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.