How can I best improve my credit score?
July 23, 2011 11:38 AM   Subscribe

I received around $700 for my Birthday. What's the best way to use this to improve my credit?

I've found myself in a lot of unfortunate financial situations over the past few years, and I'm hoping that if I can get my credit up enough to qualify for a small loan I'll be able to use that in case of an emergency. I'm also hoping that maybe it will help improve my chances of finding employment.

I pulled my report on CreditKarma and I'm in the "poor" range, because of two accounts in collections (and maybe because I have student loans out? Not sure how this works. It's not time to pay those off yet.) The thing says I have $466 in "other" debt; don't know what that is but most likely medical bills.

I've never had a credit card, cellphone bill, or anything else that would positively effect my credit score. Cosigner has never been/will likely never be an option for me. It's safe to assume that I'm on my own with this; things like having someone open a credit line and paying it in my name aren't going to happen. I've applied for loans and credit cards a few times over the past two years and always get denied, first for lack of a credit score and now for too high debt/income ratio.

I'm wondering which is the best option out of these, or something else I haven't thought of:

1) Pay off the accounts in collections. These are likely medical bills. I have a lot of little ones that my insurance didn't cover but that I couldn't afford to pay on my own, say in the $20-$300 range. Not sure which ones went to collections.

2) Pay off my chexsystems debt ($700) so that I can open a bank account and maybe qualify for one of those student credit cards. A few years ago I spoke to a bank that gave one without a credit check, but I don't know if there are any in my current area so I'm not sure this would be a wise option. Right now, I can't open a bank account that doesn't have a monthly fee, and since I don't have an actual income that wouldn't help much.

3) Put the money on one of those debit-to-credit card things and make sure I pay that on time.

In case it's relevant, I'm 21 and live in Ohio. Chexsystems bill is from 2008 or 2007 and the medical bills range from 2006-now. Tried to do the debt verification thing in 2009 to get rid of the Chexsystems thing but it was verified. I know it doesn't report on my credit score but I might have a shot at that student card with a bank account.

I've done some reading up on this but there seems to be so many ways you can mess it up... talk to them, don't talk to them, hope the debt falls off, reinstatement, etc. I'm not even clear if paying the debt will actually improve the score? Another difficulty in this situation is that $700 will probably be the only income I have for awhile (might be able to get $20 here or there from the parents or from selling things) so I'm hoping to stretch it.
posted by biochemist to Work & Money (13 answers total) 2 users marked this as a favorite
You have no income, some cash & a pile of past bad debts and you want to use that cash to pay off some old debts so that...wait for can have the option to take on even more debt "just in case"? This seems backwards to me.

Keep the money & use it to help you get a job. Then worry about the debts.
posted by pharm at 11:45 AM on July 23, 2011 [2 favorites]

This is silly. Use the money for basic necessities. Worry about your credit score when you have income to work with.
posted by killdevil at 11:55 AM on July 23, 2011 [2 favorites]

Response by poster: I know it might seem superfluous, but I've been near-homeless numerous times in the past few years because of problems at home and I've also faced leaving school because of inability to afford books and the like. It would have been really helpful to at least have a credit card that I could buy a hotel room or school books with. I'm also beginning to think that my inability to find a job is because of my low credit score, soyeah.
posted by biochemist at 12:00 PM on July 23, 2011

Even if you got a credit card, you wouldn't be able to pay off the debt without income & credit card debt carries very high interest rates.

If you think your low credit score is preventing you from getting a job, then it may be worth using the cash to pay off some old debts. But that won't negate the fact that you were delinquent in paying them, and you don't have enough cash to clear all your debts so it may not make that much difference.
posted by pharm at 12:08 PM on July 23, 2011

According to this article Employers cannot use your credit score to deny you a job. They can look at your credit report (which is not the same as your score). so you may want to pull your credit report and work out exactly whet you owe and to whom. Make a list and start attacking it, with the aim of getting as many separate accounts off the report.

Really, though, you need income before you start thinking about credit. An emergency card might help you out of one sticky situation, but it sounds like you have had multiple instances. So you might end up with all that *and* more credit debt, which will screw up your situation even worse.

In short, you need to sort out your life problems first and your money problems second. Spend the money on whatever it takes to get a part-time job. This will absolutely give you more bang for your buck than giving your money to the bank.
posted by media_itoku at 12:11 PM on July 23, 2011

Best answer: Ps in case it feels like we're piling on top of you - it's great that you've recognized you have a problem, and great that you want to use this windfall to start digging yourself out of the hole. It shows maturity that you didn't just blow it on a widescreen TV. Just don't feel like the credit score is the one thing that will solve all your problems, because it might stop you thinking of alternative solutions.
posted by media_itoku at 12:16 PM on July 23, 2011 [2 favorites]

Are you sure you can't open an account at your student credit union? I would absolutely keep the money for emergencies and worry about your credit score when you get a job. You're not going to be making any purchases (car, house, etc) that will require a credit score anyway.
posted by desjardins at 12:27 PM on July 23, 2011

The usual reccomendation for someone who has no credit and wants to build some is to apply for a gas or department store card and pay off the balance in full on time for a few months. Store credit cards are usually easy to get but can have a high interest rate. Have you applied for gas and store cards already or were you just applying for regular credit cards that send you offers in the mail and advertise on television?
posted by lovelygirl at 12:49 PM on July 23, 2011

I strongly doubt that, at 21, your low credit score is any reason as to why you aren't getting a job. Save the $700 and worry about the debt when you have a regular source of income.
posted by wondermouse at 12:59 PM on July 23, 2011

Maybe a wiser way to "invest" the $700 would be to put it towards a bus pass or giving your parents gas money in exchange for driving you to a job/job interviews. (It might be too difficult to stretch that money for buying a used car, paying monthly insurance, gas and putting money aside for repairs).
posted by lovelygirl at 1:16 PM on July 23, 2011

biochemist: "
I pulled my report on CreditKarma and I'm in the "poor" range, because of two accounts in collections (and maybe because I have student loans out? Not sure how this works. It's not time to pay those off yet.) The thing says I have $466 in "other" debt; don't know what that is but most likely medical bills.

Credit scores are not about if you're rich or poor, although I assume they track reasonably well. It's about how you behave with money over time; it's a credit history. Whether you pay promptly, if you take out lots of debt, if you've defaulted on any, and how much you owe other people. You can convert money into better credit, but fundamentally it takes time for the good news to outweigh the bad. So get one of those free annual credit reports and see what exactly you've got.

Now, credit history is only part of underwriting. If you get your accounts out of collections and stop reporting new bad news to the agencies, it won't mean you're qualified for anything. In addition to credit scores, lenders look at your ability to repay (future income) and your stake in the transaction (downpayment). With no documented source of income, you'll find it difficult to get a loan. If you do get a job, then you can use your savings as a downpayment. Until then, you're just another faceless college kid (already a bad pool) with worse than average credit. The less you have to borrow, the less the lender is risking, especially with asset backed loans.

I like to tell people to pay debt first before saving, because it's got a better return in the long run. But they've got incomes to support themselves. You're trading 700 dollars for the chance to be declined access to it. That's 700 dollars worth of food, and rent! Save the money, focus on graduating or getting a job.
posted by pwnguin at 5:41 PM on July 23, 2011

Tl;dr - Get a job, then save $1,000 for emergencies, then pay off your (pretty small) debts before worrying about your credit score. Don't take out a personal loan.

Detailed version:
Ouch, hard circumstances and decisions. First off, it doesn't sound like you need a personal loan or to improve your credit score ... there are a few things you need to do first and those will also have the biggest positive impact of your credit card as time goes on. This is a good start, here are my thoughts:

(1) You don't need a better credit score, a personal loan, or a credit card.
___(a) Credit score to get personal loan for emergencies: have an emergency account (i.e., your $700) before worrying about being able to get a personal loan. A personal loan would be high interest and hard to impossible for you to get now ... and you don't need it.
___(b) Credit card (of any variety): Yes, having mature accounts and several of them is good for your credit score, but it is not even close to the most important factor (it's near the bottom). Getting a job so you can get rid of your outstanding debts will be a MUCH more important and wise action.

(2) You need an emergency fund before you start paying off your debts which have impacted your credit score. $700 is a great start, $1000 is better but for you that's unlikely until after you get a job. Getting a job is your first priority. Your credit score, bank account, and prospects are all going to be low/poor until you get a job. Getting access to a "small loan" which would actually be a personal loan will not help meaningfully.

(3) Your debts are relatively small (i.e., not large student loans or a house that's under-water). Once you get a job you'll first need to save enough to survive for 2 months should you lose the job. That's probably close to $1,000 in an emergency fund. Next you'll want to pay off your highest interest rate debts. If they're all the same interest rate pay off the smallest loan first so you can at least have one less account in collections (which is having a much bigger effect on your credit score than anything else you could do).

(4) Someone likes / loves you enough to drop $700 for a birthday present, so we will have to assume you're not about to be living on the street if something happens and you're out of work for a bit longer. That same person may be a good resource for finding a job.

For anecdotes, consider reading ... the first posts, not the more recent stuff. It was by someone in similar circumstances but now he's better off and has different concerns and issues. His early stuff will be helpful for you. Here's a good one to start re: "How to get out of debt". Another post on unemployment / underemployment.

Best luck.
posted by unclezeb at 12:27 AM on July 24, 2011 [1 favorite]

Because you've already got at least one account in collections, paying them off won't actually improve your credit score by all that much, at least not right away. Those are the sort of events that stay on your credit report for years. So if you paid them off now, you'd probably see a small bump as your total indebtedness goes down and you have x fewer accounts past due. But the fact that you had accounts go to collection will stay on your report for up to seven years, and that's almost as bad as the account itself.

Besides, your problem is not that you have bad credit. Your problem is that you're broke. Even if your credit score was perfect, no one in their right mind would lend you money if you don't have a reliable source of income. So sit on the money and use it to cover the expenses that go along with a job search. Once you've got income, you can pay off those debts in a snap.
posted by valkyryn at 2:46 AM on July 24, 2011

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