Refinancing at a higher rate to build credit?

[crazytown]

I have a question and need a little advice. I have a newer car that I financed before BK at 4.99% interest. My lawyer dropped the ball so to speak and my reaffirmation papers were never filed (although I signed them). Therefore, I have faithfully been paying on a car that is not reporting my payments anywhere. It was simply IIB. I have 36 months left on the loan.

My credit union can offer me a refi at 8.9% interest. I will continue to pay the same amount I have been paying (although they are making it a 48 month loan with lower payments) and would pay it off in 36 months as well. I know that a 4% increase in interest sounds like a dumb move...however will the impact it makes on my credit (they report to all 3 bureaus) be worth it in the long term? I am trying to rebuild as well as I can. I currently have a mortgage and 2 small credit cards but that's it.

What do you think?

[tobee43]

did you file a 13 or 7? if a 7 asset or non asset? when did it close?

your atty didn't drop the ball, he/she helped you out by not re-affirming that way you weren't pin to the loan. however, many do re-affirm the cars they intend it keep.

did you get an approved loan from your credit union?

[crazytown]

It was a 7 and discharged about 8 months ago. I only said he dropped the ball because I wanted to reaffirm the car, signed the papers and fully expected it to be reaffirmed. He didn't tell me he wasn't going to do it. He just didn't do it. Lol.

The bank has approved me for the loan. I just need to make a decision and sign the papers. Do you think it's smart to do or stupid?

[tobee43]

It was a 7 and discharged about 8 months ago. I only said he dropped the ball because I wanted to reaffirm the car, signed the papers and fully expected it to be reaffirmed. He didn't tell me he wasn't going to do it. He just didn't do it. Lol.

The bank has approved me for the loan. I just need to make a decision and sign the papers. Do you think it's smart to do or stupid?

i can understand why you would think it would help you. however, i would start with a secured credit card as opposed to assuming more debt.

our credit report reflexs over 30 pages and years of perfect credit. yet it has ONE paragraph dealing with the bk which trumphs our great history of perfect credit.

time is really the healer for your credit standing. i would vote no, however, others may weigh in with a different view.

good luck with whatever choice you make!

[crazytown]

Thanks for the response. I am having doubts now about what to do. You're right. Even though I fully intend to keep paying on my current car loan if something would happen I am not legally obligated to do so. If I refi, well that's real debt.

I'm wondering if it would be smarter to hang tight for awhile and apply for a new car loan in a few months. Or to just do the refi so my credit is building and then trade it in for a new car in a year or so. I'm having a real hard time with the "time heals all" thing. I was so used to having perfect credit before my divorce. I never could have realized the full impact of filing bk until now.

[justbroke]

Personally, I would not do this. What's affecting your credit rating right now, is the fact that you filed bankruptcy. Everything will be just fine. Never do thing to "purchase" a higher credit score, which is what you'd be doing. The fact is, that your score will go down once that new trade line hits your credit report. After some time, it too will "age" and your score will go up.

Credit scores are precarious things and I'm not sure what you are planning to do, will work the way you think that it will.

[crazytown]

Thank you for the input. That's exactly what I was trying to do ("purchase" a higher score)! I thought having a reporting auto loan on my credit was very important. Now after reading your advice I am not so sure it is worth the extra money and the fact that it may not affect my score the way I had intended it to...

[justbroke]

Having "installment" accounts on your credit report are important to the scoring model(s). You do have some on your report and they are probably all good (showing no lates). I'm not sure what having an "open" and "active" installment account does, but your payment history is the largest factor in the credit score.

I would wait until the one-year mark and keep all your credit accounts current and without any late pays. I would revisit this at that point. Then your credit score should be up (>680 I would hope if you had great credit before filing -- and didn't have anything bad reported other than IIB). I would then think that your Credit Union could offer you a better rate. Then, it may be a good thing.

[crazytown]

OK thanks! I think I will take your advice and hang tight for a few more months. You're right I have a house and 2 small c.c. that are reporting on time each month. Why add an 8.9% loan when I can probably do better a year out.

[msm859]

OK thanks! I think I will take your advice and hang tight for a few more months. You're right I have a house and 2 small c.c. that are reporting on time each month. Why add an 8.9% loan when I can probably do better a year out.

You left out some information to consider in calculating costs. As an example I was also faced with this dilemma. I owed $7500 on a car wholesale blue book is over $14k 2.9% interest, credit union offered to refinance @ 3.9%. Thus the extra interest would cost me less than $75 per year. The business question therefore is would it improve my credit score enough such that if I was to buy a new car in 2 years I would receive a lower interest rate and save more than @$75? I went ahead and did the refinance. It is only for 18 months although I plan on paying extra to have it paid off sooner. The actual costs should be less than what many pay to have a credit card to rebuild credit. If I pay it off in 1 year it should be less than $50.

In your question the spread is more and time is more which both increases the costs. Prior to the refinance I did get a secured credit card from the same credit union about 6 months earlier which does not costs anything. So might start with that first and perhaps be able to get a better interest rate.

[IBroke]

This is not an easy decision. Do you have equity in the car (owe less than the value)? What's the balance? MY personal decision to "buy credit" would certainly depend on these factors, too. Would I do it on a $60K loan and a vehicle with a $40K-value? NOPE! How about a $5K loan and a vehicle with a $10K-value? WHY NOT?

It would also depend on my long term goals. The higher "cost" of the new loan could easily be recovered when obtaining my next substantial auto-loan. That, of course, leads to the question if you want such a loan in the future in the first place.

[IBroke]

You left out some information to consider in calculating costs. As an example I was also faced with this dilemma. I owed $7500 on a car wholesale blue book is over $14k 2.9% interest, credit union offered to refinance @ 3.9%. Thus the extra interest would cost me less than $75 per year. The business question therefore is would it improve my credit score enough such that if I was to buy a new car in 2 years I would receive a lower interest rate and save more than @$75? I went ahead and did the refinance. It is only for 18 months although I plan on paying extra to have it paid off sooner. The actual costs should be less than what many pay to have a credit card to rebuild credit. If I pay it off in 1 year it should be less than $50.

Bingo! I'd only like to add that the credit-card might not help in the same way as an auto-loan - the "Auto-Enhanced" FICO comes to my mind.

[Logan]

People are way to eager to pay interest or in this case more interest to build credit. That's the kind of thinking that gets people in debt.
I'm a proponent of credit but NOT a proponent of Debt and never pay anyone any interest if it can be avoided.
Logan

[msm859]

People are way to eager to pay interest or in this case more interest to build credit. That's the kind of thinking that gets people in debt.
I'm a proponent of credit but NOT a proponent of Debt and never pay anyone any interest if it can be avoided.
Logan

I generally agree with your statement although it has a spice of emotion in it. In my case I was trying to make an analytical business decision. If paying an extra $50 in interest in the next 12-14 months would that put me in a better credit position when I go buy a new car in 2 or more years. Obviously it makes business sense to pay 1% more on $7500 for 12-14 months if it will save you 1% or more on anything over $7500 for longer than 12-14 months. I actually had an interesting conversation with the underwriter at the credit union about credit. He told me I should get 1 more credit card (only have 1) and I am being somewhat hurt because my card with them I pay off as soon as I make a charge on it or before I am even charged (usually have a credit balance) because although there is no annual fee, there is also no grace period and I do not want to be charged 17.9% interest. However, I figure after 1 year I should be able to convert it to a regular card so for the time being it is helping with my aging.

[IBroke]

People are way to eager to pay interest or in this case more interest to build credit. That's the kind of thinking that gets people in debt.

Unfortunately, it is not as easy as that and msm859's comment that he has to make an analytic business decision is spot on. I'm not a huge fan of our credit-system either but in this case, building credit might actually get him out of debt on future loans faster. The only alternative to get out of this system is to avoid any form of credit - but as soon as you take part in the borrowing-system, you either adapt to the rules or pay a penalty for not doing so.