In some ways, a bankruptcy isn’t the worst thing that could happen to your credit. Since you can only file bankruptcy every 7 years, lenders will know that for at least another 7 years you can’t legally escape your financial obligations. Unfortunately, they do take note of the fact that you may have gotten over extended in the past and they may be reluctant to qualify you for an amount that someone with better credit may get. To get the best rate possible after a bankruptcy, you will have to wait 3 – 4 years. Also, expect to put down a large down payment of about 20% – 30%. The lender wants to ensure that you are financially invested in the house and that you will also incur heavy losses if you default.

In the case of a foreclosure, you may qualify for an FHA loan after as little as two years. FHA loans require a minimum down payment, sometimes as low as 3.5%, so it may be worth it to wait a couple years before realizing your dream of home ownership. Before the housing melt down started, you used to be able to get mortgages for 100%  of the homes value from some banks and sub prime lenders, understandably this has proved to be a very risky venture and these loans are no longer available for people needing a bad credit mortgage.

Your FICO score is the main determining factor in the interest rates you will get.

 This chart is an example given by FICO as indicative of the impact your FICO score will have on your credit. 

For a $216,000 house with a traditional 30 year fixed-rate mortgage you can see how your payments will increase as your FICO score decreases. An interest rate difference of even 1% over the course of a 30 year mortgage will add up to potentially thousands of dollars as you can see in this example.  The home buyer with an excellent FICO score of 760-850 will be paying $219 a month less than the buyer with a score in the 620-639 range.  You can begin to see how quickly this adds up, in this example the bad credit mortgage will cost $2,628 more per year.

Another possible option for a bad credit mortgage is to rent to own or find a home with seller financing. With a rent to own, you would typically pay a higher rent with a percentage of the rent going towards a down payment. After a set period you may have to qualify for a traditional loan if the seller isn’t financing so you need to be sure that you can meet the terms of the rent to own agreement or you may lose all or part of your down payment. In the case of seller financing, it is exactly what it sounds like, the seller acts as the lending agent. This can be a beneficial arrangement for both the buyer and the seller as there are no middle men such as realtors and banks driving up closing costs. With seller financing, because expenses are kept low, the loan conditions can be quite favorable for a buyer. In both of these examples you are still advised to hire an appraiser and an attorney to review the paperwork to make sure you understand all the conditions outlined in the sales contract. 

Without a doubt, the best way best possible to get more favorable loan conditions is to wait it out for about 3 years and work on improving your credit history and your FICO score. But even if you don’t want to wait, it is good to know that you still have some options available to get a bad credit mortgage.

So, any fix credit score plan needs to address these 5 facets of your report. The first thing you need to do is get copies of all three of your credit reports from Equifax, TransUnion, and Experian. You are allowed one free credit score report per year from each of these companies. Each of these companies has their own FICO score for your credit report, so you have 3 different FICO scores. These FICO scores will not be available in your free credit report but you can pay an extra $20 to purchase them if you want. For our purposes here to establish a fix credit score plan of action, we can get all the information we need from the free versions so you don’t need to buy the FICO scores.

The first thing you need to do is examine all you credit reports for any errors. If you notice anything that is incorrectly reported on your credit report you should contact the credit reporting agency and ask to have the error removed. You will need to provide supporting documents, for example that you actually paid of a credit card debt and that no balance is due. Any mistakes that you found should be immediately addressed. You may some minor differences in each of your three credit reports and this is strange but completely normal.

OK now that any errors have been addressed, you need to start actively working on your fix credit score plan. As you can see from the pie chart above, the two areas that count for most of your credit score are the “payment history” category and the “amounts owed” category. These two sections alone count for 65% of your overall credit score, so this will be the main focus of our fix credit score plan.

The “payment history” category is exactly what you would think; it keeps track of all your late payments. Every late payment counts against your credit. This category keeps track of how many accounts are paid on time, how many are late, how late they are, how many have gone into collections, and whether you have filed bankruptcy. One or two late payments aren’t enough to sink your credit, but if you show a history of being consistently delinquent, this starts to look bad. This means that from now on, you need to pay every single bill on time. This is 35% of your credit score; it is unavoidable and not negotiable. The credit reporting agency doesn’t care if you were downsized, lost a paycheck because you were out with the flu or needed to replace your transmission. One thing you can do if you fear you will miss a payment or be late on a payment is to contact the company you owe money to and try to make an arrangement to skip a payment. A lot of companies have some leeway with this, it will usually cost you some extra interest, but it will avoid a bad mark on your credit.

The next major category “amounts owed” is based on how much credit you have available versus how much of your credit you are using. If you have $75,000 in credit available and have it all maxed out, this is not good. Someone with a lower credit limit of say $20,000 but with only $100 charged may actually be much better off credit-rating wise. This category also includes how much you owe on all your different types of accounts such as credit cards, mortgages, and personal loans. For example, secured loans such as those on real estate are expected to have a higher balance while a high credit card debt will reflect much more poorly on your score. So, what this means is that you need to dramatically reduce your overall debt, especially credit card debt and personal loan debt.

A lot of people are looking for a quick fix credit score solution, but I’m sorry to report no such solution exists. Quick fix credit score repair is a myth. The only way to repair your credit score is with slow deliberate action and to stop making the same mistakes that got you into trouble in the first place. If you follow just these two simple steps laid out here, pay all your bills on time and reduce your debt, you will able to raise your credit score. It won’t happen overnight, more like over the course of two to three years, but it will happen. You don’t get bad credit overnight and you don’t fix credit score problems overnight either.

2. Depreciation. With all the uncertainty in the housing market today it may be better to wait. It’s impossible to time the housing market so that you buy at the exact bottom and once the market does hit bottom, you’ll have plenty of time to buy so why rush in. It’s better to buy once things have stabilized and so far that doesn’t seem to have happened yet.

3. Owning a House is more Stressful. This may seem like a weird thing to consider but it’s simply true. Owning a home has a lot more responsibility tied to it than renting does, some people are up to the responsibility some people aren’t. If your house needs a new roof, you better come up with the cash. If your air conditioner breaks in the middle of summer, hope you have a couple extra grand sitting around. Who doesn’t love mowing the law? The responsibilities of home ownership are endless.

4. Liquidity. Right now as unemployment is rising, housing is falling and the economy is still in turmoil, cash is king. If you tie up your money in a house, this is money you may not have for an emergency job loss or forced move.

5. Neighborhood deterioration. This is generally related to both 1 and 2 above, if you have the misfortune to buy in an area where there are no longer any jobs, people move out and vacant/foreclosed houses abound. Even if you manage to keep your job and pay your mortgage, your house has lost value and so has your entire neighborhood. In some cases entire cities are losing value. No one wants to live where there is no opportunity and no perceived value even if housing is cheap.

A lot of people are curious about their credit score range and exactly what it means in terms of their ability to get loans and what kind of interest rates they will get. All lending institutions have their own formulas they use to determine who will qualify for what type of loan, but this article will give you a general run down of what your credit score means in terms of a real world loan example. Basically the higher your risk level, the higher your interest rates. A low credit score means you’ll pay more for the “privilege” of getting a loan. Banks are essentially gambling on whether you are a good risk or not. A higher credit score range means you will pay a lot less over the life of a loan than someone with a lower credit score range. And I mean A LOT LESS.

Check out these numbers given for a $225,000 home at the national average APR provided by myFICO.com:

As you can see, according to myFICO, someone in the top credit score range of 760-850 will get an APR of 4.69% resulting in a monthly payment of $1,166 versus someone from the lowest credit score range of 620-639 who will only get an APR of 6.28% and will make monthly payments of $1,390. This is a $224 difference paid each and every month. Over the course of a 30 year loan, this will add up to a difference of over $80,000. This is substantial. Bad credit will cost you money. Bad money will keep you from buying a home or a car. And sometimes bad credit can keep you from getting a job.

Remember that although a bad credit score range may seem like the end of world, it can be only temporary if you are willing to work at improving your credit. There are no quick easy fixes, but you can slowly begin to raise your credit score range with some simple easy tips that you will find on this website.

Although you’re allowed to get a copy of each of your credit report for free each year, this does not apply to your FICA credit score. Usually you have to pay a small fee to get a copy. If you apply for a loan from a bank, sometimes if you ask nice, they’ll give you a copy.

The FICA credit score is used by lenders to get a general sense of your credit worthiness. Your credit score will determine if you qualify for a loan and if you do qualify for a loan, what type of interest rate you will get. People with better credit get better loans.

This is a quick view of the FICA credit score:

Overall, your FICA credit score is based on:

A lot of people view credit reporting as a sort of mysterious process that they have no control over, but the exact opposite is true. Except for extreme cases like identity theft, you do have direct control over your credit score. You can directly affect your credit score either negatively or positively. All banks want to see when they are deciding if you are a good candidate for a loan is that you are a responsible user of credit. Do you keep your debt low and pay your bills on time, this is the main concern of lenders, and this is why this counts for 65% of your credit score. The other factors such as how long you’ve had credit, the types of credit you have available, and new credit are not as important to lenders. Don’t get me wrong, they’re still important, they count for 35% of your credit score, but on time bill paying and lower balances are the single most important aspect of your FICA credit score.  

If you’re interested in improving your credit, I hope you’ll check out some other articles I have available on the subject. Credit is something that everyone should understand, because bad credit can end up costing you dearly. Bad credit may mean you can’t buy a home or a car. It also means you’ll pay more for any loan you do get which can end up costing you tens of thousands of dollars extra for a house versus someone with good credit and a better loan.

So, based on this information we can chart a course on how to raise your credit score. This information will apply to people who already have credit; I will cover how to start the process of even getting credit in the first place in this article: How to Even Begin Getting Credit.

Step One: Pay every single bill on time, every time. As you can see, this accounts for 35% of your credit score, so lenders obviously consider this a major component of responsible credit use. It is your best interest to not get over extended, but if for any reason, you can’t pay a bill on time, contact the company. This includes credit card companies, banks, mortgage companies, and even the electric company. If you can’t pay, call them up, explain the situation and see if you can skip a month’s payment. This may not work every time, but many companies have the ability to allow you to skip a payment and this will be much better than getting a ding on your credit report.

Step Two:  Reduce the amount of money you owe. It’s probably not possible to put down $100,000 on your house, but definitely start banging away on any smaller debts you owe. Pay down what you can. Start now, pay down credit cards, student loans, personal loans, car loans, and anywhere else you owe money. This is 30% of your credit report so get busy!

Step Three: This step isn’t available to everyone, only to people that may have some older credit cards available that they aren’t using. Since 15% of your credit history is based on the age of your credit history, you want to show as long a credit history as possible. One easy trick to do this is to keep some older credit cards and occasionally use them. Always pay off the balance quickly, but this shows that you have “active” credit going back a long time. It’s simple, it’s easy, it’s effective.

Step Four:  Stop applying for new credit. If all of sudden, you show a spike in applying for new credit this will damage your credit. It’s only 10% of your credit score but when it comes to how to raise your credit score, we need every point we can get our hands on. Now, don’t worry if you’re shopping around for different house or car loans, because the credit reporting companies expect this and make allowances for these types of loan shopping around. But if you do go shopping for a car or house loan, you want to make all your loan applications in a short time frame, so that all the loan applications are obviously for the same purchase.

Step Five: Vary the types of credit you have available. This may not be something that most people will use in the short term to improve credit, but it does factor into 10% of your score so it’s worth mentioning. It reflects better on your credit score if you have different types credit available like a house loan, a car loan, credit cards and a personal loan, this shows that you can use different types of credit responsibly which makes you a lower risk. Now, this does not mean you should run out and get a car loan because it would help to improve your credit because this would be a violation of Step Four, but I do think it’s important to understand how credit actually works.

I hope this article helps you figure out how to raise your credit score. It’s really not that difficult, it is simply making small incremental steps that when taken together will begin to improve your credit score. You start to give the impression of good solid credit use so that you can then be considered a good credit risk and get the best loan rates available.

Ever wonder how your credit compares to the rest of the population? Here’s an overview:

Benefits of the Unsecured Loan

The main benefit of the unsecured loan is that it provides money for whatever you may need. With a secured loan you have no flexibility for how you spend the money, but an unsecured loan can be spent however you want. The bank will ask how you intend to spend the money and they’re going to want a good answer that makes you sound like a good risk, but once they release the money, you can spend it as you see fit. An unsecured loan can be used for a new transmission, fixing your home’s air conditioning, or any other unexpected emergency that may crop up.

In the case of payday loans, small amounts of money can be obtained fairly quickly with little hassle making them a good choice for emergencies. See below for a more complete discussion on the potential downside to payday loans.

Downside to the Unsecured Loan

The two main downsides to the unsecured loan are they can be hard to get with bad credit and in some cases they can be very expensive if not obtained from a traditional lender like a bank or credit union. If you get a secured loan from a bank or credit union then the rates are reasonable, but if you deal with a payday lender or check cashing lender, then the rates can be astronomically high, perhaps even over 300% interest per year.

Payday Loans or Cash Advances

This is a controversial type of unsecured loan that is offered at small loan shops and check cashing storefronts, rather than banks. To get a payday loan you give the lender a postdated check that they will cash at a later date while they loan you the money. These loans are short term loans for usually only a couple hundred dollars.

Benefits of Payday Loans

The only benefit of this type of loan is quick easy cash. Plus you don’t need great credit so I suppose that makes two benefits, but the downside of these loans is BIG.

Downside of Payday Loans

These loans are considered by some people to be just steps away from legalized loan sharking. In fact, these states have even outlawed payday loans:

• Connecticut

• Georgia
• Maine
• Maryland
• Massachusetts
• New Hampshire
• New Jersey
• New York
• North Carolina
• Ohio
• Oregon
• Pennsylvania
• Vermont
• West Virginia

The main reason that these states have outlawed the practice of payday loans is due to exorbitant interest rates they charge. There are usury laws in some states that prevent unreasonably high interest rates, but payday lenders got around these laws by partnering with banks in states without usury laws. This effectively allowed them to sidestep the law because lenders fall under the law of the state where the bank is located not the payday lender. In 2005, the FDIC limited how payday loans were administered. Lenders used to be able to roll over loans indefinitely, ensnaring unsophisticated or desperate people into interest rates that were  over 300% per year making it almost impossible for low income people to get out of debt. The new FDIC rules states that after a loan was rolled over 6 times, it would then have to convert to a traditional long term loan with manageable interest rates. Due to these changes, banks have been out of the payday loan business since 2007.

Summary

An unsecured loan is can be great for emergencies, but they shouldn’t be used frivolously. Don’t use an unsecured loan for a vacation, furniture, or other items that you should be buying with cash, remember you are paying interest on this loan and interest can begin to add up, this adds to the overall price of what you are buying. For some people, the cycle of payday loans can be next to impossible to break out of, so this type of unsecured loan is almost never a good idea.

2)  Reduce the amount of outstanding debt you owe.

3)  Don’t keep applying for new credit cards (don’t cancel the ones you  have, just stop using them and pay them down). 

4)  Make sure to look at your credit report once a year to keep an eye on it, this helps you correct mistakes and keep an eye out for possible identity theft. A good way to watch your credit is to pull up just one of your free credit reports every three months that way you are rotating your free reports and can see how things are progressing.

5)  If you have a limited credit history and feel this could be working against you, you can get what is referred to as a secured loan or a credit building loan. This basically means that you give the bank $1,000 and they then loan you $1,000. Seems odd perhaps but this is a valid way of building up your credit history.

6)  Get a credit card – but only do this if you have no credit history at all. Sometimes it is easier to get a store credit card so this may be a good route. Charge a very inexpensive item and pay for it over time. Only buy something for like $50 because you’re trying to improve your credit score not pay huge amounts of interest. Be sure to make all your payments on time, because even one late payment can have a negative impact.

Your FICO score is determined by these 5 factors:

1) Payment History (35%) – If you always pay your debts on time and have no bankruptcies this is a positive.

2) Total Amount of Debt (30%) – This is the measure of all the accounts that you have open. FICO also measures the amount of credit you have available vs. the amount you are using and factors that in here. For example, if you have $20,000 available on a credit card, but only have an outstanding balance of $200 this is obviously much better than being maxed out at the full $20,000.

3) Credit History (15%) – A longer credit history is generally better, but if the rest of your credit report is good, you can still get a good FICO score.

4) New Credit (10%) – Showing a sudden increase in seeking new credit may lower your score. When a bank runs your credit history this may very well impact your score by up to 5 points. But FICO takes into consideration multiple applications for a specific loan. For example, if you are shopping around for a more competitive house loan rate and you have your credit checked by multiple lenders. However, it is advised to get these multiple checks done in a condensed time frame, like a 30 day period, so that FICO can clearly see your intensions and so your score doesn’t become adversely affected.

5) Other Considerations (10%) – With a longer credit history, it is considered good to have diversity in your debt. It would be a plus to have a mix of credit card debt, car loans, property loans and personal loans.