Which debts to target to maximize credit score change

Question

I have a variety of debts, and I have a strategy to pay them off. It starts with getting my credit score up another 40-80 points or so to reach the threshold where I can do a cash-out refi on the house (Texas, USA), use that to settle up a lot of credit debt, and then focus on items further down the list.

Anyway, when I have extra money to pay against the debt, I want to put it where it will most quickly increase the score, because every day until we refinance, the interest grows.

In particular, I am wondering about the following four categories:

• Active consumer credit cards
• Debt accounts from consumer credit cards that were canceled
• Personal line of credit from my bank
• Payment accounts on the verge of being in arrears, where I've been making each payment after the next payment has posted, so everything's always late, but I'm not technically in default.

Credit utilization is the main problem on my report, with overall revolving credit over 50% utilized, and individual cards over 70%, and in one case, over 90%. The line of credit is also in the 90's, but I think doesn't have as much credit-score-impact as the cards.

With money coming in soon, I want to strategize. My guess is that I can get the most bounce by targeting revolving accounts (cards, not L.O.C.) with the highest individual utilization. It seems, from how I've seen my score react over time, that the line of credit and the dead card accounts don't do as much, score-wise. Is that true? It also seems that continuing to run just into the edge of trouble on utility accounts and such isn't really a problem in the numbers (although its psychological value is hard to compare with money).

Are these guesses correct? Are there some general principles that I'm just missing here? I just want to be able to think about this in the right way.

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Edit, comments to tell me that my overall plan is a bad idea, when you don't know the particulars and want to just advise without finding them out...... are utterly unhelpful. Please refrain.

Answer 1

The best way to answer this would be to find an independent or at least not sales-motivated financial counselor to review your actual credit report. It's pretty easy to see specifics when you're looking at the actual data, but a little harder when you're just responding to some portions of it (as you've included in your answer). Some smaller customer-focused community banks or credit unions will have trained counselors on staff who can help you do this. Maybe even the bank you're considering taking the loan out from.

I think mhoran_psprep's answer has good advice specifically about the loan you're planning on taking out, but I wanted to answer as well to go a little more into detail about your literal question about impacting your credit report.

This is the iterative approach I would use. Some of this is redundant to things you already know, but I'm trying to explain the overall approach as a backdrop to answering your specific scenario (especially in case there are details you haven't listed here).

• First, ensure all accounts are up to date and not being reported as delinquent. The threshold for how and when a bank reports a debt as delinquent can vary, so even if you think all your accounts are being paid just in time, make sure that's actually true. This is critical - a delinquency stays on your report for a long time. Don't pay a penny extra anywhere else if you've got an account that might be delinquent.
  • As a minor footnote to that point, if you're ever in a position where you literally don't have enough money to keep all accounts current, and can't solve it creatively in enough time to meet your due dates, consider carefully how you apply your funds. If you're about to seek a new account in a specific trade line (obviously not "smart" to take out new credit if you can't pay your bills, depending on what that new credit is for), make sure the accounts in that trade line are kept up to date first. If you go in to a bank to take out a real estate loan, the lender will look at your history on real estate loans. So, even if your score gets the same impact for a delinquency on a car loan versus a home loan, the trade line the delinquency is in may have a secondary impact if you're marginal.
• Once all accounts are up to date, and you have extra money to apply, focus on revolving credit utilization next. Specifically, credit card utilization. Make sure you know your bank's reporting cycle before doing this. Some banks report balance as of your last statement, other banks pick an arbitrary day (say, the last day of the month) and report whatever your balance was on that date. Make sure you know this date for each card before you try to play any games, otherwise you may miss on opportunities.
  • In terms of what to target, look at credit cards first. If you have more than one, calculate the utilization of each, and pay down the highest utilized card first, until it is the same as the next-highest. Then, split your extra money across those two, and repeat. Utilization is calculated across all accounts in a trade line (i.e. credit cards), but you also see an impact from the highest-utilized account. So, while you want to reduce your average utilization across all accounts, if you start with the highest utilized account first, you will see the biggest impact.
  • Continue applying extra money to credit cards until utilization is zero. After that, consider setting up a small recurring transaction - say, your Netflix subscription - to hit a credit card a few days before it's reported each month, and then an automatic transfer a few days after it's reported, in order to create a very-low-but-nonzero utilization, since that's scored a tiny bit higher than a zero utilization in most credit scoring models. Other than this, don't use your credit cards at all unless you're paying them off immediately.
  • Once you're done with credit cards, do the same process on any other revolving lines (i.e LOCs). These have a similar impact but it's usually much less significant for most people.
• Once you've addressed utilization, pay down other debt based on interest rate advantages. If your primary concern is maximizing your score in the short term, paying down a car loan or a mortgage a little bit faster than the payment schedule dictates has almost no impact (other than changing the date on which is eventually closes, which in any case sounds like it's going to be way in the future compared to your short term needs.).
• There are also some (perhaps obvious) things you shouldn't do if you're trying to increase your score in the short term:
  • Don't let anyone do a hard pull on your credit report. This will result in a small negative ding that will last a few years.
  • Don't open any new accounts. In some cases, a new account will (eventually) help your credit score, in the long term, but in the short term, the impact is almost always negative, because a new account will drag down your average age of credit. (If you have two credit cards that are six years old, your average age is six years. Opening a third would mean it's now only four).

I can't finish this answer without adding some disclaimers, so bear with me:

• In the long term, the best way to keep a good credit score is to have a good long term plan for how to handle your finances. Pay everything on time and don't use credit as an "emergency" funding method unless you have no other choice. The highest-scoring individuals typically have a variety of long-term accounts in different trade lines, with everything paid on time, and very low reported utilization on revolving lines.
• Gaming your credit score higher can be easy, but it might not make much of a difference. Most lenders have a floor under which they won't write a certain type of loan (i.e. they won't write a conventional mortgage if your score is under 620). Above that, your score can have an impact on pricing (interest rate). This impact can be really significant for major long term lending, but there's a point after which the impact is small or zero. For instance, most banks would rate any score above 720 as A+, so increasing your score from 720 to 800 will have literally zero impact.
• As I hinted above, lenders will look at your whole report for significant loans, not just your score. Regardless of what number your score is at any point in time, they may look at how well you've handled similar loans in the past. If someone with a high score applies for a mortgage, but they've been late on their last mortgage a bunch of times in the last two years, might not get the new mortgage approved regardless of their good score. This doesn't usually come into play for less significant accounts (say, a Lowe's credit card for $500) but it will absolutely be important for large loans (car loans, mortgages, etc.)

So, don't focus so hard on your score that you loose sight of the bigger picture.

Answer 2

If your plan is to be able to get a cash-out refinance in Texas make sure you fully understand the rules about those types of loans in Texas. The Texas state constitution even includes provisions related to home equity loans.

Before the federal tax law changes in 2017, many homeowners used cash-out refinances to turn debt that couldn't be deducted into deductible debt. That advantage is now gone. The interest on the cash-out to pay non-home related expenses is not tax deductible.

Now onto your questions.

The goal is to increase your credit score, so I would focus on:

Payment accounts on the verge of being in arrears, where I've been making each payment after the next payment has posted, so everything's always late, but I'm not technically in default.

If these are being reported as being late, then they are adding to your dings on the credit report in addition to the impact they have on available credit and utilization. Getting these to the point where they aren't late will help your credit score.

Active consumer credit cards

Don't use these any more. Pay everything you normally put on the cards as cash or check. Now all your payment goes to reducing the utilization which will improve the score.

Personal line of credit from my bank

When you go and apply for the mortgage this line of credit may prevent you from getting the mortgage. That is a debt that you can tap into when you need to overextend in the future, which makes a new mortgage more risky. Paying it off and cancelling it will reduce the amount of credit you have available.