Getting Back Into the Black

I recently ran into a very important issue that I should have seen coming. When my bankruptcy was discharged in November I assumed that my lawyer had filed a re-affirmation agreement with the bankruptcy court to keep 2 of my credit accounts active. One was for my truck, currently our only means of transportation and the other for a Kay’s Jewelry card that we had applied for about 2 months before we decided to file. I went through my paperwork for the bankruptcy and I found the notice I had seen before about how I would continue to pay on them and keep the collateral for the credit. Not knowing any better, I thought that was the re-affirmation agreement. I found out I was very very wrong. As long as I pay the bills I can keep the items (truck and a watch) but they could no longer report to my credit report. I was livid to say the least.

I contacted American Honda Finance (the loan holder for my vehicle) and asked if the agreement could still be filed and told that normally, after 2 months have past its not possible to amend the bankruptcy. I also did not want to run the risk of re-opening it in-case the IRS decided to make a move on my newly established savings accounts.

My only remaining option of course was to refinance so that I could once again get the credit reported to start rebuilding my FICO score. I went to LendingTree to submit my application to several companies at once and I was very pleased that after submitting my info, even with my horrible FICO and the bankruptcy and a tax lien that I got an offer to refinance from HSBC and RoadLoans.com. The interest rate was only about 2% over what I was previously paying (my last rate was high because of some late payments when I was laid off in 2003) which I was actually surprised about.

Refinancing is going to cost about $400 more in the long term, but the benefit is that for the next 2 years while I’m paying on my truck, it will be reported and help my FICO begin the long climb back to having good credit.

One last note, my current loan was originally for a 7 year loan that was set to be payed off in October of 2011. With the extra payments that I’ve been squeezing in when I can, I’ve managed to move that date up to April of 2011 so far. I had planned on paying off the balance by Feb. 2010 and with the refinancing it will actually move that up to March 2010. There is a great calculator at YoungMoney.com that you can use to determine how much interest you can save and how much shorter your loan will be by making extra payments. Once the truck is payed off, I’ll be 100% debt free and every extra dime we have will go towards saving money for our first home down payment.

   The FICO score is the most commonly used credit score that lenders use to determine what kind of rates and credit you qualify for.  FICO scores range from 300 to 850.   Do you know what your FICO score is and what it means to you?   Knowing your score and working to improve it, can mean the difference between paying $1,678 for a $300,000, 30 year fixed rate mortgage or paying $2,680 a month.   I can think of a lot better things to do with $1,002 dollars a month than to give it to a lender to make up for my poor credit decisions.  

   Understanding your score   Here’s a quick rundown down of the scores.

Over 750 is excellent

720 to 750 is very good

660 to 720 is acceptable

620 to 660 is uncertain

620 and under is risky

Understanding how FICO is scored will let you know what you need to do to improve your score.  The biggest factor is payment history, it makes up 35% of your score.  Payment information on credit cards, installment loans, retail accounts, mortgages, etc.   Bankruptcies, tax liens, collections, judgements, late payments, etc make a huge impact on this part of your score.   They also look at how many late payments you have on file, how long they were late and time since they were reported.   The next most important category is the amount you currently owe creditors.  This makes up 30% of your score.   They look at the ratio between  the amount you owe and the amount you have available to you.  The higher this ratio, the better, meaning it’s best to carry low balances.  The length of your credit history counts for 15% of your score. They’re looking at time since accounts were opened and time since activity on the accounts.  New credit and types of credit used each make up 10% of your score. 

   How to optimize your FICO score

The most important thing you can do, is to pay your bills on time.  If you have missed payments, you need to get caught up and start paying them on time.  The longer you pay them on time, the better your score will be.  Paying off a collection will not remove it from your credit report.  It will still stay on your credit report for seven years.   Keep the balances on your credit cards low.  It’s better to pay down your debt on all of your cards then to move it to one card. Owing the same amount but having it on fewer  open accounts can lower your score.  Don’t open up a bunch of accounts that you don’t need, many experts say you only need a few credit cards to have a great score.  If you haven’t had your credit card or loan for very long, don’t open a lot of accounts at the same time.  New accounts bring down the average on your credit history length and can look risky if sign up for too many.  

   Why the Fico score is important to us

  One of the biggest goals my husband and I have is to buy a house.   We want to make sure we do it the right way.   Rebuilding my husband’s credit and establishing my credit has become an important process.   Due to our credit mistakes and my husband’s bankruptcy, we are estimating that will take two years to get our credit where it should be.   There are no easy fixes.   It takes a very short time to damage your credit and a fairly long time to rebuild it.    We could get a mortgage in a few months but we’d be paying so much more that it would be a dumb, illogical choice.  So, instead we will continue to put money into our savings accounts to use as a substantial down payment when our credit will get us a good rate.    Be informed, don’t pay more than you have to.   Get your score and more information at www.myfico.com.  You may have heard something about a new credit scoring system.  It’s called VantageScore, but at the time of this article, FICO is still the most widely used.