Get Out of Debt Guy

Can I Rebuild My Credit With a Loan?

Posted January 6, 2015
Updated January 7, 2015

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

…Click here to read my answer.

Steve Rhode
WRAL Get Out of Debt Guy

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About this Blog:

Steve Rhode has had careers in opthalmology, real estate and as the head of a nonprofit debt counseling firm. On his blog, he offers hard-won, free advice about getting out of debt, consolidation and making the right choices as you manage your money.