Yesterday’s emailer, C.E., wanted to know how to rebuild/repair credit in order to afford a house. I loved his original email. He was trying to formulate a plan to help get his family into a better situation. He had admitted a history of poor financial decision-making. He was contrite. He was honest. He was ready to learn. Today we will wrap up my answer to him.
As you read yesterday, C.E. had some technical and philosophical questions that he had to deal with. His goal was to buy a house in April 2013. My contention was that he shouldn’t buy a house in 2013. Am I holding him back from achieving a dream? Yes. If my dream were to fist fight a polar bear, would you stop me? I hope so. I believe that if C.E. were to buy the house in April of 2013, he would be in real financial trouble within five years. His financial situation is not solid. You can buy a house, lease a car, go to college, and several other things on a shaky financial base, but that doesn’t mean you should. Instead, C.E. should strengthen his base, and revisit the home ownership conversation a few years later.
He also asked how he should go about repairing his credit. That’s a great question. Unfortunately, there is a tremendous amount of bad advice out there on this topic.
Here are the best tips for repairing credit.
Get current- If you are behind on your bills, then make sure that you make payments on time. Believe it or not, paying your bills on time really helps your credit score.
Address your collections- If your debts have gone to a collection agency, then your credit will get beat up until you address the problem. The quickest way to fix your credit? Payoff your collection debt. Make sure that the collection agency provides you a promise to clear your debt from your credit report in writing.
Time- Time heals credit damage. But this is the last thing people want to hear. If you have a bankruptcy or some other bad credit moment, it will eventually exit your credit report. But most people want it to go away faster than it will.
Short list, huh? There are more ways to improve your credit, but I think they are really bad ideas. Do you remember the Atkins diet? It was the diet that had you eat primarily fatty foods and protein, all the while avoiding carbs. It worked. Kinda. Somewhere between my 2nd and 3rd pound of bacon my fourth week in, I decided that the diet just didn’t make any sense. Many Americans came to the same conclusion, and the diet died a slow fatty death. Many of the credit repair and credit building techniques that you commonly read about are very similar to the Atkins diet. In other words, you are cheating the system for a temporary result that won’t last.
Your credit score is a measure of how good you are at borrowing money. If you have proven over a period of time that you suck at it, then take a break. Just get out of the game for a little while. I SUCK at golf. I have taken a break. I will take it back up someday when I have the patience. People that are told that they “can’t” borrow, get in such a hurry to borrow again. And those that can borrow freely, don’t really care that much about borrowing. It’s like The Gift of the Magi….kinda.
There are going to be people who read this that say “Peter, you are being unrealistic.” In fact, that was a major kerfuffle that I found myself in yesterday. If you know what I’m talking about, I’m sorry it happened. We’re better than that. To the people that are reading this and saying “Peter, you are being unrealistic,” I promise you that I’m not. If you aren’t pleased with your current debt/housing/money reality, then change your reality. If you have made poor decisions and find yourself in a pinch, then it’s going to require different thinking to get yourself out of the bind you’re in. Get angry. Don’t angry with me. Get angry and change.
To me, you shouldn’t even consider buying a house until you are out of the Survivin’ stage of the Four Stages of Your Financial Life. By God, you are SURVIVING. This means you are struggling. Firm up your foothold, collect yourself, and then put together a plan.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.
Your comment about changing reality is spot on. You are giving advice & answers to questions. It also seems people would rather ask the question and think that solves their problem and dont want to listen to an answer outside of what they think is right. If the way they think is right was indeed right they wouldnt be coming here asking for help. Seems C.E. may take your advice.
Insanity is when you do the same thing and expect different results, or something like that.
Pete, first off congrats on being named the fourth most amazing person on the planet.. Second, this entire article is on point. I too, like many Americans played Russian Roulette with my credit in my twenty’s only to wake up at Thirty-something wondering what happened. Part of my issue was returning to school later in life and still not being able to find a Graphic Design job to USE that degree afterwards.. All through the power of student loans that I can’t afford to pay pack because I have no job.. sooo, yeahhh.. I really appreciate your candor, and look forward to being able to write back another day in the near future with great news.. until then, I’m trying to get on that list of amazing people!
I read your article, and your response to the gentleman’s post about wanting to purchase a home. I think you were bang on, with one small exception. There are those of us that can’t purchase life insurance for health reasons. I don’t know the answer to this question, so I’m asking you. When you apply for a mortgage, loan, or credit card, you are usually always offered insurance that will pay off that debt in the case of your disability or death. I don’t ever recall being asked for medical information when receiving those offers. If I am correct, (and I don’t know that I am) if you are otherwise uninsurable, should you make sure you take advantage of those offers even if they aren’t the cheapest insurance available?
My husband died with minimal insurance after I became 100% disabled and had to leave the work force, and it threw me into an ugly financial situation simply because our creditors very quickley lowered my credit limits to the amounts we owed them, thereby making it appear that I actually used nearly 100% of my available credit. For example, we had a Visa card with an available credit of around $11,000. At the time of my husband’s death, I believe we owed somewhere around $2,800, and with every payment my balance lowered, but so did my credit limit. Once I received the insurance proceeds (which wasn’t anywhere near your recommended amount), I paid those cards off, and the creditors canceled my accounts thereby driving my credit score down even further. Right now, I can barely purchase a pack of chewing gum on credit. American Express didn’t totaly abandon me, but lowered my limit to $500. I have a store card that lowered my limit to $1,600, and a just got a credit rebuilding card with a credit limit of $300. The rebuilding card came with 0% interest for the first year, and something like 21% thereafter. I have not had the card for a year yet, so I am using it and scheduled automatic bi-weekly payments in the amount of $50 to make sure the card is always paid or close to being paid in full while still using it. I am hopeful my credit limit will be raised so I can use it for travel purposes, as it is sometimes difficult to use my debit card. Hotels like to hold a large portion of my available cash and don’t always release it within a day or two after check out. Some hotels will not let you make a reservation or check in using a debit card. I found out about that only when I tried to check in. Fortunately, I was traveling with a friend with exceptional credit and she lent me her card. Of course, I never plan to carry a balance at 21% card.
I belong to several widow(er) groups, and we all have different problems/situations relating to our new status. I would love to see you address the special situations new widows face when it comes to managing money. A very common problem is what happens to the new widow after she receives the insurance money. This influx of cash is highly emotional and there is so much guilt associated with it, widows tend to make very poor financial decisions with these irreplaceable dollars. Family and friends think that the widow is now “rich” and the widow sometimes becomes the family ATM.
Or, there are the widows whose husbands died without having purchased any insurance, and now face life without their spouses and the income they provided to the family. What then?
Pete, please consider educating everyone about the importance of life insurance regardless of your social status. Life insurance isn’t just for the rich. And, there is no greater gift of love than making sure your loved ones are protected in the case of your unexpected demise. Yes, death can happen at any age. I could introduce you to a group of young women that would break your heart. Insurance money won’t bring back our husbands, but at least it would make the horrible journey just a little easier.
*pay BACK (not “pay pack”)
OMG, I love you even more now because you successfully used the word “kerfuffle.”