Help! My Credit Stinks!

[Marshall F. Graham]

Help! My credit stinks!

By: Marshall F. Graham
Aulds Horne and White
www.auldshorneandwhite.com
marshall.graham@auldshornewhite.com
(318) 869-4444

01/12/2010

As minimum credit score requirements steadily increase within the real estate industry, more and more questions arise in regards to increasing one’s credit score. What steps can I take to ensure I am approved for a mortgage in the future? How do I know if I have enough credit to qualify? The problem is that there exists no published blueprint to answer these questions. The following recommendations are based on my experience of what generally is needed to feel certain one will qualify to purchase a home.
It is important to understand, as I humbly include myself, that no one can fully comprehend the complex mathematical formula that is “credit scores”. The formula that makes up our scores is not as simple as say, Y=MX +B, which is calculated based on one unknown, but rather an incomprehensible computerized algorithm that is able to compute a single figure after the inclusion of hundreds of possible variables.

Step 1: Clean up the old, and learn from your past!

The first step in improving one’s credit score is to get out the mop bucket and clean up the old. Until we have all of our past debts settled, as well as our current obligations paid up to date, don’t even bother with attempting to establish new accounts, let alone apply for a mortgage. You will be declined!
It is imperative at this point that we learn from the mistakes of our past. If we do not, then we are simply covering up an effect, rather than helping to mend the cause. I understand that we as a society live within a debtor nation, and I get that we are bombarded with zero percent interest and payment plan offers, but everyone must at some point in their lives take a stance to not let these “great” deals control one’s life. A penny earned can be a penny saved, and those pennies do add up along with the interest gained through strategic investing. Let your money work for you! The wealthy earn interest rather than pay out interest. It is far better to have second hand furniture in your home, than to have new furniture with a stack of “I owe you’s”. If we are to ever learn from our mistakes, then we must fully comprehend and be able to decipher the difference between needs and wants, and through this understanding, better allocate our hard earned dollars.
I first recommend obtaining a copy of your credit report from a company such as www.annualcreditreport.com. This will allow you to visualize what accounts are showing up on your report as collections, and which accounts are showing up as past due. The government requires that these companies provide to you one free credit report per year. Do NOT bother with purchasing your credit scores. These scores are considered to be inflated. These companies place a higher value on different aspects of your history than do financial institutions, and are therefore not worth your money. Go line by line on your credit report and make a notation next to all collection and past due accounts. Next, place the collection accounts into the following categories: Collections that are rightfully yours and still owed, collections that are yours but should be marked paid, and collection accounts that are not yours. Unfortunately, unless you are using a company such as Aulds Horne and White (plug), who provides you with an account number to CBC Innovis, who will correct all three credit bureaus at once for you, then you must deal with each individual credit reporting agency separately.
If the accounts are not yours altogether, you must utilize the phone numbers listed on your report for each collector, and have that collector fax you evidence stating so, and then you must forward this information to the credit reporting agencies to have them removed. You will continue on with the same method in regards to accounts that are yours, but should be marked paid. Any evidence that you can locate from your personal records will expedite your claim. Finally, you will be left with those accounts that are rightfully yours, and are still rightfully in collections. Do I need to pay these accounts in full, or is it okay for me to settle with them? It depends. One could say since we do owe these accounts, then ethically we should pay these accounts in full. It certainly is better to pay each collection in full if you can, but it is far better to settle the accounts for a lesser amount than to not pay them at all! Take a look at your income and savings in relation to the total owed in collections. If you can easily pay them off, then pay them. If you can pay a few in full, yet need to settle with a larger account, then do that. In other words, do your best to pay all the accounts in full, and then settle the accounts that cannot be paid in a reasonable amount of time.

Step 2: Pour the foundation for your future home

As vital as a solid foundation is to a home, your credit needs to be adequately constructed for you to obtain a mortgage. The best way I know how to put it is, if you want to play the credit game, you have to play the credit game. You also have to crawl before you walk. It takes a certain trust, which is only gained through a repetitive positive payment history, for someone to lend you $100,000. Would you lend someone with your credit history $100,000? I am assuming the answer is no. You would, however, be more willing to loan them $500. There exists a certain expectancy of repayment when money is lent. Everyone reaches a point in life after being burned enough times by friends who borrow money and don’t repay that they eventually say, “You know what? I’m not going to lend money to anyone again unless I know for a fact that I’ll be repaid”. Luckily for us, mortgage companies are more lenient! Mortgage companies lend money to a homeowner based on their likely hood of repayment. That’s why interest rates are based on a matter of risk! Each mortgage company sets its company risk standard, and this standard depicts how conservative or liberal their lending habits are.
How do I know when I’m ready to apply for a mortgage? I believe that a client is ready to pursue a mortgage when they have taken the necessary steps to correct the old, and have then paid on 3 credit lines simultaneously, on time, for a minimum of 6 months.

Step 1:
Establish your first credit line: Walk into your local bank and let the financial service representative know that you would like to get a secured credit card. You will hand her $300, or whatever minimum that specific institution requires, and she will hand you a secured credit card. A secured credit card is a collateral based credit card. You have a $300 credit card, and they have your $300 as collateral. In other words, you are eliminating any risk to them, and they can receive interest on your $300. There are several benefits to secured credit cards: automatic approval, shows up on your credit report as a credit card account, helps you to raise your score to receive your second trade line.
Step2:
1. Do not be late or miss any payments on your secured credit card! Since you have bad credit, or little to no credit, you have a red “high risk” flag on your account. Anything negative postpones your chances of obtaining a mortgage, since you don’t have numerous positive accounts to help counterbalance.
2. Use your secured credit card as a gas card. Use your card to fill up your tank throughout the month, and pay it off in full each month. Paying a credit card in full each month, as far as credit is concerned, is just as good as making the minimum monthly payment.
3. Do not apply for anything whatsoever! Wait at least six months after obtaining your secured credit card prior to applying for your second credit account.
4. After making six payments on your secured credit card you should be able to obtain a second account. I do not condone purchasing $6,000 worth of furniture, but would encourage you to obtain some type of account that is easy on your budget. Remember, the goal here is not to place ourselves into a bad situation, but to “play the credit game”, to establish a credit history to purchase a home.
Once you have established your third account, and have made six consecutive on time payments to all three accounts, your credit scores should be at the right level to pursue a mortgage. Feel free to contact me at the office, and I will be more than happy to walk you through the process of obtaining a mortgage for you and your family.

By: Marshall F. Graham
Aulds Horne and White
www.auldshorneandwhite.com
marshall.graham@auldshornewhite.com
(318) 869-4444