Should you close your revolving account or not? This is one of the few emailed answers from the question, “What would you like to know about fundability?” that Merrill Chandler and Brad Burnett tackles on today’s episode. As they share a way to close an account without harming your borrower profile, they also give some amazing insights on fundability and how to avoid the landmines where you have been blowing up your funding chances. If you have many credit cards, you have to learn how to manage each one so as not to complicate your fundability. With Merrill’s insights, you will slowly learn how save your fundability and learn what are the better accounts to open.
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Q&A #1 with Co-Host Brad Burnett
In this episode, I’m excited because Brad and I are answering questions from random people who would send in emails when we put a call to, “What would you like to know about fundability?” This was one of the most popular episodes that we ever did. Brad and I were on point and the questions were perfect. There are many good questions and our answers were highly revealing. We’re going to drop right into that and I’m going to give you some amazing insights on fundability and how to avoid the landmines where you have been blowing up your funding chances.
We’re going to be answering a couple of questions that we had come in some emails from different clients and different sources. The first question is somebody was told that they should never close a revolving account ever. It’s bad for their credit.
Did they get this from CreditKarma.com? That sounds awfully suspicious like a lender or a merchant’s policy, “Never close your card. It’ll destroy your credit.” First of all, it’s not true, but there is a way to close an account without harming your borrower profile. We’ve talked about the low-value card, junk cards and mall store cards and things like that. If you’d go out and close them, you’re going to hurt your profile. There’s a way to do it where you don’t have to hurt your profile. It’s getting under the hood of how FICO measures the value contribution of a particular account. If you opened up an account within the last 30 days and it’s a junk card or mall store card, close it. You may take a hit, but you’ll rebound very quickly. Get rid of any brand new cards. Never go into a merchant that says, “We’ll save 10% on your purchase if you apply for our card.”
The only ones who do that are merchant store cards, mall store cards or junk cards. They are the ones who make those offers. Unless you’re spending $67,000 at Target, don’t do the card. It’s not worth it. It will ruin you on a number of levels. As part of our optimization process, we always replace the negative point. We built an algorithm that allows us to rank the contribution of each one of your revolving accounts. We value that. That ranking tells us when a particular card ends up at the bottom of that ranking as the junk store cards or a low-value card. Only then is it closable. We only close it when it ends up at the very bottom of the profile and it doesn’t cause the average age to go up. Those are the two features. There’s a lot of math in there. If you want to try it on your own, I’m putting in my disclaimer, soccer in a minefield. Do this with adult supervision.
Don’t just close an account, because if it’s soccer in a minefield, the end of that is you might score a goal and regret it. It’s more likely you’re going to blow up your accounts and blow up your profile.
The bottom line is once that ranking is at the bottom and your average age goes up by having it closed, that’s the only time that we recommend a closure. We’ve had clients who their junk cards are projected one per quarter for five years. They’re such a consumer borrower that they have fifteen or twenty consumer cards that needed to be closed to make their profile valuable. Every single one of them, there’s a deliberate process. The idea is ultimately, you want no open consumer cards. There’s a FICO negative indicator called Consumer Finance Accounts. You only have to have one. If it’s present, you’re not getting all the points and your fundability is definitely taking a hit. That’s why they call them negative indicators. That is wrong. You can close accounts. You just have to close them after you’ve replaced their points with points from higher value cards.
Be smart about it and be strategic. If you need some recommendations, we’re more than happy to help where we can. Sometimes it takes a little more than a quick review. That’s what we do. Leading off of that here. It’s okay to close accounts, but when you pay off an account, does it close the account? There’s an individual that I had a chance to speak with and I reviewed their profile and did the analysis for them. They had four or five bank accounts that they didn’t realize they were the same account because they had never looked at their credit report.Be smart about closing accounts and be strategic. If you need some recommendations, we're more than happy to help where we can. #GetFundable Click To Tweet
There are five accounts all covered by the same, then it’s a lazy boy. He thinks it’ll automatically close.
It closes once it’s paid off like an installment loan, not a revolving account. Here’s the thing with any revolving account. You go into a mattress firm, you go into a furniture store, you go buy a TV, any of these accounts are revolving. They always put you on a revolving account because they want you to pay it down. They get more interest out of it and then you might use it again and that’s the reality.
They don’t close it. They want you to go pick up that next ATV on a Honda account or a new mattress.
These accounts tend to stay open longer than a normal credit card would because they have different financing and different financial requirements. A normal credit card if you don’t use it for that certain amount of time, it will get closed for inactivity.
They don’t want the exposure. Real credit cards or what we call cash cards because you use them the same as cash. Those close out because without that activity, you got a $5,000 credit line sitting there. You haven’t shown them that you are using it and paying it off. There’s no behavior being tracked for the previous 24 months. After 24, 36 months, they’ll shut you down for inactivity because there’s no evidence showing how you manage it. These cards don’t have anything to lose. They’re marking up their products five to ten times, so $1,000 is $100 exposure to them. They want you ten years from now to still have you buy your next sleep number.
Which he had. One of his oldest bank accounts was eight years old. His exact words were, “I paid that up seven years ago.” It was paid off quickly, but it was never closed. First of all, you have to know what you’re getting into. Let’s start there. When you go into one of these companies, ask them, “Is it a revolving account or is it going to be an installment loan?” If you can get an installment, some of them won’t do that. We get that it happens when you have to get a new mattress.
Put it on your Chase Sapphire card and get the air points. Many of us, since we haven’t known until now, that these are low-value junk cards. It’s a seagull credit, not Eagle Credit. We don’t want these junk cards, but because we have a good score, we walk in and say, “Finance it because it’s 90 days same as cash or six months interest-free.” Now, you’re operating again over here on your cashflow side rather than on, “I’m going to pollute and junk up the most valuable financial asset that I know, which is my credit.” Don’t get those accounts if you could in any way avoid it. It will junk up your card. It will ruin your average age. We need to do the entire low-value card discussion, credit card hacking and all those things.
Check out our YouTube channel because we have a boatload of videos. Credit Sense-YouTube, it’s easy to find. You can research it and spend days going through videos and learning stuff that you never imagined.
This is free stuff. We don’t charge for you to become a conscious borrower and to become aware. Find out that there are rules of the game you can learn and then talk to us. Get an analysis. Find out how you stack up against mortgage underwriting or business credit underwriting. Find out the facts you need because unless you know where you are, you can’t get anywhere. You’ve got to know where you are to get to $1 million in credit lines, to buy a new house, refinance or whatever so get informed.
That leads us into the last question or it was more a comment. This was a comment from a gentleman who had been in business for 40 years. He said never in his 40 years of business did any financial advisor or banker tells him how to successfully manage his business finances with regards to where should business expenses be placed. He had a ton of available credit all in his personal, all business expenses. You can imagine as he’s running these business expenses, it’s like running it up to the beginning of the month, spike it out and he paid it down. He’s reporting every month with high balances and it’s killing his personal credit and his scores where he could have easily been in the high 700 range. He was in the low 700, high 600 range.
He had never been told to have business expenses be on business. For some of us, that seems obvious, “We should be on business credit.” When you go into Capital One, they give you a Capital One Spark card. They say it’s a business card and have commercials that tell you it’s a business card. This gun that I made with these two fingers, I’m like shoot yourself with because it reports on your personal every single month. You can’t run credit on it. You can’t run balances as you would with a business because it’s going to damage your personal profile.
It’s not a business card, no matter what the marketing says.You can close accounts. You just have to close them after you've replaced their points with points from higher value cards #GetFundable Click To Tweet
It doesn’t matter what it says. If they didn’t print it on there, business card, it’s not.
That’s why I’ve been flipping you off. I was flipping off the system. The ignorance of the marketers or pure deception. The point is that it reports on your personal profile. It is personal credit regardless of anything else out there. Your personal credit has different underwriting than business does. The business should get millions of dollars in lines of credit and you can’t do that on your personal. There are different underwriting criteria and it’s the goose that lays the golden egg. If you nurture and take care perfectly your personal profile and you don’t treat it like a business expense, reporting function and using all your credit lines to run business expenses. If you move that over on a business, you keep this prim, proper and pristine, they’ll allow you more liberties to carry balances, grow your lines or grow your credit card limits.
Just because you get to write it off as a business expense, even on a business card. Technically, you need to have a letter where you’re leasing that card from the personal to the business in your taxes if you’re audited. They won’t accept business expenses without some formal denotation that you are using this expressly for your card. I’m going to add one more thing here. This is so important. You know what piercing the corporate veil is, right? Piercing the corporate veil means that if you put on a credit card, personal expenses and you put business expenses on the same card, you have all these assets, real estate, notes and all these assets in the business. Because you have treated it with non-deference and non-respect, you have not separated your personal and your business expenses, even if they’re both personal cards. You need to use separate cards for personal business or you pierce the corporate veil and they can sue you and take all your business assets and all your personal assets.
If you have not talked to us and create a clear path and strategy to separating personal business, make sure all your businesses are on one personal card and all of your personal are on a different personal card. Then get out of business on your personal profile and get business cards. Get business cards and run your business on the business card and keep your personal pristine so you don’t run the high balances. Your utilization isn’t killing you and you’re not strangling the very asset that is going to get you anything you want in your financial lives. There’s so much misinformation out there.
The good news is you don’t have to be the expert. We don’t even have to be the experts on this. We happened to have been in business for decades between the two of us. One thing I would say is if the concept of piercing the corporate veil or you’re looking at this and you’re going, “Am I going to be in trouble with the IRS?” That’s the last place you want to get in trouble. If that rings for you a little bit and makes you pucker a little, check out Anderson Law Group. This is not a paid promotion. They helped me set up my first entity in 2001 and they know the space well, especially if you’re an investor or a small business owner. They know it well. It’s likely they have some free information out there that you can get ahold on and watch some videos. They’re attorneys. They’re experts that I would refer you to.
We have mutual clients. I could almost say hundreds. Many dozens of mutual clients and not one of our private strategies has ever run amuck with Anderson. They have reinforced many of our strategies, asset protection and things that are going to be important for you to prosper in a business environment. We do it because we trust their coaching of our mutual clients. We’ve never rejected out of hand any of their strategies as well. We have very parallel tracks. Check them out. It’s free Information. It’s not a paid political announcement. We have lots of mutually satisfied clients between our two organizations that will take care of setting up the entities or things to make sure you’re protected.
The last thing I want to say on this is I started the conversation and it seems obvious that we should have business on business. It is the furthest thing from obvious that somebody can be in business for 45 years and never have a single advisor mentioned that they should maybe get business credit and separate out. It goes to show that in this world of finance, people silo themselves. This is what the banker focuses on. They don’t think anything outside of it. This is what an attorney focuses on. They don’t think anything outside of it in many cases. The Anderson Law Firm, the reason I do like them is that they work in this space of investors and small business owners. They see a bigger picture than maybe some other types of asset protection attorney who just focused on trusts maybe or something like that.
All I know is in our client consultations or strategy sessions, we’ve run up against a number of their strategies and recommendations and everyone will pass muster with good credit management and good credit growth strategies.
If this is all brand new for you, it’s okay. Don’t think that it’s terrible that you’re hearing this for the first time. We’ll try to do a better job of getting information out there. Send us questions. We’ve got three great questions. We will be back. You’ll get some updates from FICO World. Thanks for joining. Send us questions or comments. Jump on YouTube, check it out and ask those questions there. We’re more than happy to answer or Info@CreditSense.com and our team of strategists will guide you through the process and help answer any questions you have. For now, take care and be wise with your money.