Repairing Credit
November 10, 2004 7:45 PM   Subscribe

How should I repair my bad credit? I'm 26, my income ($53k) exceeds my expenses and I have only $1.5k debt, but I was awful about paying bills on time until the last year or so. Now I'm finding it difficult to secure a car loan. I haven't even gotten a credit report because I'm afraid to look at it. I will probably end up talking to a credit counselor, but I thought I'd ask for advice before I do. College kids, don't wait until the utility bill is yellow to pay it. Trust me.
posted by anonymous to Work & Money (13 answers total) 1 user marked this as a favorite
Uh, do talk to a credit counselor, DO get a credit report. Your credit problems could also be because someone stole your identity... but you won't know that till you pull a credit report, now, will you?

Note that multiple 'pings' on your credit report will also keep you from getting ANY auto loan (so if you've been "shopping" many dealerships and applied for credit at many places, or if a dealer went and sent your credit information to four or five companies at once in a shotgun approach to see what worked, you're screwed for several months), as will having been in your job for less than a year.

You should see if you can't get manufacturer fiancing. It's often easier to qualify for those programs, but dealers may not get as good of a kickback so they're loathe to bring that up at first.
posted by SpecialK at 7:51 PM on November 10, 2004

Get a secured credit card. I did the same thing - NEVER paid bills - and ruined my credit. I fixed it with a secured card (at least enough to start getting all sorts of credit card offers in the mail again, I haven't actually checked my credit rating). Basically you give the bank, say, three thousand bucks, and they give you a card that you can charge on up to $3k. Make sure you charge lots of stuff and pay every bill on time. It takes very little time - less than a year I think in my case - before you start looking good again.
posted by CunningLinguist at 8:24 PM on November 10, 2004 [1 favorite]

Yeah. Get your credit report and dispute any errors on it. Pay off that $1500. Then get some kind of major credit card (secured, if necessary) and establish a bit of payment history on it. Six months to a year will probably do the trick.

I'm dubious that a credit counselor would be useful, since they are really geared toward helping people who are in debt way over their heads. If you go, do not let them put you on a payment plan for a measly $1500! Most (even non-profits) have incentive to get you on a payment plan, since they get a fee from the credit card company for each payment made through them. It's a serious ding on your credit report, nearly as bad as a charge-off. Stay away.

Capital One has a good offer for a secured card -- typically, you send them $50 and you can charge $400 or $500. They pay you interest on your $50 too (not much, but still). I got one of those after my credit meltdown.
posted by kindall at 8:45 PM on November 10, 2004

Read the articles about credit at the motley fool. There're also some old threads about credit cards somewhere on (one of which I think I posted the same suggestion in).
posted by advil at 8:50 PM on November 10, 2004

So what happens if you have charge-offs? I've paid them off, but I'm terrified I'll never be able to buy a house.
posted by sugarfish at 10:08 PM on November 10, 2004

I absolutely second what kindall said about a credit counselor. A credit counselor will take your $1,500 debt (if they will even work with it) and turn it into a couple of years of payments in order to secure themselves the most profit. If you're earning $53k, cut back on expenditures for a few months (turn off cable, no clothes, no eating out, no tech toys, etc.) and knock that that measly debt away ASAP. (In fact, if you have the money in savings, you're probably better served, given relative interest rates, to pay it all off right now.)

Meanwhile, get a financial advisor/planner, not a credit counselor. With that kind of income and your relatively young age, not only can you get your credit repaired, you can set yourself up now to have a much better future. You just need someone to give you good guidance on the way.

Be careful about credit cards, as interest rates and fees (fees even requested limit increases) for people in your position can be onerous. If you get one, look for one that will allow you to set up payments ahead of time online. (Capital One will not, Providian Bank and Orchard Bank, which have accounts for credit rehab/building will.) Never go over limit, never carry a balance, and schedule your online payments for a week before they're due. (And budget for them accordingly, since they're a direct ACH withdrawal from your bank account.)

If you belong to a credit union and have a good track record with them, they're more likely to work with you for an auto loan (and frequently for a mortgage, depending on where you live) than a manufacturer or a commercial bank. If you don't belong to a credit union, you should. Run off and do that now, even if it's just to open a basic savings account where you squirrel away a small amount each paycheck as an emergency fund.

I also recommend the book Total Money Makeover by Dave Ramsay. Ramsay is a Christian and intermixes religious stuffs into his advice, but the underlying financial principles (get out of debt -- he advocates a method called the "debt snowball" which is a scheme for how to pay stuff off that is brilliant in its simplicity -- have an emergency fund, have sufficient liquidity in savings for job loss or health crisis, have adequate insurance and then start saving for retirement) are smart and hard to argue, and if nothing else will get you pointed in the right direction.
posted by Dreama at 11:24 PM on November 10, 2004

Also: With your income, you should be able to pay cash for a good car, so don't let the loan troubles get you down. Go to the library or buy a copy of the Consumer Reports for used cars. There are lots of good cars that will last another 15-plus years available for $6,000 or less.
posted by croutonsupafreak at 11:55 PM on November 10, 2004

posted by four panels at 7:47 AM on November 11, 2004

I'm terrified I'll never be able to buy a house.

"Never" is a mighty long time. Believe it or not, a mortgage is one of the easiest loans to get even if you have poor credit, assuming you currently have reasonable consumer debt levels, stable employment, and an appropriate level of income. This is because the loan is secured -- if you don't pay, they take your house! Kinda hard to go wrong there from the bank's perspective. It'll affect what kind of interest you'll pay, though. That's why I decided not to buy a house this past summer -- I can't get the really low rates anyway, yet. In fact, if I wait a couple years, I'll probably get a better rate, even if rates overall go up a point or two. And 'll have a bigger down payment then too.

An auto loan is almost the same as a mortgage from the lender's perspective, but the asset depreciates, so banks are a little more leery. Especially since people with poor credit are exactly the same people who will buy a car they can't afford, don't take care of it (e.g. no oil change for a year), and then end up having it repossessed. The bank tends to take a bath on these customers. Still, there are plenty of places that say "we'll finance anyone" and will. You'll be able to get a loan -- you'll just pay ridiculous interest rates on it, and you might not be able to get a new car.

If you know someone with good credit, who trusts you, maybe you can talk them into co-signing for you. From the other side it's a really bad idea to ever co-sign a loan for a friend who's having financial troubles -- but if your actual troubles are over, if you can show your friend a budget, you might be able to convince them. (Relatives are more likely than others to help, usually.)
posted by kindall at 7:59 AM on November 11, 2004

I was in quite a bit deeper than you, and probably had more black marks on my account, so things took longer. But I did finally manage to clean things up.

The tool that made it possible for me was an account with Equifax. I originally got it because I went to a class on identity theft, but it turned out to be much more useful to me.

I forget the name of the exact package, but I have a credit watch product that comes with several credit reports, which I order as I need. I ordered one right away, and read all the information that came with it on my credit score and what they said I could do to clean things up. Then, slowly, I did it. Over the course of 18 months I guided my credit from a high-risk FICO score to a low-risk one, and over the next two years I expect to improve it even more.

The account gave me a concrete goal to shoot for, and the steps to take to get there. I'm sure there are several credit aggregators that offer a similar service--Equifax is just the one I have experience with. I cannot recommend it highly enough.
posted by frykitty at 8:53 AM on November 11, 2004

Kindall, thanks for your reassurance. My husband has really good credit, so maybe I'm freaking out a bit too much, eh?
posted by sugarfish at 10:25 AM on November 11, 2004

Oh, sheesh, yeah. You won't have a problem. Use him for all he's worth!

I used to date someone who did a Chapter 7 (debt elimination) bankruptcy and still was able to get a car loan. Of course, someone who just had all their debt wiped out is actually a pretty good credit risk, since they can't do it again for another seven years. The only thing she couldn't easily get was, believe it or not, a cell phone. Had to put down a whopping deposit for it. My point is, having good credit is important, but there are many degrees of "yes, you can get a loan, but not at the lowest possible rate" before you get down to "we won't give you a loan at all."
posted by kindall at 11:11 AM on November 11, 2004

So what happens if you have charge-offs? I've paid them off, but I'm terrified I'll never be able to buy a house.

Time is your friend. Nearly all negatives eventually come off the credit report. And even while they're there, they lose signifcance as they age. Charge-offs come off X number of years (5, IIRC, but ask the credit reporting agency and they'll be able to give you an exact date when each record is scheduled to go away) from the Date of Last Activity. Ideally, when you paid off you conditioned it on a "PAID SATISFIED" status. If not, do use the normal report disputing process to get those accounts reported accurately. A old debt, made good, shouldn't be a substantial roadblock to getting your loan.

Nolo Press has good books for this type of situation: Money Troubles and Credit Repair

Stay away from credit "counseling"/repair services, including the nonprofit ones, until after you've read the Nolo book or a similar reputable source.

It sounds like your prospects are a lot better than you imagine. First step, pull that report and see what's really on it.
posted by nakedcodemonkey at 12:27 PM on November 11, 2004

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