Hi everybody, I am trying to figure out what to do here and what would have the most impact on my credit score for the money. Heres my situation: I have pretty bad credit, but its getting better. (FICO was 650 until 2 weeks ago when a CA placed an open collection account on my file, saying I was past due 120 days (insted of charged off/closed) and gave a balance due. Knocked my FICo to 594.) I have been paying my bills regularly with no lates for 3 years now. I have a few open revolving accounts with zero balances. I don't use them. I have 2 student (installment) loans that have been in forbearance and come out next month. I will soon be making regular payments on these too. Barring loss of my job, paying these won't be a problem. So I imagine that should help my score somewhat. I had to buy a car (used) last week. Financed $5500 at 23% (ouch) for three years. The payments aren't bad at all really. And I got a great deal, so even factoring in the high interest rate, its no real biggie because its a great car. However, I can pay it off at any time. I have the funds. But I'm curious what would be best for my credit report. I can pay a few months (like 5) on the car, then pay it all off, thereby establishing a positive tradeline. However, if I pay 5 months, most of it will be interest, and I will have paid about $500 in interest just to get the positive tradeline. Would it be better to pay like $4500 on the first payment, and then make the next 5 payments or so to pay it off. The way I figure it, the interest should drop to a total of $100. Which would be much more reasonable for a positive tradeline. But given the student (installment) loans, will the positive tradeline do me any real good anyways?? I'm wondering if it might not have any effect because I will already have 2 installment loans with positive tradelines. Should I just pay off the car now and not pay the interest at all? A related question: There are no prepayment penalties for paying off the auto loan early. They also use the actuarial method to determine the amount of finance charge refund. However, I've never paid off a loan early. Do I need the total (principal plus total finance charges for the term of the loan) in order to pay it off, and then they send me a check for the refunded finance charge? Or do they just factor the remaining unpaid principal and I send them a check for that? And if I paid like $4500 right now, will they factor that in determining the amount needed to pay off the loan? I'm a bit confused about what to do, so any advice or suggestions would be great. Sorry for typing so much too
Hi Lawguy, If I was in your position I would take the cash and put it in a CD and take out a loan against the CD and pay off the car. You will get a much lower interest rate (CD easier to repo than the car). Plus the CD will actually gain interest. Most any bank or credit union will do this type of secured loan. Good luck. Mike
Thats not a bad idea Mike. But if I do that I'm still going to be paying interest that I don't need to pay. The loan will have a higher interest rate than the CD, and thus I will have an overall negative interest rate. If I just pay off the car, or pay it off real soon, I don't pay a bunch in interest.
Sorry dude but there is no other way to build your credit than to show on time payments over time. These all come with an interest rate. You can't get around it. The CD thing is just lowering your interest rate. FICO will think any of the things you want to do are a joke. There is no way around this. If I can be proven wrong on this somebody please tell me. Mike
I understand that Mike. But I guess what I'm getting at is "How much will it affect my credit?" I'm not willing to pay hundreds or thousands of dollars in interest just to bump my score a few points. But if it would have a significant impact, then I would consider it. I have a long established history of credit. Unfortunately I ran into trouble a few years ago and had 4 CC chargeoffs. Thats really the only thing killing my score right now (that and the BS CA line). Those will eventually be off, and given both my expected future income and currently 19 positive tradelines, I should be able to get my credit scores up without too much difficulty. I'm not really looking to buy a house or any other major purchase any time soon. Not for at least 2 or 3 years. And thats about the time my chargeoffs are listed to come off. I'm just curious what option will give me the most economical influence to my scores, even if that means paying off the loan and incurring no interest because making payments on the loan won't have too much effect on my score, if that be the case.
Sorry not to have an answer but am very interested as well. We are in the same boat. DH got his IC check recently and we played with the "score simulators" on CE and CW so many times trying to split hairs. I just don't think they are very reliable. We had bought a home in '01 and shopped for a mortgage, then HEL (denied) so our inquiries are up there. Bringing them below 10 seemed to give a nice boost on CE. Paying down balances another nice boost. However, the biggest boost on the simulator was not having those 90 day lates on there...that's a pipe dream...but oh well. Our reports look probably similar to yours. Long history, no collections, many good tradelines but nasty lates on about 5 cc. 4 still have balances so haven't had any luck with CHOD etc. I think just time and paying down remaining balances will do it. We ended up paying down our Cap One because we had jacked it up to "show" CL. Sorry for the long winded post...keep us posted on what you decide!
LawGuy, I'm not an expert but based on my own experience, I like your idea of paying a large chunk in the first payment, then paying the balance over the next 3-6 months. I don't think you want to immediatly close the account, as that will not show an on-time payment history. My suggestion would be to make a large payment #1, maybe 60-70% of the balance, and pay the remainder over the next 5-6 months. That way, you show a positive tradeline with a decent amount of history and it doesn't cost too much. When it comes to auto loans, the lenders seem to pay more attention to past auto loans than other types of credit, so it will help your next car purchase as well. Whatever you decide, good luck!
