This is a different kind of story for me. My usual story assumes that you're already on an upward trajectory. Today's story, though, assumes that your credit is thrashed, scraping the bottom of the barrel. Still, sinking to the bottom is easy. Working your way back is where the tough work is. Which brings us to today's story.
What do you do if your credit report is littered with a bevy of negative accounts? Do you try and dig your way out by grabbing a host of tradelines (accounts) that will overwhelm the amount of negative accounts that you have? Do you just try and grab a few accounts that you can nurture while the negative accounts age? In a lot of ways, these are philosophical questions. For those at the bottom right now, I think it makes a lot of sense to sit back and think about the path you want to take.
To be sure, prime lenders aren't going to be knocking your door down with new credit offers. With a host of bad accounts spread about your credit reports, you're not in a position to be picky when it comes to new credit. But you do control how many new accounts you're going to ultimately add to your credit report. Fact is, there are a lot of options out there for people with bad credit. Indeed, there is no shortage of creditors out there that will give you a new card -- equipped with usurious interest rates and pathetically low credit limits. It may not be the kind of credit you want, but it's something.
Considering how important new tradelines are to the credit-repair process, deciding how many to add is an important question that must be asked -- and answered. I think there are three ways that you can play this.
One, you can get a plethora of new accounts, thereby overwhelming the negative accounts. Two, you can get a handful or less, and nurture them as the negative history ages away from the credit report. Or, finally, you can do nothing. I don't think option three is a very realistic option, so I'll discard that from my choices. Option three, just for the record, is a bad choice because you'll be left with nothing when those bad accounts finally age off your reports. You'll be left looking like a credit beginner when that happens. So option three is a bad choice.
Option one, adding a bunch of accounts, whether you need them or not, is tempting. It's tempting because you'll want to add new credit limits that will help your utilization ratio. The more limits you get, the easier it will be to keep utilization low when you do use the credit cards. Given that 30% of the FICO calculation consists of utilization, getting a lot of additional credit seems appealing.
Adding a lot of accounts also makes sense because, as I have preached many times, having options is a good thing. If one of your creditors does something to irritate you, you can always sock drawer the card and put it in time out. So, having options is a good thing. And it's another reason why getting more than a handful of cards could make sense. Moreover, there's a chance that adding a lot of new credit limits could result in a short-term approval, an approval that could hinge on a higher credit score. Of course, there's no guarantee that a bunch of new accounts would actually result in a score increase. Those new accounts could end up costing you points instead -- as inquiries and new accounts drive your credit score down. It's a crap shoot at best.
Sub-prime accounts strewn about the credit report may haunt you later
However, there is also a downside to grabbing a bunch of new cards. Because your credit sucks, you're going to be offered a lot of low-limit cards. What's more, you're going to be offered cards -- by sub-prime lenders -- that aren't likely to grow with you over time. Additionally, you're likely going to apply for cards that you'll never use (especially if you're applying solely for utilization purposes). The risk in all of this is that you'll end up (way down the road) with a bunch of cards that scream sub-prime. And I mean scream. Even when the bad accounts age off, you'll be left with a slew of cards that you'll probably regret having. In a nutshell, your credit report will look like credit road kill.
Surely, though, this person's credit score will be significantly higher when those bad accounts finally age off the credit report. It's at this point that I worry most about the choice -- made long ago -- of adding a bunch of lackluster tradelines to the credit reports. Now that the scores are up, and the bad accounts are gone, you're in the market for some prime accounts. But will the prime lenders want to play ball with you? Is Chase, Bank of America, Citibank, or American Express really going to be enamored of your clean credit portfolio?
What's more, even if creditors are willing to give you an approval, what kinds of credit limits will you get? If higher limits beget higher limits, then I imagine lower limits beget lower limits. Indeed, why should American Express hand out a nice credit limit when so many of my other creditors only trusted you with $300 and $500 limits?
I'm also worried about creditors wondering why the credit report is littered with all of these sub-prime accounts that were acquired years ago. If your credit history is subjected to a manual credit review, I don't think there's any question that an analyst will wonder if something extremely negative occurred during your past life. Quite frankly, that's not the kind of scrutiny that you should welcome. I'd be worried that an approval (assuming you got one) would result in a credit limit that doesn't work very well.
I have a saying about higher credit limits begetting higher limits. I can extend that thinking to quality as well. Quality tradelines beget quality tradelines. Credit card companies aren't difficult to understand. They're like lemmings in a lot of ways. If your card portfolio is full of high-limit, quality names, there's an excellent chance that you'll get a high-limit approval from the credit card company that is evaluating your application. Creditors follow the leader. Because other lenders have showed you love, new lenders feel more comfortable showing you love. My own portfolio is living proof of that.
Fewer accounts at the beginning create less stress at the end
So what about option two? Would getting fewer accounts, that you use on a regular basis, be more beneficial once all of the negative accounts age off the credit report? There is no definitive answer here. And I can't, with an assurance, argue that this is definitely the correct way to proceed. Still, you read this blog because I take positions. You'd be unhappy if I waffled and vacillated on tough issues. Therefore, I'm going to take a stand and argue that option two makes the most sense to me.
At the outset of the credit-repair process, nothing comes easy. I'll acknowledge that right up front. Quality approvals will be difficult to come by. Still, I'd rather be selective when it comes to the sub-prime lenders that I choose to do business with. Although I'd be pigeon-holed into the same kind of approvals that our option-one friend is saddled with, I'd still try to be as methodical as possible when applying for cards. I'd be looking for creditors that have both a sub-prime arm and a prime-lending arm.
Consider HSBC, for example. HSBC offers the Orchard card, a sub-prime card that plenty of people grab when they're rebuilding. It's not the kind of card that people with good credit would want, but it has its place when the borrower is not in a position to be choosy. The good thing about the Orchard card, though, is that it's underwritten by a lender that also offers a host of prime offerings as well. HSBC underwrites the Saks Fifth Avenue World Elite MasterCard, for example. That's a great rewards card that prime borrowers would be extremely interested in. Indeed, I have the Saks MasterCard in my own credit portfolio. Thus, if a borrower manages to get an Orchard card, and shows a history of using the card responsibly, there's a better chance that a prime offering from HSBC will be extended to this person when the credit reports finally look better.
There are other lenders out there that cater to sub-prime borrowers as well. Juniper and Washington Mutual, for example, are both known to be bankruptcy friendly. They're both willing to overlook blemishes and bad marks that might be on the credit report. The good thing about these particular lenders is that they're also appealing to prime borrowers. Indeed, just as I have the Saks Fifth Avenue World Elite card, I also have the Washington Mutual Platinum MasterCard and the Juniper US Airways credit card. In other words, these two lenders offer cards that appeal to sub-prime and prime borrowers alike. Sub-prime borrowers may not receive initial limits that are hefty, but I know people who have grown their limits over time with both of these card companies. Again, because you're not in the best position to dictate terms, you'd probably be content to add these kinds of tradelines to your credit history.
In addition to working with lenders that play to both crowds, potential lenders won't be able to tell -- by looking at your credit report -- if you have a subprime or prime offering from the previously-mentioned credit-card companies. They all look the same when HSBC shows up on your credit report. Ditto Washington Mutual. Potential lenders simply won't be able to tell if you were a subprime customer once upon a time -- or if you were always prime.
In addition to adding credit cards, there is also the option of adding a secured card -- provided that you can find a bank that's willing to give you one. If you've got some cash handy, you can always look for a secured credit-card option. There are plenty out there; you'll have to do your homework to find one that's willing to work with you. Not every sub-prime borrower will have a lot of loose cash laying around (if they did, they likely would have paid their bills), but not every sub-prime borrower is broke, either. I know plenty of people who have high incomes but have terrible payment histories. When they get serious about credit repair, getting a secured card is a wise option for these kinds of borrowers. Anyhow, don't forget about secured cards when you're beginning credit repair. There is no guarantee that a lender will work with you, but it's a great option if someone is willing to give you a chance.
As you can see, there is no "right" way to rebuild your credit history. There are several ways you can do it. Given the choice, though, I'd likely opt to pick up fewer accounts at the beginning. They're easier to manage (which is something that should appeal to people who've had a tough time managing their credit in the past). They'll be less conspicuous when all of your bad accounts fall away from your credit report. And you'll be more likely to use the cards even after you've graduated to cards that were only a dream to you many years back.
I can understand why people want to bury their past with a bunch of positive tradelines. What worries me is that you won't be able to hide all of these sub-prime accounts when your bad accounts fall off the report. I think it's going to be an uphill climb trying to overcome not just the bad history, but the sub-prime history that follows.
I believe that fewer tradelines -- in the beginning -- will yield more fruit in the end. Still, you'll ultimately have to figure out what's right for you.
Best of luck in whatever course you take.