With the economy in turmoil and default rates through the roof I hope that this thread will provide some guidance and/or reinforcement to establish/re-establish good credit.

I will break down this thread in several categories to allow for easier navigatgion and see what applies to you. Take what you need and leave the rest.

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What is credit?

-Credit is a reflection of you and how well you manage money. When you establish credit you are showing whomever you want to see it that when you borrow money you pay it back. (there is more to it than that, but that is the gist of it)

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Why do I need credit?

-You absolutely do not need credit. But then again your financial future depends on it. Credit allows you to borrow money other peoples money (always a good thing ) at 0%-100%+ rate of return. The better you manage your credit, the lower the rate you pay and the more favorable the terms of repayment become. A side benefit of credit is that potential employment opportunities become available when they see your strong "character" (I will use this term often).

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How do I get started?

-BORROW MONEY!! To establish credit you have to borrow money from individuals and/or organizations that report to any one or all three of the major credit rating agencies (Experian, Equifax, Transunion). I will go into more detail later depending on where you are staring from as how to proceed.

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How a creditor views your report:

I will start it off with the tables turned so that you can make a decision how far you would like to take your credit and how you would like to manage it (short term vs long term)

There are 3 major things that a lender will review when considering lending you money or giving you a line of credit. These are the 3 C's

Capacity - You have to prove the abilty to repay the debt..plain and simple. This involves having a steady and reliable source(s) of income.

W2>Commissions>Residual Income>Self employed
--Lenders can wage garnish first 2 and that means less risk.

Just because you make x amount of money doesn't mean that they type of job you have is not just as important as the amount of money you make.
Jobs like cashiers, waiters, laborers have very little weight in the lending world. These jobs are not what you would consider long term employment and while you may make enough to qualify for the loan now, you will most likely switch during the repayment period.
--Find a career before you start really using credit.
--Always apply for credit before you leave your job
--Long term means less chance you will be fired, quit, and the lender can find you to collect if you default

Debt to income %, Net disposable income, are just some of the many terms used to determine your shit happens %. This percentage is based on you net income vs your expenses.
Ex you make $1000 net income a month. Rent+utilities $250, car loan $100, no credit cards, gas and car insurance $150. Your income ($1000) vs expenses ($500) would be 50% ratio. 50% is the max and 30% or less is most desirable, but the % is not always applicable. If you make 10k and expense 7k you still have $3000 to live off of and this quite a lot.
The higher the % the more likely you will default if something unexpected happens in your life. The lower the % the lower the risk and honestly you should not be applying for credit if you can barley afford to live.
--Stay below 30% expenses vs income

**Note - Not all credit requests require proof of income. Retail financing (no payments, interest for 6/12/18 months) is based 99% off of credit score alone. You can put that you make more money (within reason) to qualify for a higher credit line. Put that you make too much money and they might make it a stipulated approval based on your furnishing proof which you will then have to provide to get approved.

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Character - Who you are in relation to how you manage your debt.

When filling out an application, EVERYTHING on it is reviewed in order for the lender to determine who you are and feel comfortable trusting you with their money. The more complete, the better picture of your character.

Employment - Career is better than part time. The longer and better type of job you have, the less likely your situation will switch/change/lose your job.
--Lender can garnish wages or levy your bank account if you default if you still work there, they can't if you leave. Big +++ on you app
--When you change jobs the bureau is notified by your next employer. This lowers your score and no one want to lend to someone who just started their job. So if you know that you are quitting or going to get fired, apply for any loans/cc you can get becuase it will be awhile before you will be approved again.

Residence - The longer you are at the same residence, the easier to collect.

A person who is a homeowner and has lived at the same place for 10 yrs vs the guy that relocates from Wyoming to LA to become and actor and lives with roomates. Who would you trust?
--Avoid moving at all costs unless you have to. 2yrs+ is the minimum to get good marks when applying. 5+ is the best.
--Lenders can sue you if they cannot serve you with court papers. Homeowners > renters because of this one reason.

Repayment History - 40% of your scoring on your FICO. On time is the only way

If you show you can pay on time every month then your are showing that you care enough about your credit to make it a priority.
If you are more than 30 days past your due date you will have severe damage on your bureau and it takes 2 years to cover it up (payment history on accounts only report the last 2 years to date)
A credit history is just that HISTORY. If you think that you should get another loan even though you had a few 30/60 day lates , but managed to pay you loan/cc off then you are in for a big dissapointment. No lender wants to lend to a person knowing that they are going to have to make collection calls for 12/24/36+ months.
--Set up auto pay/bill pay through your bank to take the managing part of your credit out. You will never miss a payment
--Never pay later than the due date. You will pay late fees and additional interest. That $30 sweater can easily be $100 if you don't exercise on time payments.

Balance vs Credit Limit - the other 40% of your socring on your FICO. < 30% is best.

You make think that you are the cats pajamas because you never miss a payment and have perfect payment history. You would be mistaken.
When you are carrying large balances month to month and are using more than 50% of your available credit you may be losing points. When given responsibility (credit) it is important that you do not abuse it. When you are maxed out or over the limit you are showing that you do not have control over your finances and/or need credit in order to make ends meet. Lenders will deny you for excessive obligations even though you may not have missed a payment ever.
Everyone starts off debt free so if you cannot manage your current debt or are in over your head, you only have one person to blame for that.

-Over 50% score goes down, 30-50% limited FICO gain, <30% is rockstar
-Even if you get approved for a higher credit limit, use only what you need and kepp it below 30%.
-Likewise, shoot for the highest limit possible to make the 30% stretch as far as you can. Call your credit cards every two years to bump your limit (without making an inquiry)

Inquires - Only apply once per year.

The only time it is acceptable to apply more than once is when shopping for the best auto or mortgage loan. If you get denied for a personal loan or credit card STOP and wait a minimum of 90 days before reapplying.
-The maximum damage you can cause without missing a payment is to inquire for credit. You can lose 20-50 pts just in inquires alone. When all possible wait a minimum of 90 days between inquires


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Collateral - When your credit is not strong enough for the amount that you requested or because your credit is damaged you may be asked to put up collateral to qualify

This can be:

Auto
RV
Boats
Household goods
Real Estate

If you default these your collateral can be repossessed in order to sell it and use those funds to pay towards the balance owed on your account. If there is money left from the sale (over) that is refunded back to you. If there is money still owed (short) then you have to continue to pay and/or settle that remaining balance.
--If you are in a financial bind, you can use the title as collateral to obtain a loan much easier and to get better terms (ie lower rate, longer term, etc)

 

No Credit

Remember that managing credit requires managing. The definition of managment is to achieve a pre-conceived goal through the use of others....."use others"

If you have friends, famly, etc with good credit you have be added to anyone of theri accounts as an authorized user. You will instantly get ALL of their payment history for however far back the account has been established.
-This is the only type of credit you want. Don't rush out to add yourself to collection accounts.

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If you don't have anyone that will help you then you need a higher education....literally. Student loans allow you to take out multiple loans for large amounts without having a job or prior credit. These are wonderful loans because:

-90% of them have automatic 360 month repayment plans (lowest repayment plan out there besides a 40yr real estate loan).
-Interest rates are competitive with that of a mortgage secured loan and most can be fixed for free
-You do not have to make payment while you are enrolled half time or more in school. Most degrees require 4yrs in college and that means you get 4 free years of established credit without having to pay any of the money borrowed until after you are done

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If you have no one to help and are not going to pursue college, but have a means of income. Do exactly this

Apply for a gas card w/ no annual fee
Use it once a month for gas and pay it off every month for 12 months
Open another account
Use it just as you did your gas card for 12 months
Repeat
Repeat
Repeat...

Never apply for credit more than once a year for the first 3 years. After 3 you shoud have no troubles getting a 6-8% auto loan for 20k+ w/ no money down

 

Poor Credit

We will use a rating scale for the type of damaged credit you have. 1 is best - 10 is worst.

1-3 - Some 30 days maybe a traffic/parking ticket or two.

4-6 - Rolling 30 days and maybe some 60 or even a 90/120 day late. Several collections accounts.

7-9 - Most, if not all of your debt is past due 90days or more. Several charged off accounts and maybe a repo or voluntary surrender. Lots of medical collections and maybe a judgment or two.

10 - Former BK7/13, Foreclosure, Repossesion, Judgements, no more good credit, bounced checks from Grocery or Video store, numerous unpaid collections accounts.

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Solutions

1-3: 2yrs of no missed payments and <30% balances on your credit will remove the bad marks and restore your FICO

4-6: Contact a non-profit Consumer Credit Counseling agency to get your payments reduced. Do not apply for ANY credit until you are finished paying off your debts by finishing the program. What credit you still have available use it once a month for gas pay it off until your FICO is back into the 600+

7-9: Contact a settlement compnay or any attorney to get the creditors off your back and negotiate paying back less. This will take 7 years to remove the bad debt. If your situation is fairly recent in regards to delinquency and it will take 5+ years to pay back that debt and will be very difficult for you too, then it is time to consider BK7 and start all over again.

10: This is either the worst of luck or the worst of judgement.
-Former: Ride it out and don't use your credit for 5 years min. Let the bad stuff drop out
-Latter: Consult a psychologist for help to curb spending and pick up a Credit for Dummies book

 

Average Credit

This is 580-660 range. You have a lot of good payment history and a few established accounts, but you can't seem to get over that hurdle.

Keep balances below 30%, apply for credit once every 90 days to six months, and keep paying on time

 

Good Credit

680+ FICO.

You know how to manage debt and already have a strong grasp on what you are doing.

Just take this as a reference if you need any of it to help maintain your good credit standing

 

Helpful Hints

Have old collection accounts? Parking tickets? Medical bills?
--There are credit specialists who will review your credit and send disputes to that old debt. Chances are they stopped reporting over a year ago and won't respond, automatically clearing that debt off your bureau.

Over 8-10k in debt?
--Contact a Non-Profit Consumer Credit Counseling (CCC) agency to help lower your payments. You can get reduced rates, payments, longer terms to help you out financially. This will reflect negatively in your credit report but will be removed when the program is finished and is better that past due marks and charge off

Are you already past due and know you cannot pay back your debt?
--Contact a settlement company or attorney. They will get the creditors off your back as you pay into a pool over 8-12 months. They negotiate settlements on your behalf and when you are done paying into the pool, the money is disbursed and the account is settled. No more phone calls to the job, or legal action against you.

Someone steal your credit card?
--The maximum that a credit card agency can charge you is $50 for fraudulent purchases.

 

Be patient with me. I will finish it up this weekend.

 

Finished!!!

I will add things periodically as I remember them, but this is fairly comprehensive without wiritng a novel


Post any questions you have or would like me to add.

-Joshua

 

Excellent information.

I'm in the hole, I have balances on 2 credit cards. I was in a bad work situation last year, and recently the last 6 months I have a new job where I am making steady money. In 6 months I have been able to pay off other cards, I had balances on 4 other cards and now they are finished. The cards are still open, but they are paid off and I am focusing on the 2 current ones I have. I may have balances on the credit cards, but I always make my monthly payments and on time, usually for double the min payment. How would you think I stand for a credit score?

I try to keep some balances, usually just on one card and for under 3 grand, but the last year killed me with just surviving. I figure in 6 months - 1 year I should be back to my normal debt level.