Credit score gurus.

[Eric P]

My friend asked me this and i have no clue.

He is in bankruptcy from a hospital stay while he was unemployed, but was approved to purchase a low end car to replace one that was totaled in an accident. The interest rate is mid teens. He is expecting a payout from the other drivers insurance, which could likely payoff the loan. Thankfully not injured in the crash.

His question was would it be better for his credit score to pay off the loan asap, or make payments?

My answer was to payoff the high interest loan asap for cash flow purposes and not worry about his credit rating till after he is out of bankruptcy and keep debt to a minimum.

Am I wrong?

[J]

He isn't going to get much help from anything until bankruptcy is finished. After that, he gets to start rebuilding.

I'd recommend he keeps finances as lean as possible, so pay it off. That said, I'd talk with his bankruptcy attorney, and see how having the additional loan, vs the additional liquid will factor in to the bankruptcy terms. Both debt and assets (including liquid assets) factor into the terms.

[ChunkyMonkey]

My friend asked me this and i have no clue.

He is in bankruptcy from a hospital stay while he was unemployed, but was approved to purchase a low end car to replace one that was totaled in an accident. The interest rate is mid teens. He is expecting a payout from the other drivers insurance, which could likely payoff the loan. Thankfully not injured in the crash.

His question was would it be better for his credit score to pay off the loan asap, or make payments?

My answer was to payoff the high interest loan asap for cash flow purposes and not worry about his credit rating till after he is out of bankruptcy and keep debt to a minimum.

Am I wrong?

To recover from the score drop, the new payment history would really help. Paying high interest however is no bueno. Pay it off and IF he needs his credit score for business/licensing etc, get an authorized user credit cards for him instead (strictly for score purpose).

[Rumline]

What Monkey said. By keeping the car payment your friend would literally be paying every month for the privilege of increasing his score. Which is something he could get for free w/ a revolving account that he uses (even just a little) and pays in full each month.

I'll differ in saying that a secured credit card (where you put down cash equal to the credit limit, usually only a couple hundred $, that the bank keeps until your score goes up) would be better Edit: in the long term /edit than being added as an authorized user to another person's card.

[Wulf202]

What every other poster has said.

[ChunkyMonkey]

I'll differ in saying that a secured credit card (where you put down cash equal to the credit limit, usually only a couple hundred $, that the bank keeps until your score goes up) would be better Edit: in the long term /edit than being added as an authorized user to another person's card.


I usually advise against opening a secured credit card for credit score purposes - as new revolving trade line will dip your score further. Of course, you will build your score as on time payments being recorded. This is the slower safer way.

In the case of authorized line of credit, the original credit card holder's history will carry over onto your credit history. For example, if I put you as an authorized user on a 10 year old $40K limit AMEX card with 40k history balance with zero dollars current balance - The whole detail will transplant onto your credit history. Typically you'll see a huge jump in credit score in a matter of couple weeks.

[thedave1164]

I usually advise against opening a secured credit card for credit score purposes - as new revolving trade line will dip your score further. Of course, you will build your score as on time payments being recorded. This is the slower safer way.

In the case of authorized line of credit, the original credit card holder's history will carry over onto your credit history. For example, if I put you as an authorized user on a 10 year old $40K limit AMEX card with 40k history balance with zero dollars current balance - The whole detail will transplant onto your credit history. Typically you'll see a huge jump in credit score in a matter of couple weeks.

WOW

[ClangClang]

In the case of authorized line of credit, the original credit card holder's history will carry over onto your credit history.


Yup, that is accurate. And to echo, your buddy will have no material improvement in his credit score from paying off the loan over time. Just pay it off all at once, ESPECIALLY with a criminal interest rate like that. Further, don't make the mistake of getting hung up on the credit score itself. The full credit report is what actually matters, and since his report will have a bankruptcy on it until 2024, his score doesn't really matter - he's still a giant credit risk and will be turned down on most loan applications (or be approved with outrageous interest rates).

Your friend's primary goals should be maintaining cash flow at this point. He doesn't get to play with other people's money for a while, so he needs to retain as much of his own money as possible.

Source: I stayed in a Holiday Inn last night.

[Rumline]

In the case of authorized line of credit, the original credit card holder's history will carry over onto your credit history. For example, if I put you as an authorized user on a 10 year old $40K limit AMEX card with 40k history balance with zero dollars current balance - The whole detail will transplant onto your credit history. Typically you'll see a huge jump in credit score in a matter of couple weeks.
Yes, but...lenders will see that account as being authorized user rather than your own account; they know you're not responsible for making the payments. There are many different FICO score types and versions, with different algorithms that drive the score. They will weigh the benefit of being an authorized user differently. If you're applying for a mortgage, for example, that authorized user account won't help you at all. Not that OP's friend is buying a house anytime soon; I'm just saying in general re: authorized users.

Like you said it's the best quick fix method but it's not a silver bullet.

[ChunkyMonkey]

Yes, but...lenders will see that account as being authorized user rather than your own account; they know you're not responsible for making the payments. There are many different FICO score types and versions, with different algorithms that drive the score. They will weigh the benefit of being an authorized user differently. If you're applying for a mortgage, for example, that authorized user account won't help you at all. Not that OP's friend is buying a house anytime soon; I'm just saying in general re: authorized users.

Like you said it's the best quick fix method but it's not a silver bullet.

Of course not, it's strictly to improve score as mentioned. I underwrite them all the time, and it's still one of best loophole to get over 'minimum score' overlay on loans.

[Eric P]

I passed on your advise. He said he wants to pay the loan and keep the payout in a savings account since it may come in handy in an emergency, since as you all have said, getting a loan for anything else will be next to impossible.