I want to follow up on Lee’s last blog about first-time home buyers. He mentions that credit is the most important thing that you can have! He is absolutely right!
I ruined my own when I got my first credit card at 18. I was so dumb! I got the bill in the mail and my minimum payment due was $25.00. I bought the money order, filled it out, put a stamp on it, and just stayed too busy to mail it. That’s stupid. There’s no way to make myself feel better; it was dumb. So when the next bill came in, I just didn’t bother.
Actually, I applied for two more cards, and just let them go too. I had no idea what I was doing in the real world of paying bills, or how I would affect my future self who wanted to buy a house.
What happened was that my credit bottomed out, and I ended up with negative remarks on my credit. Everything was turned over to collections, and I paid them that way. That doesn’t really help. Your credit report still shows that you were turned over to collections.
Sure enough an emergency arose. Had I taken care of business, I would have been able to cover it. Instead, I had to rely on others for help. Enough about me.*
How did I start fixing the problem?
First, I signed up for Credit Karma and started really reading what they had to say. I looked at my credit score and used their recommended tips on how to rebuild it.
One thing I did was get a secured Discover Card. I think I had to put down $200.00 to start. After a certain period of on-time payments (it varies from card to card) you get the deposit back. Here’s the trick. Do not use more than 25% to 50% of your total limit, and pay it off every month. I used it once a month for a tank of gas, which was just under the 25% mark. It takes a while to see real results, but they do come in.
After three months of that, I had credit card offers coming in the mail left and right. Throw them AWAY!!! Every time your credit is checked, your score is hit. So don’t do that except when absolutely necessary, and watch your Credit Karma.
Check for discrepancies
If you see something on your credit report that is older than seven years, file a dispute to have it removed. Seven years is typically the longest something can stay on your credit. Student loans count for MAJOR points! Keep those loans current! Federally issued and backed student loans always have several repayment options. Call them, explain your situation, and ask for help.
Remember, these student loan folks do not go away. They can and will come after your tax returns and wages. They can also tarnish your credit very badly. Keep these paid up! Ask them for a deferment while you are researching options that are best for you. Call them. Right now. Stop reading. I will wait…..
These, in what I have read, cause people’s credit the biggest problem. Not only do the huge ones often go to collections, they are also usually for tens or hundreds of thousands of dollars. Sometimes, the best thing you can do is wait them out. I hate to say that, but realistically, most of us just can’t afford to pay them. If you do make payments, the seven years doesn’t start until after you stop making payments.
Most hospitals will turn you over to collections even if you are making payments on time. The balance owed also shows up on your credit report.
Here’s an example: Let’s say you have student loans of $50,000 and a hospital bill of $150,000. Your amount owed just between those is $200,000. That means if you want a home loan for $150.000, your credit will show you as having $350,000 in outstanding credit issued to you. If you make $48,000 per year, those numbers just do not work. That was explained to me by a bank once.
How to improve your credit
Now, if your credit is really good, and between all of your credit cards you have an available $350,000 credit, and you use about $1,000 per year, they like you!!! This shows them that you do not live beyond your means and keep your bills within what you can pay. That is one thing that will make you a good credit risk.
Another option to help rebuild your credit is to take out a secured loan with a bank. Be honest with them that you are trying to rebuild your credit. Give them whatever amount you can to borrow, and make sure you always pay it on time. At the end, you will get your deposit back. Never take more than can be paid back by loan or credit card.
It will take you a while to rebuild your credit. It isn’t an easy fix once it has had some negative entries, but it can be done. As for me, I’m almost back to the low side of what could be considered for a mortgage.
*If you have any questions about anything I have written, please contact an attorney who deals with credit issues. Nothing I have written should be considered professional or legal advice by any means. This is only my story and personal advice. All of us are different, and not everything I have mentioned will work for everyone. I hope you all get the answers that you need and get the score that you deserve in order to get your dream home!!