This is part 4 of a 5 part series
Part 1 – Credit Reporting Agencies
Part 2 – What’s in Your Credit History?
Part 3 – Correcting Credit Report Errors
Part 4 – Rebuilding Your Credit
Part 5 – Quick Fix Methods & Other Tales From the Crypt
Rebuilding Your Credit
or How To Make An Elephant Disappear
How do you eat an elephant? Yeah, yeah, you know, one bite at a time. Well that simple principle is very applicable to rebuilding your credit report. Although, with a few tricks of the trade, one can speed up the process considerably.
This simple tried and true method has been used by millions of people over the years and it’s still the best one anybody has come up with. You first have to put together some savings of $500 to $1000 (I didn’t say it was easy, just simple). Once you have your savings, start calling banks, starting with your most local one. Talk to a loan officer and be honest and frank. Explain to him or her that you’ve had some credit problems in the past and you want to rebuild your credit. Ask for a 12-month secured loan using your savings as collateral.
On the surface this may sound like a win win situation and it is but some banks don’t like to loan small amounts even if they are secured. But there are plenty of others who do, so keep trying. Many loan officers are very attracted to a person serious enough about being credit responsible that they would go to the trouble of taking out a loan they don’t need just to rebuild a credit history. If nothing else, it shows determination and after all, the bank has nothing to lose anyway.
Once you have the loan, be responsible. The easiest way to do this is to make the monthly payments out of the money you’ve borrowed. It’s good to pay 2 months ahead and keep it one month ahead for the duration of the loan. Don’t try to pay it off too early! Paying a loan off too fast will sometimes cause it not to be reported on your credit file. Besides what creditors are looking for is a pattern of on-time steady payment over a period of time.
After you have paid the loan off, go back to the same bank and ask for another loan but unsecured this time. You’ll be surprised how much easier this loan will be to get. But try to deal with the same loan officer. I can’t emphasize enough how important it is to build a personal relationship with a loan officer. They have more pull that you would think. Obviously the second loan is paid back in like manner as the first.
Using the same principle of a secured bank loan apply for a secured credit card. The amount you have to put up as deposit can be as little as $150 or less. The largest advantage of a credit card to rebuilding credit is the regular reporting they do to the credit bureaus.
It is best to use it monthly for small purchases and then make your monthly payments on time and in full. Note: make sure you shop around for the best deal because there are some real stinkers out there with all kinds of hidden charges.
You can geta secured Visa, MasterCard or even American Express but don’t yield to the temptation of too many of these cards. Too many credit cards on your file can scare off some loan officers. It may look irresponsible to them. You can find a ton of these cedit card companies with any search engine.
This one may not be for everyone but I can tell you from personal experience that it works great: buy a home! “Yeah right.” you say but let me tell you how I did it. This technique is discussed in some detail in many “How to Buy Real Estate with No Money Down” courses such as Carlton Sheets and others. It really does work.
First find a piece of property that has good investment potential.
1. It should be a single family residence.
2. Usually a fixer upper.
3. In a part of town on its way up, not down.
4. It should also have a motivated seller.
Once you’ve done your homework and compared comparable housing in that area, you’re ready to make an offer. Since you can’t get a conventional mortgage with a poor credit file, offer the owner a “contract for deed, bond for deed or what ever they call it in your part of the country.” If they are at all flexible, their next question will be “How much down?” Now you’re in negotiation stage which is where you want to be.
From personal experience, I’ve found most property owners are more willing to sell contract for deed than they are to rent it and for obvious reasons. A home owner tends to take better care of the property than a renter. Anyway, you’ll be amazed at how many property owners and especially realtors are willing to sell this way.
I bought a 3-bedroom, 2-story fixer upper for $32,000. I offered 2000 down with 1000 now and 1000 in 6 months. The contract was for 2 years, meaning I had to get it refinanced else where in 2 years. I made all payments by check and kept them in a file. For 2 years I made many improvements both inside and out. When it came time to refinance, I went to a loan broker. These are the people all over the radio and TV offering to refinance mortgages. They sent out their appraiser who claimed the home was now worth $55,000 and loaned me $45,00 at an unbelievably high interest rate. That was expected, the $45,000 wasn’t. Needless to say, the wife and I did a little jig an took the money. We paid the original contract for deed off and had $15,00 left to finish our remodeling. They tell me the home is worth closer to $75,000 now and as soon as we finish our remodeling, guess who’s selling out.
The 2 things that really sweetened this deal were 1) since I was refinancing, the mortgage company said I didn’t need any down payment and 2) I got a mortgage loan on my credit report reflecting on time regular payments now.
As I said, this may not be for everyone because of the work involved but it can be done with property that doesn’t need as much work as mine did and the principle of being able to get a real mortgage loan on your credit file is doable.
I should also mention that purchasing a home from any of the government repossessed housing auctions is another viable option. First, they are usually fixer uppers (People tend to get stupid when they know they’re loosing their home.). Secondly, government offers financing for most of these repossessed homes. And thirdly, their credit requirements are extremely liberal by most standards (How do you think they get so many repossessed homes?)
We are currently offering an information package on buying from these agencies along with a current list of what’s available in your area. If you’re interested in more info, contact us about buying government repossessed homes.
Buy a car. You’d be amazed by how many new car dealers are financing vehicles to folks with far less than perfect credit. As usual, the trade off is higher interest rates and often large down payments. I have to admit that I’m not really big on this one. The cost incurred from owning a brand new vehicle is high enough without throwing in an even higher interest rate. And unlike investing in a home or even rental property, cars lose value every time the sun goes up and down. Nevertheless, for those of you who feel you simply must own a new car, there are usually several new car dealers in every major city who are only too happy to accommodate. First you have to do that phone thing and literally call every single dealer in and out of your area. To save everyone a lot of time and trouble, be very honest and blunt about your credit report. Don’t waste time on an overly anxious sales man. Ask to speak directly to the credit department. Every major dealership has one. If they say they can finance you, your in like flint. Anyway think this one over carefully. Of all the techniques we’ve listed so far, this one has the biggest potential for problems.
And never, never, never finance from a used car dealer. I know I’ll get some flack over this but I have too many friends in the used car business. It’s hard enough to come out without too much collateral damage from a new car dealer, it’s impossible to come out on top from a used car dealer. Besides it won’t go on your credit file.
Hot Tip: Used car dealers get most of their cars from new car dealers. They usually have high mileage and the down payment the used car dealer is asking is what he paid the new car dealer for the vehicle. So if you need a high-mileage used car, bypass the middle man (used car dealer) go directly to the back lot of a new car dearler. The back lot is where they hide them, excuse me, I mean save them for the new car dealers and make your offer. 9 times out of 10 you can get the vehicle for what the used car dealer was asking for a down payment. But be aware that these cars are always sold as is and many need some kind of repairs. But so do the ones from most used car dealers. Actually, the best place to buy a used car is usually a relative. This way you at least know the history. Besides, your brother in law has to face you again at family get togethers.
After you have implemented any or all of these techniques, check your credit file every 6 months from all of the Big Three. If your new good credit information is not on there, first contact the creditor and ask them to report it to all of the Big Three. If they can’t or won’t, have them give you updated documentation of your credit status and send it yourself to all of the Big Three asking them to add it to your credit file.