Nicki

“Dear Steve,

When I left college with credit card debt I had no way of paying, no real job and student loans piled on top, I was struggling to keep from drowning in debt. Top that off with medical isses (no insurance) and those bills, it took almost seven years to pay back the largest items after being delinquent about three years.

I currently have several small bills, including bills under dispute that the original creditor has still not validated, that are on my credit report. I find myself in a cycle of paying on time for 6 months and having a crisis (family, health, auto, etc.) that causes me to fall behind and those negative items seem to pile up.

Suffice to say that while I’m currently in the catchup mode, my credit score is not. I’m in my early 30s, still renting though I make a decent salary now, and frustrated. I just want to get everything paid off, have my credit score be reasonable so that I can buy a house.

I know with the current economy many people feel I don’t deserve to buy a home because I’ve had terrible history managing my credit – but I don’t seem to know the magic point to turn this cycle around. In total I’ve managed to pay off about 20k of debt since 1999 and currently have a total of about $2900 spread over random small accounts and a collection that can’t be validated. I’m feeling pretty defeated about my financial future.

What’s the likelihood of my buying a house anytime in the next couple years and do you have any recommendations for seeing near-term improvement to an extremely low credit score?

Nicki”

The Answer

Dear Nicki,

I can see how you feel defeated but there is tremendous good news to help you here. You really deserve a huge hug for all the progress you’ve made. The struggle you have been through is not one that many could have tolerated. I’m really, really proud of you.

The cycle of debt is primarily because getting out of debt should not be a goal that excludes saving money at the same time. Without saving money in a regular boring savings account, at the same time that you are trying to get out of debt, you will find those odd events throwing you under the bus again. Sure, it will take you a bit longer to get out of debt that way but you will avoid the twice yearly debt crisis.

You are close to the end of your debt repayment, I can see the light for you at the end of the tunnel, and now is the right time to start dreaming about your new home.

I sure don’t know what your consolidated credit report looks like right now, but I really think you need to take a look at it. This consolidated credit report is the one I use and love. It is so simple to read and interpret. When you get your consolidated credit report you should also get the credit score option. It will tell you exactly what is bringing your score down and how to fix it.

I suspect that the biggest anchor on your credit score is your past history of money troubles with little or no new good credit to start showing what a good job you are doing now.

Credit reports are not report cards on how great you are doing, but on how great your creditors think you are doing of being a good target and low risk for them.

If you’ve spent the last ten years responsibly paying off old debt, that is good for you, and smart, but does not demonstrate you can handle credit now. Nicki, it’s all a game and you just need some advice on how to play it to achieve your goal, that’s all. You’re on the right track.

So how can you get major unsecured credit reported about you will minimizing your risk of getting back into trouble? Why with a secured credit card. A secured credit card will allow you to put up a deposit that will be equal to your credit limit. If something was to happen and you could not pay your bill then the deposit would be there to cover you.

But many secured cards also report to credit bureaus, sometimes for a fee, and that’s what you want. You want them to show you responsibly using your credit and that, in conjunction with clearing the remaining debts, will help you to bring your credit score back to life.

Now, with the end so close in sight the last thing you need is yet another crisis to pop up and erode the progress that you’ve made. So what I want you to do is to open a savings account and put 50% of the money above the minimum payments that you would have sent, in the savings account each month. This will help to protect you against those unexpected expenses and it will be the beginning of you saving a down payment for your new home.

I sense that you are probably a few years from moving into your new house, but if you follow this plan your old debt will get resolved, you will increase your credit score in preparation of your new mortgage, you’ll protect yourself when the next crisis occurs and you’ll have cash in the bank for your down payment.

I want you to follow me on Twitter at @GetOutOfDebtGuy because I want you to tweet me so I can celebrate on that day you move in to your future home.

I’m really excited for you.