If your credit score is holding you back from becoming a home owner, it is likely holding you back from other things as well. Credit scores are used for insurance, employment, cell phone accounts and a wide variety of things. Having good credit will not only allow you to purchase a home, it will also save you a great deal of interest and open doors for you that would otherwise be closed.
We recommend two simultaneous approaches to credit building: deal with the negative items and add positive items. We’ll review both below.
DEAL WITH NEGATIVE ITEMS
The thought that negative items will eventually just “go away” is flawed. Collections can turn into judgments, and judgments can stay with you for decades. It is important to deal with these negative items head-on. First step is determining what they are. Fortunately, you can see all the information the bureaus have on file for you for free at annualcreditreport.com. This site is the official site made available to consumers. Don’t worry about your credit score for now – you only want to know what is being reported to the bureaus. Get started here:
The next step once you know what is being reported is to create a plan. List all of the debts on a single page that you can clearly see, along with the list of creditors and their contact information. Make sure you know where the debt is coming from – was it actually yours, is the amount accurate (remember, collection agents and/or creditors may be entitled to additional fees per the original credit agreement or state law) and do you actually owe the debt?
A collection account is an account placed into a special category with the credit bureaus. The category is for debts that have serious delinquency and the creditor indicates to the bureaus that they haven’t been paid as agreed. To remove a collection, the debtor needs to work with the collection agency to bring the amount owed to $0. Settling these debts is an option, and generally any method to bring the amount owed to $0 is advised.
A judgment is a debt that is ordered to be paid by a judge. It is entered into the court system and becomes of record. Judgments do not go away until they are satisfied with the court.
Bankruptcies, foreclosures, deed in lieu, late payments and repossessions are all what they are – meaning none of these require any particular action as long as they are accurate. Some credit repair companies may claim or advertise that they can delete these old bad debts, but our advice is to acknowledge them for what they are and create a plan to ensure they don’t reoccur. Automate your monthly payments to make sure they are made on time, keep your debt within manageable levels, and track your credit on a regular basis to make sure all debts are reported accurately.
Our recommendation is to bring collection accounts and judgments to a $0 balance as soon as possible and to add positive credit. We also recommend that any inaccuracies be dealt with either through the dispute process or by contacting the creditor directly.
ADD POSITIVE ITEMS
You want to have 1 open revolving account (credit card/credit line) and 1 installment account in good standing. It’s important to do this today so you have positive credit building. The revolving account (credit card) doesn’t need to have much of a limit and you should use it regularly (gas for example), pay the balance each month, and keep the balance under 30% of the credit limit. The installment account doesn’t need to be for much either, maybe $1,000, and should have a regular payment set up for 1 year.
Secure revolving accounts require an initial deposit from you – say $300, that they hold and then give you a credit card credit line against that money. It’s a great way to start building positive credit.
Secure installment accounts are loans typically made by a credit union or bank. They put the proceeds of the loan into a savings account or certificate of deposit that are locked up until the loan is paid in full, then the money in savings is released to you. Think of it as a forced savings plan. The loan reports to the credit bureaus to add positive credit.
It is a good idea to check with your credit union or bank to inquire if they offer these types of accounts. Alternatively, here are two online options you might consider for each:
Open a secure revolving account here:
Open a secure installment loan account here (request secured, and the minimum $1,500):
Any of the consumer credit models are ok (experian.com, transunion.com, equifax.com, creditkarma, etc), but www.annualcreditreport.com is the official consumer site. Regardless of what you use, the important detail is that you are actively monitoring progress on your bureau data. Seeing your credit score estimate is good, but more importantly watching how that score change over time will help you to know you are doing the right things.
GET HELP IF NEEDED
You don’t need to do this on your own. Free help is available from the MN Home Ownership Center: https://www.hocmn.org/search/?fwp_audience_services=homebuyer-advice. Tell them we sent you and you should get some great advice from them on getting your credit profile to a good place. We can also help you with creating a plan, reviewing your consumer report, and review your official credit report when you are ready to apply for new financing.