Thursday, February 21, 2013

That Dirty Little Word...

Credit. It can be your best friend or it can be that superficial evil that keeps you from living a "normal" life. Gone are the days my grandfather talks about when he walked into a bank with his father and walked out with a loan. To get a loan for a house these days you practically have to give them your first born and half your liver. Ok, maybe not your first born, but you get my point here. We are faced with changing tactics in order to get us in a house of our own in the near future. First let me tell you about why we can't get a loan. It will make you run and check your credit report...

When my husband was a young thing, just out of high school and trying to make it on his own, he racked up some medical bills far out of his budget (no insurance) and a couple of utility bills from a roommate situation gone bad. Fast forward about 3 years and all of these bills are now in collections. Collections. There is another dirty word for you. This is not an uncommon scenario, many young adults left to fend for themselves end up with at least one collection. What this does to your credit in addition to a lack of positive history is detrimental. And you won't get a house loan. Period. Not even an FHA or RD. Sorry, Charlie, it just ain't your day.

So what do we do about this overwhelming hurdle? Well, you have to spend some money and do some waiting. First you have to get rid of all those collections. Yup, all of them. If they are older than 7 years they should get removed soon, so it's up to you whether you want to touch those or not. You want to take care of the most recent ones first, they are doing the most damage. Older ones are kind of a catch 22. When you pay off an old collection it brings it back to a "current" state which makes it look new and scary despite it being paid or settled. It will lower your score, there is no way around it. The only option for it to raise and not lower your score is if the collection agency kindly deletes it from existence from all 3 credit bureaus. So simple for them to do, yet so hard for you to get them to. Most agencies will slap you with "we don't do that" when you ask. There are many ways to tackle trying to convince them. You can go all old school and send a formal "pay for delete" letter which is slow and could be fairly aggravating. You can call and say if you want money you need to delete, which will more than likely get you a nasty retort and "have a nice day" *click*. (I got that one just 2 days ago!) And then you can settle and pay up with as much pride as you can muster, and do that one thing most hate even thinking about... beg. Send them a "goodwill" letter. Basically your aim is to make them feel sorry for you, tell them why you had a collection and why it is ruining your life. This blog explains it a bit better. What have we done? All of it. Has it worked? Time will tell.

Now what can you do to boost your score after you get rid of the negative? You borrow more money. Sounds counter intuitive right? Well, no. Basically a lender wants proof you got your s*it together. If you can handle a small loan or credit card they see you can handle a monthly payment. They want to see 3-6 current/open credit lines at all times:

One, they want to be a major credit card. If you don't qualify for a credit card, get a secure credit card like this one that reports to all 3 credit bureaus.
Two, they want to see a loan. Be it an auto loan or personal, they want to see at least a year if not two of perfect payment.
The third and others can be another loan or another credit card but you need 3 at the least. I, personally, have 3. A car loan, personal loan with MM and a major credit card with a decent limit. I have just about perfect payment on all. And I have good credit. So, what is the problem you ask? I am a stay at home mom. I have NO income. So I can't be a primary on a loan. Even if I was a primary, a joint loan looks at you both as a single unit, if one is bad, both are bad.

So, in summary, we can not do anything until we as a unit have better credit. At this point it is looking like the type of loan we will be eligible for will only pertain to an existing house, i.e. an FHA 203(k) or Rural Development. We will be diligently rectifying the collections, saving money and building credit over the next 6 months in hopes that it will be enough to move (after expected renovations) before late fall.

P.S. A little more about credit cards...

Keep all credit card balances below the 25% mark (30% is the ok but pushing it) but, regularly use at least 20% for maximum credit building.

Pay that bill on time and in full when you can (i.e. not just the minimum).

If you have a high balance, focus on paying it down first, it will boost that number the fastest.

If you can, get a card with cash back rewards and use the rewards to pay off debt or just save it. Don't, for the love of Pete, spend those rewards on stuff unless you could really spare the extra cash already.

A little tip I have discovered about payment and interest is if you pay your balance before your due date and pay it also twice a month you will save big bucks and make more headway on paying down a large balance.

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