When I was 18 Bank of America sent me my first credit card. The limit was $500. I was working part time at an elementary school as an aftercare counselor. I hadn’t received any education on how to manage credit, nor did I know how it would affect my future. I just knew I had free money. And that I could use it and just had to pay it back eventually. I remember telling myself, “I’ll just make the minimum payment and everything will be alright.” I was responsible enough to handle it.

I was. At first.

Then they increased my limit to $1,500.

You know what happens when you’re 18 years old with a $1,500 limit credit card with a 23% interest rate and a part time job where you make $800 a month?

Bad things.

At first I didn’t notice. The kids at work want me to join them playing Mario Kart on their Nintendo DS? Swipe. My friends want to go to Busch Gardens? Swipe. New Xbox and Halo just came out? Swipe. Hungry? Swipe.

Suddenly, my balance is at $1,000 and minimum payment is $30. No big deal. I miss a payment because I’m out of town and bogged down with school and completely forgot. Honest mistake. Suddenly the minimum payment goes up to $75.

My car breaks down and I don’t have room on the card to charge it. I have to use my entire paycheck to get my car fixed. All of a sudden I just have my credit card to pay for gas and food. The card is maxed out by my next paycheck.

Suddenly, making my credit card payments isn’t as important anymore…

I start ignoring the calls and mail from the bank…

Eventually I put the card out of my mind…

Five years later you have no idea what your credit score is. You have gone to the hospital several times without health insurance. You graduated college with tens of thousands of dollars of federal loan debt that is in repayment. You have several other credit cards you forgot about. If you have any cards now, they are probably at over 20% rates. You’ve applied for loans in the past, and have always been denied…

I’ve worked as a loan analyst at credit unions for the last two years. In my time I have seen hundreds, if not thousands of credit reports. Below are my tips to help you get a better picture of your financial history, and what you can do to improve it.

I will also tell you what you can do to improve your odds at getting approved for loans in the future and perspective on how we look at your application.

Get a clear picture of where you stand:

1. Pick up your phone and call your local credit union. Ask for the loan department, and apply for any loan.
2. Answer everything truthfully, and give them permission to pull your credit.
3. At this point, the rep will ask about your not-so-good credit history. Be honest. Everyone has been affected by the economy and we see this every day. There’s no need to be embarrassed.
4. Ask the rep what credit bureau they pulled (Experian, Equifax, or Transunion), and what your score is.
5. Ask the rep about every single item you have in collections. Medical bills, charged off cards, vehicles. It’s illegal to give you a copy of your report so write everything down.
6. Ask the rep about who owns your debt. Most likely your bank sold it to a debt collection company, who then sold it to another debt collection company. Google is your friend.
7. You may have to make a few calls to find out who really owns your debt.

Congratulations!

You’re now armed with an accurate picture of your financial standing. Credit scores are weird. It’s a mysterious algorithm and no one really knows how it works. From my experience the things that affect it are:

• The size of the credit line, whether current or in collections.
• How much revolving credit you have (credit cards), and how much of it is being used.
• The diversity of credit lines you have open, including installment and revolving lines.
• Opening new credit lines. Every time you open a new credit line, your score will drop a few points. It takes a couple months of positive payments to bring it back to what it was.
• Closing revolving credit lines. Any credit card you close will lower your score several points.

A common misconception is that pulling your credit kills your score. This is incorrect. The credit score algorithm weighs your pulls by month, every six months, and every 2 years. It combines them and if what you pull over that timeframe is considered “too many” it will affect it, but only slightly. In the long run as long as you get your credit pulled no more than a handful of times a year you’ll be okay.

Another misconception is getting a loan to “improve” your credit. The algorithm weighs what you have current against your delinquencies. There’s no point in getting a small loan or credit card to improve your credit when you have thousands of dollars in collections, or charged off. The best thing you can do is clear up those collections first, and then get a loan to positively affect your score.

The algorithm tiers your positive and negative credit lines. A good rule of thumb is to have at least double the amount of positive lines as you do negative. It’s a mystery exactly what the tiers are, but roughly any collections less than $400 hurts your score, but not much. Debts that are over that amount will make your score drop like a rock if you do not have a significant loan counterbalancing it. A good example of a positive counter balance is having a current auto loan.

Prioritize your debts:

Start planning on how you will attack your delinquencies and collections. Focus on one at a time. Once they are cleared from your report they will never affect your score again. You will save yourself the most money if you can pay off each charged off loans at once or in a few (no more than five) installments.

1. If you have open lines that are not charged off, the first thing you need to do is bring them current. This includes student loans.
2. Once all your open lines are current, focus on your charged off accounts. Pay off the largest amounts first.
3. Keep in mind whoever owns your debt bought it from the original bank for pennies on the dollar. Do not hesitate to offer them 1/5 or 1/3 of your total debt.
4. Most of these companies are willing to work with you, and many times you will make off by paying less than originally owed!
5. Medical collections last. Again, prioritize by largest amount first.
6. Take a big sigh of relief once you’ve cleared all your charged off accounts and collections.

Now it’s time to bring your score up!

This part requires patience. There’s no quick way to get your score up. The best advice I can give is to put everything on automatic payments, and forget about it.

1. Open a share secured loan. Most credit unions offer these. You’re basically just lending against your own money, and paying a tiny amount of interest. This will report as a positive installment loan on your credit report.
2. Open a small secured credit card, or small regular credit card if you can get approved for it. This will report as revolving credit on your report. It is important to note never have more that 25% of your total balance in use by the end of your pay period. Anything more than that will report negatively on your score.
3. Apply for an auto loan. If you cannot get approved for one by yourself, have a family member cosign on one with you. Auto loans really boost your score.
4. Profit. As long as you have no negative trade lines you will see your score shoot up over the next two years!

Okay, I’m ready to apply for a loan. How do loan analysts look at my report?

First of all, loans are subjective. All things equal, one analyst may approve your loan, while another may deny it. It is a gray area.

Be honest. We have a complete window into your past and present, and we know when what you are telling us does not match up with your report. It is our responsibility to determine whether you are financially capable of paying us in the future.

The report does not lie. Only in rare situations is there a true mistake on the report. Again, if you are honest in why you need the loan the analyst will note that.

Protip: We put more effort into the notes for people who we feel are being honest. If we feel you deserve the loan, the notes will reflect that. This will increase your odds of getting approved.

We know since 2008 that millions of people have lost jobs and homes. What we want to see is how you’ve done since then. If you can prove that you have been consistent with your payments, your odds of getting approved skyrocket.

Income is important. We like to see that you have at least $1,000 of disposable income available after we deduct your rent, your debts, and any other expenses. Most credit unions use your gross income (before taxes) to determine your “Debt To Income Ratio”, or DTI. A general rule of thumb is having your DTI at 40% or less. The more disposable income you have, the higher you can afford having your DTI as well.

We look at the kind of debt you have. Is it secured or unsecured? Credit unions are conservative. We prefer to award loans secured by a car, boat, ATV, home, etc. That way, if you don’t pay it we can repossess your vehicle.

Too much unsecured debt is not a good thing. This includes credit cards and personal loans. Be wary of how much unsecured debt you have. Credit unions are terrified of bankruptcies. We can’t recover unsecured debt.

We look at your living and work history. Have you lived at the same place for more than two years? Have you worked at the same job, or at least in the same industry for the last two years? This is important, because this tells us how reliable you are.

All in all, we just want to see that you’re trying. Many people truly need loans, but fail to realize that awarding it will put them in a tougher financial situation in the future. Credit unions actually care about their members, and having a positive history with one will benefit you greatly. Do your research, and pick one that you feel comfortable with.

We understand that people can be irresponsible. Also that people can change. We want to give you that loan.

You just have to show us you care.

If you know someone who may benefit from reading this, please show them! If you have any questions or comments, hit me up on Twitter @o_rourke.

Have a wonderful day.