that is not a sure thing!). I hate to get a credit card just to get one but at least with this I could possible upgrade it as with the  previous Platinum and do a Combo to a bigger limit for utilization purpose's in about 6-8 months.

I know it will cost me a little more in the end, but sleeping well at night would be a lot better with the debt paid off. Please let me know your thoughts.Thanks.

[tufa4311]

Ok, if I understand you correctly, your primary goal is to get rid of your cc debt and add to your mortgage debt and you plan to do this by a refi. In addition, it is not a factor what this will cost you in the long term. You note that your montly mortgage payments would not change - you are adding to your mortgage, shortening your term, and you will not pay a higher monthly mortgage payement? The only way that could happen is if your interest rate was greatly reduced.

Ok, I will speak directly to your question. Raising your credit score is based on a small number of factors and while it can be difficult it's not too complicated.

1. Payment History: 35% of your FICO score. You need to clean up your credit history; this includes late payments and charge-offs. I would work to remove any negative factors in my history from my credit report. There are a number of ways to do this but they mostly are one form or another of simply asking (although there are things like disputing of incorrect info, etc). Removing negative factors will usually increase your score. I say usually becuase in limited circumstances it may actually lower your score, for example if the CO is old, and that account is the only one you have well then you just deleted all your history! This is usually not the case though.

http://ficoforums.myfico.com/t5/Rebuilding-Your-Credit/REMOVED-CO-FIRST-PREMIER-BANK-YEAH-SON/td-p/3...

http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/removal-of-charged-off-accounts-lowered-m...

And many more examples on myFICO...

2. Credit Utilization: prime would be to have balance on only one card and keep it lower than 10%. You just need to work to get as close to this as possible. Having debt on too many cards is not good, but having too high a utilization on just one card is not good either. I wouldn't throw it all on one card. Just pay off the lowest balance and work your way up.

3. Credit history; New Credit; Credit Mix are the final 3 factors and are more difficult to mess with. But they also have less influence on your score.