Tuesday, February 2, 2016

Turnover Tuesdays - Reselling in Earnest Has Hurt My Credit Score

For those who are not familiar, I started a series a while back called Turnover Tuesdays. Every Tuesday I like to highlight one item that I have resold. This will include profitable and non profitable sales. I hope that there is always something to learn.

This is not the usual format for a Turnover Tuesdays but I think that it is important for people to read and many people read all of the TT posts when they find the site.

I started reselling back in April 2015 and for the most part I did it for the points back then.  I bought something here or there but that is it and it was mostly iPads.  Since then I have really branched out in the number of products and listings I sell and the number of sales I have.

Here is a graph of my sales from Amazon:

You can see that quarter 4 was crazy.  Just nuts.  I couldn't keep inventory in stock fast enough.  Life is now readjusting back to the slower days of the rest of the year but January was better than I did most of the year last year.

One thing that has happened which is not great is a hit to my credit score.  I will explain why and possibly how to avoid it.

You can see the determinants of your credit score here:

Image result for determinants of credit score

30% is based on the amounts owed and that seems to be calculated based on how much is reported as owed at the time that your statement closes, not based on how much you actually spend.  If you pay your bill before the statement closes you can usually avoid the ding that is associated with using too much of your available credit.   Don't do that too much as that can look risky from a money laundering perspective and can lead to account closure.

You can check out more information on this DoC post

Reselling Requires a lot of Float

One thing I didn't completely realize before I began is that selling on Amazon requires a ton of float.  It takes time for the item to get to you, to send to Amazon, for Amazon to list the item, for the item to sell and then up to 2 weeks to be paid after selling.

Even if you sell the item the same day that you list, you may not be paid for the item in time to pay your credit card bill for that month, let alone to pay it early.

That process sometimes takes me more than 4 months if I am being really patient.

What do you do in the meantime?  You need a good sized float to pay your bills.  In fact, I've made a lot of money on Amazon but I have less money than when I started because I have so much money in inventory!  Ever watch Shark Tank (love that show!)?  They are always in need of money to fund future purchase orders because it can take a while before you finally get paid.

My Credit Score from Discover

You can see that I went from a mid 700's score to slightly below 700 in only a few months.  What are the key factors?  Percent of balance to credit limits is too high on revolving accounts!  I'm reselling too much!

This is intuitive right?  You spend a large percentage of your available credit and that looks risky.

What Should You Do About it?

I've paid midcycle on my 2% card a few times but that is only a temporary fix since I end up putting more money for reselling back on it right away.  I have more in reserve but I would rather not touch my investments/personal money.  It's a bad precedent.  Food is kind of important still.

One thing I did was to increase my credit limit on my main card.  I was able to get an increase from $17,000 to $30,000 which really helps a lot.  I still use a large percentage of it but it is (usually) not 200% of it anymore.  During quarter 4, I would max one 2% card, move on the next and then have to start earning on my 3rd tier card.

There are other options.  You can start with a larger float than me.  Good luck!  You either have it or you don't, not really a option you can just decide on your own.

You can take a loan, either from a bank, friends and family or peer to peer lending site.   I don't really recommend friends and family but to each their own.

Alternatively, you can put spending on your business credit cards.  Your spending on a business credit card and the balances don't affect your credit score.  You should be doing that anyways to separate your business expenses from your personal expenses since it is much easier to track everything but not everyone does.

I spend far more for my reselling business than my personal business so I would rather get the points/cashback for the business than personal expenses so I've stopped putting personal expenses on my personal lucrative cards!  Once again, to each their own way of tracking.  Remember, what you put on a business credit card is not automatically a deduction on your taxes if it isn't an expense for your business.  (If I'm completely off here, someone yell at me in the comments).

The last alternative is to scale more slowly.  Bah!  That means you are making less money.  Please, please do that if you have no other way to pay your credit card bills.  Late payments will take away your profits really quickly.

Bottom Line

For the time being I don't really mind. I don't have any needs for credit short term (outside of credit card signups).  When I need credit, I will avoid purchases for a little bit and make sure I am able to pay the vast majority of the bills before the statement closing dates.  I'm not sure exactly how long it takes to rebound but my understanding that it is fairly quickly.  Also, I will be able to recover quite a bit once all my quarter 4 inventory is sold.  I sell a little extra from previous months every month and it allows me to pay some of the bills earlier and earlier.