>Someone close to me is in the market for a first-time homeowner purchase and was recently told by a mortgage rep that they needed more debt in order to qualify for a home; so they needed to get two credit cards, charge $100 each month and pay the bills in full each month for 12 months in order to establish “good” debt. Now let’s look at the background information on this person I’m referring to, they have no real assets; had a secured credit card but it was closed, and has some debt already…bad debt like student loans and charge-offs; their debt-to-income ratio is too high to afford the additional monthly recurring fees associated with the two credit cards yet they are expected to over-extend themselves in order to hopefully qualify for home ownership in no less than 12 months. Talk about a frustrating situation!
So, let me analyze this closer… you have student loans, late payments, and one or more charge-offs, and are already stressed as to how you will afford to pay off that debt, but you have to deal with your daily debt of a car loan, rent, health insurance, life insurance, car insurance, utility payments and whatever else you’re expected to pay on a regular basis; with the dark cloud of reality over your head that reminds you that you don’t make enough money to cover this debt; how in the world will you be able to assume two new high interest debt payments for not just 12 months…but until you give up and tap out?
If you notice I didn’t mention that you are swimming in credit card debt already…you don’t have credit cards because you stayed away from them after learning the hard lesson behind them such as, you can’t merely close a credit card account and not receive a “ding” to your credit report. No, you have to pay at least the minimum monthly amount in order to show a good credit history. But paying just the minimum won’t get you anywhere fast. This rat race is incredible! Where’s the consumer bailout???
We’re told that credit cards are “bad”, that the extremely high interest rates (usually 19% and higher) and added fees can cause you to eventually drown in debt; yet we’re being cajoled into getting these debt-magnets because somehow although they are bad, they are also somehow good for us. So is this another case of using the 1980s coined term, “bad” to mean “good”?
My research has shown that this process is called “re-building your credit“. You have to get help with this because there are quite a few obstacles.
1) not apply to too many credit card companies because that will negatively affect your credit score
2) apply to “good” credit card companies and not ones that charge high interest, processing and administrative fees
3) consider a department store, gas, or secured credit card
4) avoid pre-paid credit cards since they don’t report to credit bureaus (so they can’t help your credit)
5) build new credit habits by not doing what you did in the past to end up with “bad” credit
6) replace bad credit with good credit by charging only what you can afford, making sure to pay your bill on time each month, and making sure you pay more than the minimum each month
7) make sure to not take out too many credit cards because it can become costly as well as confusing
Now check back next week to read my analysis of these 7 points referenced above.