Fixing bad credit

August 18, 2005 9:02 AM

I have pretty bad credit.

I'm sure I'm like a lot of people out there, but I'm at a point where I don't even know where to start to make it right. I'm one of those "got a credit card and went nuts" kids in college, and after grad school, I ended up being in what I think retroactively was a pretty severe depression, and ignored my bills for years. I never budgeted, I just kept spending until I had no more money. My student loans have defaulted, two credit cards have charged off their balances on me, and I'm paying down another slowly. My federal tax refund in 2003 was withheld because of how deeply in arrears I am with my student loans.

Now - I'm married and have really altered my way of life. I pay my bills on time, but I wasn't able to get any utilities on my own - they're all in my husband's name. I have two cell phones under my name, but I paid an arm and a leg for deposits for them. My student loan issues are (sort of) being fixed - one is in "rehabilitation" and the other I'm trying to get a forbearance on because I don't have the money to deal with them right away. It is crushing to think how much money I owe because of my education and that number just expands every year.

We pay for everything by cash/debit card, but god, it makes everything so hard sometimes, not having a cushion of credit to lean against when times are rough.

What other things can I do to fix my credit? Will I ever be able to get a credit card again? Buy a car? Buy a house or apartment? At this point I am so overwhelmed that I don't even know where to begin. Thanks in advance.

posted by anonymous to work & money (27 comments total)

I was in the same boat. I feel your pain.

See if you can talk with Consumer Credit Counselling. It's a non-profit group who works with banks and credit unions. It's a free service. Do NOT go to one of those credit rehab places that charges you a fee for their services. The one I worked with was Balance and their number is 1-888-456-2227.

The hardest bit is just going through and opening all those envelopes and seeing how much you owe. It's shocking and distressing, but it's the first step toward eliminating the debts.

If you go through the CCC group, you still have to keep on top of things. They will pay distribute the payments for you, but it's up to you to make sure they have the correct information. In my experience, the creditors are actually very professional if you call them and try to set up a payment plan. Sometimes you can actually get a reduction on your total debt, especially if the original loan was sold to another agency.

You can email me at my.name at gmail dot com if you want to talk some more.
posted by luneray at 9:16 AM on August 18, 2005

I had bad credit. After a few years of paying my bills on time, I needed to buy a house (with my fiance who had great credit). My mortgage guy gave me a printout of everyone that thought I still owed them money and had reported it to the credit police. I had to research each case, sometimes proving that I had already paid, sometimes paying what I owed, and in one case just paying something I didn't really owe to avoid making 100 phone calls to clear it up. I was approved for the mortgage, and after a year of paying that off, I finally was able to get a real credit card (real: not the ones where you make a deposit or where the limit is only $1000). I take this to mean that my credit is now "good."

thanks for listening
posted by ba at 9:20 AM on August 18, 2005

It may not seem this way now, but if you do everything right your credit rating will start getting better slowly but surely. Nolo Press has a good page with resources on debt and credit. Also, you might consider yourself lucky that you don't have that "cushion of credit" -- without credit, you're being forced to live within your means. If you did have a card, you might slowly but surely be adding on a couple of hundred bucks a month until you were in the hole again...
posted by footnote at 9:45 AM on August 18, 2005

Get thee to a library and read through debt management books. There are tons. I didn't find any one book that gave me all the info I needed, but the two best ones were:

Why Smart People Make Big Money Mistakes by Gary Belsky. this deals with the psychology of money. It is not a self-help or financial management book.

Guide to Surviving Debt by National Consumer Law Center. This is written towards the person in extreme cases, but it's useful because the authors don't assume you are making 100K a year or have a parent willing to bail you out. There are also resources listed to help you find out what your rights are. (The book outlines them, but the info was only accurate when the book was published. Things may have changed.)

Find out what your rights are. This is really important.
posted by luneray at 9:53 AM on August 18, 2005

You can always (for most values of "always") get a secured credit card - deposit $1000, get a $1000 credit limit card... This is not "credit" in the strict sense, since the issuer is taking no risk on you - but you have to admit that outwardly, you do not appear to be worthy of having monetary risks taken on you.

A history of making small charges on such a card (or any other obligation) and paying them off ON TIME will gradually cancel out your previous recklessness.

You shouldn't be overwhelmed - you've already taken the first several steps, the hard ones, and the rest are just following through.

General advice: pay high-interest items first (i.e., pay the minimum payment on those student loans and the max you can spare on the outstanding credit card balances). Negotiating with creditors early, before they're banging on your door, will almost always work.

Miscellaneous note: if you move to another country, you start *fresh*, with no credit history at all.
posted by jellicle at 10:00 AM on August 18, 2005

It sounds like you've done a great job re-adjusting so that you are living within your means- that's the first (and hardest, IMO) step. Once that is done, it's just a matter of time and budgeting to keep making payments until it's all gone.

The hardest part for me was realizing that there is no quick way to get out of debt, or restore credit. It's just going to take years, and anyone who tells you different is trying to scam you. Pay your bills on time, get rid of the credit card debt, and slowly but surely you'll be back to financial health.

I would also recommend a book that's had a huge effect on how I think of money, and has helped many, many others: Your Money or Your Life.
posted by bobot at 10:09 AM on August 18, 2005

That cushion of credit is not good for you. Build a cushion of savings instead.
posted by caddis at 10:16 AM on August 18, 2005

I've had similar financial problems, and have only recently been able to deal with them effectively. For my weblog, I read and summarized a stack of financial self-help books in an entry entitled Get Rich Slowly! There's some great information to be had there on debt reduction.

From personal experience, my main advice would be contrary to what everyone else will suggest: do not pay the high-interest items first. While attacking high interest rates makes sense from a financial perspective, it can be demoralizing from a psychological perspective.

What worked for me was to implement a "debt snowball". I paid off my debts starting with the smallest first. Then I took the money that was freed and used it to pay off the next smallest. Then I took all the free money and paid off the next smallest. This worked for me — and quickly — where the high-interest rate first route had never worked, not in a decade of trying.

And bobot is right: Your Money or Your Life is a fantastic place to start.
posted by jdroth at 10:19 AM on August 18, 2005

jdroth, what you're saying about "debt snowballing" can make sense, but only with certain types of loans. Credit cards, car loans, etc, yes; student loans or mortgages, no. Anything that's an investment (education, housing) should be taken out of that equation.

Anon, I was in a very similar situation for basically the same reasons. I agree with bobot -- now you just have to be good and wait. I never thought I'd get another credit card, but five years later, much of the negative history has dropped off my credit report, and the recent on-time payments keep improving my credit score. Good luck, and you can do it.
posted by occhiblu at 10:43 AM on August 18, 2005

Hello, the first thing I reccomend doing if you haven't already is the get you Free Credit Reports You'll be able to see where you stand credit rating wise and fix any erroneous reports.

2nd, keep plugging away at settling those student loans with as low an interest as you can get.

Also consider getting a temporary 2nd income (part-time job, ebay, babysitting, etc.) to help get rid of that remaining credit card bill and eventually free up some of your income so you don't feel so strapped. $5,000 debt paid at $500 month extra income is only 10 months.

Open a savings account and start paying yourself, even if it's only $5 a paycheck. You'll feel good and create a good habit.

You can add your name to your husband's accounts - which may increase your FICO score but may also decrease his score slightly (you'll have to use your best judgement based on how high or low his score is). If he has good credit, then get what the two of you need in his name. He can buy a house and add your name to the title afterwards, no credit involved. Should be the same with a car. Have him call and see about adding your name to the utilities. And if his credit's good, you should have put the cell phones in his name. Right now you need to focus on clearing up bad debt, and not so much on getting credit.

NEVER, EVER, EVER, NEVER, close a credit account. Doing so will lower your credit rating. Much of your score is based upon debt ratio.

Within in a few years, time depending on the state you live in, the charge offs will be expunged from your record. That's when especially your score will rise.

Continue to pay all credit reported bills ON TIME. Late payments greatly affect your record and sometimes ALL your credit accounts will increase your interest rate because of a late payment on ONE bill.

Finally, I think you're doing pretty well. Other than the CC you mentioned, you have only student loan debt. Student loans are considered 'good' debt. Really focus on getting those loans under control, I think that will give you the greatest sense of control over this issue.

Oh, and if you get CNBC, I highly recommend watching the financial show called Suzy Orman. You'll learn a lot and be inspired. She's also on the radio but you'll have to check the site to find out when & where in your area.

Good luck, I really think you're doing well and should be proud of yourself. It's work and your paying for your past mistakes but it won't be forever.
posted by LadyBonita at 11:00 AM on August 18, 2005

Another voice chiming in here, anon, to say I was once in basically the exact same boat. You're taking all the right steps to get your debts under control and learn to budget -- now it's just going to take a lot of time (seven years, in fact, for much of the worst stuff to roll off your credit report). In the meantime, I agree that the cushion you want to build right now savings, not credit -- no matter how little it is, put something aside each month.

Rebuilding your credit truly can be done -- mine is now excellent, after absolutely trashing it out of grad school. It just took being very good (in terms of paying my bills and learning how to budget) -- and very, very patient. Be proud of yourself for taking the right steps now, and pat yourself on the back every time you reach a milestone in terms of paying off your debt. There's so much emotional pain in this kind of financial situation that it can be overwhelming -- so I think it's crucial that you find moments of emotional relief and even celebration as you work your way out of it. You really can do it! Honestly (cliched as it is to say it), there will be light at the end of this tunnel, and every day you're moving a little bit closer to it. Good luck!
posted by scody at 11:02 AM on August 18, 2005

I second the secured credit card idea. I also had questionable credit out of college. I got a secured credit card with a $600 limit and paid it, and the rest of my minimums, on time. I was surprised at how quickly I got back in to the good graces of TransUnion, et. al. Credit Card companies want your business back, you just have to prove your trustworthiness over a couple of years.
posted by surferboy at 11:15 AM on August 18, 2005

Paraphrased from a book by Mary Hunt.

"If you get a credit card to protect you against emergencies, I can guarantee that you will have many emergencies. They will be in the form of pizza, movie tickets, car repairs and dentist bills."

I competely agree. You don't need credit, you need to pay off your debt and get some savings, otherwise you will be back to the starting point with an even heavier debt load after your next "rough patch". You should consider the lack of a credit card a boon at this point, as it is helping you from getting in further debt.
posted by Invoke at 11:28 AM on August 18, 2005

I had pretty much the same thing, right down to the depression -- except my debt was all credit cards (I paid for my education). The only thing that'll really fix your credit is to pay off the debt and then wait for the bad marks to fall off your credit report (it takes 7 years, or 10 years for some types of bankruptcies).

Be careful of credit counselors. They work for the banks, not for you. Seriously -- even the "non-profit" ones get a kicktback for every payment you make through them, paid by the bank as a collection expense. A notation on your credit report that you're making payments through a counselor will pull down your score just as though the account was in collections. So it's not necessarily a bad thing to go through a counselor (it's much less damaging than bankruptcy) but you should be aware of the effects.

The chargeoffs are pretty bad for your credit report, but the good news is you don't have to pay those accounts anymore. Since you've already got a couple of chargeoffs, your credit is already in the toilet, so it might make sense to go the credit counseling route or even to just stop paying your other credit cards and let them go to collections. When you notify the collection agencies in writing to stop contacting you, your creditor will either take you to court and get a judgment against you, or they will charge off your debt. If they take you to court, you should show up to the court date -- sometimes your creditor won't send anyone, and in that case they can't collect the debt. Even if they do show up and the court grants a judgment, there will be no more interest on the account. They can garnish your wages, but if you are making any kind of payment at all they probably won't.

Another possibility, other than going to court or sending your account to collections, is that your creditor will offer you a settlement -- they will accept less than you owe and consider the account paid in full. The downside is, you will usually need to come up with the money very quickly. This too will drag down your credit score IF you just accept the deal they offer; however, you may be able to negotiate what kind of status they will report to the credit agencies (get it in writing) and in this case it is worth doing what you can to raise the money.

You may be the kind of person who feels a strong obligation to pay all her debts and is loath to take advantage of the system by deliberately taking chargeoffs or settlements. I personally never sought any "special deals" but I figured any deal that was offered me, the creditor offered of their own free will, and I felt free to take it. If you feel otherwise, that's fine -- I'm just telling you what will happen and what your options will likely be.

You have probably already discovered that your unsecured creditors (e.g. credit cards) can be very annoying and nerve-wracking, calling you constantly and so on. This is because they have no leverage. They can't take back the things you bought with the card, so they harass you to the maximum extent allowed by law. They will do their utmost make you feel like a terrible excuse for a human being. Keep in mind that this is a deliberate tactic to collect the debt and try not to take it personally.

Capital One has a decent offering for a secured credit card. You make a deposit and they give you some multiple of that deposit as a credit limit. (I put in $50 and got a card with a $400 limit.) And they pay you interest on your deposit too -- a very small amount, but still, better than a poke in the eye with a sharp stick. This will help you build your credit rating again.

What's the aftermath like? Give it two or three years after you've paid everything off and you'll be getting credit card offers again. Hopefully you'll have learned your lesson about that.
posted by kindall at 11:37 AM on August 18, 2005

NEVER, EVER, EVER, NEVER, close a credit account. Doing so will lower your credit rating.

Eh. Having too much available credit is also a red flag, especially if you're going for something big like a mortgage. (There is more than one kind of FICO score -- mortgage and auto lenders use a different version from the one you'll see quoted at various credit reporting sites.) Lenders do want to see a fairly low utilization ratio on your revolving credit accounts (not using the cards at all is also not so good) but that's not to say you should never close accounts. Credit accounts you never use tend to sneakily start charging you annual fees and the like. Now, you may have to put up with annual fees if your credit is too damaged, but once you start getting offers without fees, there's no reason to keep the others open. Paying $30 or $40 a year is not worth the few points your score will temporarily drop from closing the account.
posted by kindall at 11:46 AM on August 18, 2005

Beware of consumer credit counselors. Many that claim to be non-profit or offer free services are simply smoke and mirrors. CCC agencies don't do anything you couldn't do yourself, such as negotiating lower payoff amounts or lower rates. Do your research before selecting a CCC if you decide to go that route. Also you should know that most potential creditors will view CCC like a Ch. 13 bankruptcy, but that shouldn't be an issue for you unless you plan on applying for new credit before the plan is completed.

Look here and here for more info on the debt snowball somebody else mentioned.
posted by curlyelk at 12:16 PM on August 18, 2005

Yes, I agree with kindall above about the whole "never close an account" truism not always being necessarily, well, true. After I started rebuilding my credit, I got a small (high interest) secured credit card (and then a second one), used them/paid them off wisely, and eventually got a very good non-secured credit card as my credit got better and better. I finally closed the secured accounts for good about a year ago (precisely because I didn't want to keep paying the annual fee for cards I'd paid off and never intended to use again), and my credit score actually jumped by nearly 40 points the next month.
posted by scody at 12:20 PM on August 18, 2005

NEVER, EVER, EVER, NEVER, close a credit account. Doing so will lower your credit rating.

This article explains more in-depth when this is the totally right thing to do and when it may not be. Note: there is a difference between closing a credit card account and cutting up the credit card and never using it again or otherwise making it unavailable to yourself.
posted by jessamyn at 12:36 PM on August 18, 2005

The chargeoffs are pretty bad for your credit report, but the good news is you don't have to pay those accounts anymore.

GNAAA! WARNING - this is true literally but not in any useful way. You don't have to pay that account since it's closed, but you still have to pay that DEBT. A chargeoff is a banking term & process that has NOTHING TO DO WITH YOUR OBLIGATION TO REPAY THAT DEBT. A chargeoff occurs no later than 180 days after the account is unpaid. It's off their books for certain accounting purposes. But you still owe it, both morally and legally.

Your legal obligation to pay that debt can expire after the statute of limitations expires and that varies from state to state. The shortest anywhere in the US is 3 years and the longest is, I believe, ten. The clock starts running the first day you're late and resets every time you make a payment (tho in some states you have to bring the account current again) - that's why debt collectors so often will push you hard to may a payment, any payment: even sending them $1 restarts the clock.

This is, however, an affirmative defense, meaning you have to offer it up - it's not automatic. They can file suit against you 30 years later and if you don't show up or don't offer SoL as a defense it doesn't help you. And you should always show up: although I have never heard of the circumstance kindall describes with a plantiff not showing they will get a default judgement if you don't show. And judgements are, effectively, forever.

Unfortunately this is a very complicated issue. Fortunately there are people out there who have been in your shoes and will share their experiences, victories and failures. Over at Art of Credit you'll find message boards which will give you guidance on how best to deal with these 'land mines' of yours. You can make your own ethical decisions about if you want to make restitution if you don't legally have to but you should still cover your ass and negotiate from the strongest position possible. If you can't stand to read too much you might start with The FlyingIFR Method of Agressive Credit Repair over there - it covers a lot of important facts in a vaguely constrained space.

Do your reading before you contact any CCC services. You don't want to acknowledge any of these debts if they're off statute or close to it - it weakens your position. Some credit card companies will negotiate rates with you directly, others will not (Citibank in particular). Be careful also of dealing with collection agencies and, if your debt is old enough, junk debt buyers. They will game your credit report to soak you best they can.

I've gone through a lot of this myself, fixed some things and other still haunt me. If you want to break the veil of anonymity I'll be glad to answer any questions if you mail me. Create a yahoo account or something if you want to keep your privacy.
posted by phearlez at 12:44 PM on August 18, 2005

Thanks for the correction. I did have one chargeoff but it was in fact something that went to collections and I did end up paying.
posted by kindall at 1:10 PM on August 18, 2005

Beware of consumer credit counselors. Many that claim to be non-profit or offer free services are simply smoke and mirrors. CCC agencies don't do anything you couldn't do yourself, such as negotiating lower payoff amounts or lower rates. Do your research before selecting a CCC if you decide to go that route. Also you should know that most potential creditors will view CCC like a Ch. 13 bankruptcy, but that shouldn't be an issue for you unless you plan on applying for new credit before the plan is completed.

I have gone through CCCS (the name-brand, original credit counselors), and later went through a no-name brand (so no-name that they were sold off to different organizations during our time with them and the name was always changing).

In both cases, I would highly recommend these services. In the quote above, it says "CCC agencies don't do anything you couldn't do yourself". This is NOT true. We were referred to CCCS originally by one of our credit card companies who said they did NO restructuring of debt of any kind unless a credit counselor was involved. Most credit counseling organizations have standing agreements with lots of creditors and your rates are often get your rates lowered (or even eliminated).

The credit companies would much rather you do this than go through bankruptcy. And your credit life isn't over while you're going through the process.

A mortgage will be tough to get, but a modest car loan is not out of the question. We bought a used car while we went through our first round of credit counseling. When I bought my last car, we were with a credit counselor and our credit rating was 690... almost the best you can get (700 and up is considered damn near perfect). We couldn't get the prime rate offered by the automaker, but we got real close to it through a local credit union (arranged by the dealer's finance dept.)

There is a cost for going through one of these agencies, but in my experience you save much, MUCH more than the fees due to decreases in interest rates. You can expect a 4-5 year payoff typically, which seems like a long time but will be over before you know it, and unlike a bankruptcy your credit is considered good as soon as it's paid off (or even sooner, based on my auto loan experience).
posted by Doohickie at 1:32 PM on August 18, 2005

Bankruptcy vs CCC is a complicated issue and there are situations where you will recover faster through BK7 than CCC and vice versa. It's hard to get good advice one way or another - bankruptcy attorneys make money filing BK and CCC agencies are in the business of counciling and often get a lot of funding from credit companies. BK persists on your credit report for 10 years but as a civil filing it's available to anyone anywhere forever - the actual impact of that is unknowable.

It's likely irrelevant for the original poster since student loans are not dischargable and that's most of her issue.
posted by phearlez at 1:53 PM on August 18, 2005

it makes everything so hard sometimes, not having a cushion of credit to lean against when times are rough.

Caddis nailed this more briefly than I can bring myself to but you should not be using credit as a 'cushion,' particularly if you are already massively in debt. You could make a (weak, IMHO) case that it's useful as a PARACHUTE but not a cushion.

Really, what are the circumstances where you would use this cushion? You already have more debt than you can make payments on so clearly you're not going to have the money to pay back this 'cushion' next month either.

First rule of getting out of a hole: STOP DIGGING.
posted by phearlez at 1:57 PM on August 18, 2005

State by State Credit Card Statute of Limitations

The statute of limitation is the length of time someone has to sue you if you do something wrong, such as cause an auto accident or break a contract, including an obligation to pay debt. In every state the statute of limitations for credit card debt begins to tick from the date you failed to make a payment that was due, as long as you never make another payment on that credit card account. If your state's statute on credit card debt is seven years and your last payment was due on January 10, then the statute of limitations on your debt will run out seven years from January 10, assuming you haven't made another payment.

National Foundation for Credit Counseling
[phone]
www.nfcc.org
Also known as Consumer Credit Counseling Service (CCCS)
Based on your area code, your phone call will automatically be plugged into the NFCC office nearest you.

Debtors Anonymous
Debtors Anonymous General Services
P.O. Box 920888
Needham, MA 02492-0009

Debtors Anonymous is a 12 step spiritual self-help fellowship, modeled upon Alcoholics Anonymous. For information about the DA program and groups in your area, contact the General Service Office, 781-453-2743 (all calls are confidential) or www.debtorsanonymous.org.
posted by LadyBonita at 2:48 PM on August 18, 2005

Does the state statute of limitations on credit card suits have anything to do with the federal rules on how long those debts can appear on your credit report? I would imagine that the latter is more important to most people, in practice.
posted by footnote at 4:56 PM on August 18, 2005

Does the state statute of limitations on credit card suits have anything to do with the federal rules on how long those debts can appear on your credit report? I would imagine that the latter is more important to most people, in practice.
posted by footnote at 4:56 PM PST

Every day, consumers pay off collection accounts and charge-offs which they do not have to pay off because the Statute of Limitations has already expired for the open account. Consumers pay off these accounts because the accounts still appear on their credit reports. [when the accounts should have been expunged from the reports]

According to TransUnion:

How long do accounts remain on my credit report?
In most cases, accounts that contain adverse information may remain on your credit report for up to seven years from the date of first delinquency on the account. If accounts do not contain adverse information, TransUnion normally reports the information for ten years from the last activity on the account. Adverse information is defined as anything that a potential creditor may consider to be negative when making a credit-granting decision.

If I pay accounts, will they come off my credit report?
Like other credit history, paid accounts generally remain on file for seven years from the date closed if they contain any adverse information. If an account is paid and does not contain any adverse information, the account would remain on your file for ten years from the date closed.

How long do public records remain on my credit report?
In general, civil judgments remain on your credit report for seven years from the date filed. Tax liens remain on file for seven years from the date paid. If the tax lien is not paid, it will remain on the file indefinitely. Chapter 13 bankruptcies that have been dismissed or discharged remain on file for seven years. All other bankruptcies remain on file for ten years.
posted by LadyBonita at 6:29 PM on August 18, 2005

As someone who is on the other side, I'd have to say there is a lot of good advice here. I've been in the credit card business for almost 20 years, most as a supervisor/manager and most in the collections department.

One suggestion I didn't see above - call your creditors. You'll note I said 'call them'. The folks taking the calls are nicer than the ones making the calls.

When you call in, you are 'asking for help'. And you will be helped (if the company does it right). But when the collectors call you, its because you are 'trying to avoid the debt'. At least thats what we think.

No one wants to get a collection call, but many creditors have special plans to help debtors out. I know we do. But you wont know that unless you call them. Believe me, for every one bad story you hear, there are a few hundred customers who were treated properly and with respect.

The credit card companies lose money when your account is sent to CCCS, you file bankruptcy or the account is sent to a collection agency, so many credit card operations have plans to help consumers avoid this.

The collection laws have changed much in the last 20 years to protect consumers from the stereotypical nasty collectors that occurred in the past. Companies are now scared to death of lawsuits.

CCCS is good. Must be non-profit though. Check the fine print for the phrase "non profit organization". But the good ones advertise that in big red letters.

And that "kickback" mentioned is not the best way to label it. CCCS agency folks call it paying their bills. Non-profits organizations have electric bills and employees trying to raise families just like you.

Don't allow your account to be sent to a collection agency, if you can help it. There is credit bureau ugliness that occurs (as stated before), plus the agencies are not covered by the collection laws, like the large credit card operations and banks are. They will sue you more quickly than Really Big Credit Inc will.

Finally, the nice friends of yours say it this way: "do not live above your means". But I say it this way: "If you are poor, act like it." Poor does not equal 'bad'. Poor simply means 'not rich'. Good luck.
posted by mikeinclifton at 11:22 PM on August 18, 2005