Credit Score Improvement Suggestions...for a friend :)

[Rollin]

I have this friend(s) see...really I do (not fictitious) and they are having trouble refinancing. I am in the mode of telling them that their HAIR IS ON FIRE with credit card debt and giving multiple face punches, but we are also working on their 1st mortgage (6.75% - $1,315/month including taxes and insurance) and 2nd mortgage (9% - $400/month). Poor guy (of the couple) really thought he had to work to 80 years old (presently 58) and I just finished a spreadsheet applying all our MMM principles (at least those that I know and can remember) and he can be out at 62!!!!!

Anyway, they have many credit cards, most with no balance. Those that do are going to be paid off before the end of the year ($21,000 worth) and their stash of cash will go to that. So at the end of the year their only debt will be the two mortgages (22 years remaining on each).

My initial thought is to whittle down the credit cards to 1 or maybe two, but I'm not sure. Should this be done? If so, should it be drastic (ditch as many as possible as soon as possible)?

Any other suggestions so that I can get them closer to refinancing (by the way I'm suggesting a 20 year mortgage as opposed to another 30)?

[iamlindoro]

Anyway, they have many credit cards, most with no balance. Those that do are going to be paid off before the end of the year ($21,000 worth) and their stash of cash will go to that. So at the end of the year their only debt will be the two mortgages (22 years remaining on each).

If most of their cards have no balance, but they still owe $21K, that suggests they have a couple of cards with very high balances relative to limits.  These are probably the ones that are hurting them.  Of what you have told us, this is probably the biggest negative factor currently.  Utilization % across all credit is a major factor in credit score, but so is utilization on a single credit source.  If the $21K is all on one or two cards, and those cards are 50% or more of their limit, this will harm their credit score more than having the same amount spread across more cards and all cards below 30% utilization.

My initial thought is to whittle down the credit cards to 1 or maybe two, but I'm not sure. Should this be done? If so, should it be drastic (ditch as many as possible as soon as possible)?

Don't have them do this.  Closing cards will reduce their available credit, which will increase utilization percentage, which will substantially harm their credit.  Using the above figure of $21,000 owed, it's far better to be using $21,000 of $100,000 (21% utilization) in total consumer credit than $21,000 of, say, $25,000 (84% utilization).  Even when the cards are paid off, the statement balances would still be reported on a monthly basis (even if they pay off the entire balance monthly) and having less available credit means they will show a higher utilization at any given time.

This response only addresses the things you have told us... if your friends have made a lot of recent applications for credit, or have missed payments in the past several years, the only thing they can do about those is wait for them to age.  They don't necessarily have to age completely off the report-- most single missed payments and credit inquiries have a minimal impact after two years (though this depends on the credit scoring model used).

[Rollin]

iamlindoro

Very clear and helpful information - thank you.

They plan on paying off the two cards that hold the majority of that balance in the next month (using some of their cash that was sitting with minimal interest!). Then, they plan on paying off the remaining smaller balances on multiple cards throughout this year - with the goal of zero balance at the end of the year.

I may get them to just pay them all off now, as the DW is hanging onto old thoughts/emotions (needs another face punch). That is, because these cards have no interest on the remaining balance (until certain dates of course) she feels more comfortable having the cash as opposed to no cash and no debt. Pow!Pow!

[Mother Fussbudget]

They probably think of the cash as their emergency fund (EF).

Tell them that for a short-time-period - until they can get their savings 'engine' up and running - they *could* think of their now paid-off credit cards as a source for their EF. 

And be sure to reinforce:  The EF is for EMERGENCIES ONLY!  (broken water heater, etc)

Ask if they EVER want to get CC debt  again.  ;-)

[Rollin]

They probably think of the cash as their emergency fund (EF).

Tell them that for a short-time-period - until they can get their savings 'engine' up and running - they *could* think of their now paid-off credit cards as a source for their EF. 

And be sure to reinforce:  The EF is for EMERGENCIES ONLY!  (broken water heater, etc)

Ask if they EVER want to get CC debt  again.  ;-)

They are coming around quickly, but I notice they take time for things to settle in with them.

Your suggestions are explained well and I'll use them - thank you.

[galliver]

If there is an impulse control issue, all or most of the cards could be cut up or frozen in an ice block and deleted from browser/amazon/etc, without closing the account(s) for the abovementioned reasons.

[MrSal]

iamlindoro

Very clear and helpful information - thank you.

They plan on paying off the two cards that hold the majority of that balance in the next month (using some of their cash that was sitting with minimal interest!). Then, they plan on paying off the remaining smaller balances on multiple cards throughout this year - with the goal of zero balance at the end of the year.

I may get them to just pay them all off now, as the DW is hanging onto old thoughts/emotions (needs another face punch). That is, because these cards have no interest on the remaining balance (until certain dates of course) she feels more comfortable having the cash as opposed to no cash and no debt. Pow!Pow!

if they pay them off now in one go ... and IF they have no derogatory marks on their report - late payments for example or no payments - then their credit score may bump up 100+ points or more!

Like it was said before, credit utilization ratio in a single source impacts negatively as well in a very bad way. In a single month I went from 750's to 640. And once I got that balance paid off in about 1.5 months i went from 640s back to 740s in a single update.

After they do this, and once their credit as increased i would go ahead and probably refinance that mortgage? it seems rather high! especially the second mortgage

[Rollin]

If there is an impulse control issue, all or most of the cards could be cut up or frozen in an ice block and deleted from browser/amazon/etc, without closing the account(s) for the abovementioned reasons.

Possibly, but I think it is that they simply have given up on their finances to some degree. I think they scrimp and save, don't see a lot of progress, and then do a "I deserve it" purchase.

[Rollin]

iamlindoro

Very clear and helpful information - thank you.

They plan on paying off the two cards that hold the majority of that balance in the next month (using some of their cash that was sitting with minimal interest!). Then, they plan on paying off the remaining smaller balances on multiple cards throughout this year - with the goal of zero balance at the end of the year.

I may get them to just pay them all off now, as the DW is hanging onto old thoughts/emotions (needs another face punch). That is, because these cards have no interest on the remaining balance (until certain dates of course) she feels more comfortable having the cash as opposed to no cash and no debt. Pow!Pow!

if they pay them off now in one go ... and IF they have no derogatory marks on their report - late payments for example or no payments - then their credit score may bump up 100+ points or more!

Like it was said before, credit utilization ratio in a single source impacts negatively as well in a very bad way. In a single month I went from 750's to 640. And once I got that balance paid off in about 1.5 months i went from 640s back to 740s in a single update.

After they do this, and once their credit as increased i would go ahead and probably refinance that mortgage? it seems rather high! especially the second mortgage

That is cool (if they could go up 100 points), as they really would like to refinance.

Sadly, this has all come about because he wants a new boat and is asking my opinion. I said I'll do your retirement calcs and you'll see where yo stand. If he wants the new boat and needs to work 1 or 2 years more to get it then he can decide the worth of it. Right now he'd have already purchased it (ignoring the higher costs with this bigger boat).