Credit! We hear this term often. We may have credit. But what is it and what does it mean for us?
Here’s your crash course:
Let’s start with the basics. We are going to keep this very “gump” or simple. Credit shows your worthiness for a lender to loan you money or a line of credit. Your FICO credit score basically defines you. The FICO credit score ranges from 300-850 and where you fall in there is based on your use of credit and making payments.
Now that we have an idea of what it is, let’s quickly chat about who needs it. That is an easy one. Everyone! If at any point in your life you plan on purchasing a home, buying a car, or in some cases even getting a job, you need to have credit. And not just credit, but good credit. I doubt that many of you will have $150,000 laying around for a cash purchase of a house, so you will have to finance your new house like the rest of us.
Credit is built and maintained by opening revolving credit (like credit cards which revolves from paying your balance down and adding to it) or installment debt (a car or house loan which you are making installment payments for a set period of time) and making those monthly payments on time. I am going to give a little more detail about this below.
Here is a hard truth. Life fucking happens. Sometimes shit out of our control can happen, or sometimes we just make poor financial decisions and really fuck ourselves. When this happens. this can lead to damaging our credit and impacting us for a long time.
When I was in my early 20’s, I had opened up some small little credit cards for people with little to no credit. I also had a house phone in my name from when I was around 18-19. I had a DirecTV account as well as some other internet provider that I can’t even remember. My now ex and I joined Ballys so that joint membership was on my credit. I made the payments for quite sometime and was working on establishing my credit. My credit was just decent enough to allow me to lease apartments, but not strong enough to buy a car. I tried to get a loan from my credit union and they soundly shut me down because I did not have any credit.
In that young age, I do not think I truly grasped what credit was despite all of my research. I idiotically decided that I was over those credit cards and other responsibilities and just stopped paying them. I was pissed at Ballys for not altering the lease. My ex was using the gym that I was paying for. So I stopped paying them too. For quite some time I had those companies hounding me. After a while, the original creditor sold their debt to collections companies for pennies on the dollar. Then those companies would start calling me. This went on for about 7-8 years.
My credit was crap at that point. My mother had to buy a car in her name for me since I couldn’t qualify. I couldn’t open any credit cards or anything. I had gotten used to that life though. I just lived in my apartment, paid the bills I had while ignoring the old ones, and chilling. When I got a job at the bank working with defaulted clients, I had to send them a letter of explanation because my credit was trashed.
It was while apartment living and being in the mortgage business for a few years at that point that something changed. I was 31 and thought “I really want to be a house.” I knew then that if I had tried to take a loan for a house, I would get laughed right out of the lender’s office. I had a good understand of credit by this point, but I really deep dived and studied it hard to create an action plan.
I am going to share this action plan with you in 10 steps in case you have found yourself in that same situation I described above.
Here is the 10 step action plan:
Step 1: Admit and identify that you did make a few mistakes and forgive yourself. None of this is permanent! Taking on past due debt is fucking tough and feels like a swift kick to your balls. That is how I felt anyway.
Step 2: Go to annualcreditreport.com and obtain all three credit reports from TransUnion, Experian, and Equifax. You can only get these credit reports for free once a year (hence the name annualcreditreport, ha!).
Step 3. Create an account on CreditKarma.com and download the app to your smartphone if you have one. You can now track your own credit for free. Credit Karma updates your TransUnion and Equifax credit scores every few days. Experian is kind of a dick and charges a hefty monthly fee to track your credit. Reviewing your own credit is a “soft inquiry” and does not impact your credit.
Step 4. Review your credit report history and identify all of the accounts in collections. Make note of the collection company’s name, phone number, time the delinquency has been reporting, and balance owed. If you have received mail from the collection companies, hang on to those.
Step 5. Create an Excel spreadsheet (or on Word or paper if you do not like Excel) to organize your debts. Here is a version of the Excel spreadsheet I had created for myself: Credit Repair Spreadsheet.
Step 6. Call those creditors and verify the balance amount. Sometimes a collection company is willing to accept a lower amount to satisfy the debt. I did this with a couple of the credit cards. Some people will say that is bad for your credit, but it didn’t do anything negative to mine.
Step 7. When on the phone with the collection company, see if they take payment plans. Do this will all of them! Take notes of who you are speaking to and their contact information. Note the date and time as well.
Step 8. List all of this information into your spreadsheet. Review your finances and see what you are able to afford. I actually got a second job to help me with this.
Step 9. Start with the lowest amount and work your way to the highest. I made payment plans for the higher amounts and paid off the lower amounts as soon as I could. Depending on your debt amount, this could be tough, but not impossible. Anything that has been reporting for almost 7 years should be tracked, don’t sweat paying that. Once an item on your credit has hit 7 years, it will fall off.
IMPORTANT: Make sure you get a paid in full letter from the collection company upon satisfying the debt and save it!
Step 10. Once you have paid off everything, pat yourself on the back and be very patient. It will take some time, but you will see your credit start to increase once everything shows paid in full.
Keeping your credit in good standing after repairing it is vital! Here are a few post-repair tips and a graph to help you out:
Make your monthly payments on time (every time)! Late payments on your credit card or loan can cause late fees. You do not want those! Because I am real and know that shit happens, here is a little tidbit. Just in case you are ever in a bind, you can technically make your payment up to 30 days past the due date and not be reported to the credit bureaus (but you will still get a late fee). Credit bureau reporting occurs on the 31st day of delinquency.
Keep your credit card balances down to 30% of your limit. For example, if you have credit card that has a limit of $1,000, your balance from month to month should never be higher than $300. To figure out your max balance, use this formula:
Credit Card Limit X .30 = The max balance you can have
Also, limit how many times you apply for credit. The temptation will be way too real once you start getting approved. Anytime a third party like a lender looks at your credit, that is considered a “hard inquiry” and a bunch of those will ding your credit. If you are starting over like I did, just stick with two bank credit cards. Once you have established a good payment history and low balances for at least a year, then consider opening a new card. It’s a painfully long process, but the payoff is so worth it.
Tip: If you are shopping around for a home loan, you can have multiple credit inquires in a 14 day period and that will only count as one.
Things like paying rent or a cell phone bill do not count as credit and will not be reported on your credit. They only get reported when they are 30+ days late.
Now that you have the steps you need to repair and maintain your credit, you won’t get as fucked in interest when you take out a home or car loan or open a new credit card!
All of this worked out very well for me. It took me about a year but all my debt is paid off! I cleaned up my credit and was able to buy a home in 2014 and a car in 2015! I have several credit cards with high limits. My balances are higher than I would like, but I am a lot better off than I was 4+ years ago!
If you have any questions or comments about credit, please feel free to comment below!