Trapping out the credit score
Credit scores can be a lot of misery and mystery. They seem to fluctuate without doing anything. Doing things you would believe to help can drop them significantly.
You can actually survive without a solid credit score, but it’s going to be tough. Here is what you need to know to embark on your rebuilding journey.
1. Scores from Equifax and TransUnion aren’t your actual credit score
Even if you pay every month to monitor your credit report (look for a free service instead), these companies are only providing you with an estimate of your score.
As stupid as this sounds, credit bureaus only give you an estimate of your actual credit score. That’s because their are multiple versions of the each companies (FICO) score.
For example, a car loan might be calculated using Equifax 2.0 while your bank is still relying on original Equifax score.
Also some providers of credit reports have been known to pull incomplete reports, resulting in lower or higher scores.
At the end of the day you don’t 100% know your true score.
2. Every company relies on different providers
Some banks use TransUnion, while others use Equifax. This can make things complicated as it’s very common for a person to have one report show up clean, while the other has many derogatory remarks (late payments, collections items, etc).
You may find that old accounts remain outstanding on one of the reports. You need all your reports to be able to make any corrections to your report.
3. Credit isn’t needed to survive
It’s not that you can’t live without credit, it’s how well can you live without strong credit?
Someone has probably told you that you don’t need a credit card and that credit isn’t good.
This is totally wrong. You do need one credit card. At some point you will need to purchase or borrow something (car rental). Most places you run into will require a credit card for security.
There are places that will work with you if you don’t have a credit card if you’re in a major market.
The problem is what you can actually get from them. Surviving with damaged or no credit isn’t anywhere near as hard so long as you’ve got decent cash or a high paying job (without either good luck).
Cars
You’ll likely find a small car rental company that will rent to you without a credit card. This likely will require a big cash deposit. If you flash, luxury, or something sporty, you’ll likely find yourself out of luck. These companies that deal with cash-only transactions limit their liability by renting out older cars. These cars are even more at risk of breaking down while you drive them. Then you’d have to pay for a tow truck.
The only way you’d get a cool car with and no credit card, is to pay an exorbitant amount of money upfront. Their may be apps where you live where you can get a private rental from an owner however.
Getting a car is even more painful with bad credit. Your best bet here is to have a solid amount of cash and a decent paying job that you’ve held for a while. If you’re a contractor, expect to show that you the contract you’re working on isn’t the only of it’s kind and pay that you have received. If you constantly have high paying jobs you’ll likely be fine. Private dealerships are much more likely to work with a buyer with bad credit, who has cash and solid income. This income has to be traceable.
Just don’t expect Honda, Toyota, Ford or BMW to deal with you easily (or at all). Some automakers such as Dodge and Mitsubishi deal with sub-prime lenders often and have programs to help you. If you aren’t picky, research these cars. If they are safe and reliable, go ahead and buy the car.
A much better option is to buy a used car from a private owner. With careful research and shopping around, you can drive a luxury car for a fraction of the price. Why do I say to buy a luxury car? You’ll be more satisfied with it and most importantly, they often have more safety features. There are personal finance gurus that brag about driving a 1996 Corolla and spending no money. You can only brag so long as you’re alive and getting hit by an Escalade in that won’t be pretty. Don’t fall for the “you’d die in any accident” line. Cars are getting safer each year. Value your life then reliability second.
Cheat Code: Take the used car you’re about to purchase from a private owner to a dealer and get a pre-purchase inspection. This rules out potential issues.
Also, avoid buying brand new cars anyways. You’ll just lose a ton of money.
Yes you can just buy any car with cash but this is a bad idea. Depreciation again sucks but this isn’t your primary concern (almost all cars lose value).
The problem is that you’ll miss out on a huge opportunity to build your credit. If you have damaged credit, how do you think lenders will look at you after paying off your car loans on time?
Buy a much cheaper car than you can afford to pay for in cash and finance it instead. If you have $15'000 in cash, finance a car that costs you $15'000 (interest included). Your credit will sky rocket. Just keep the money in a separate account, with a separate bank that isn’t connected to a debit card.
Just make sure the car loan is reported to the credit bureaus. There are some private dealerships that will offer you their own financing (“buy here, pay here”). Research very carefully and avoid these types of places if possible. Many do not report financing on your credit report.
Rentals
Apartment rentals are where things get tricky. Every landlord is different. Additionally, units owned by large companies usually have rules that they must run your credit before allowing you to rent their unit. This can even apply to a privately owned condo in a building owned by a corporation!
So how does one get a home with bad credit? You guessed it, by flashing cash. Rules exist everywhere, but the average person has a hard time turning down $5000–30'000 cash. There are options such as paying a large deposit upfront but this money does nothing for you. You could invest this money or use it to repair your bruised credit score as much as possible. Even worse you’re still stuck paying rent each month. Best option? Search for a landlord that will work with your bad credit or not even do credit check in the first place.
Some landlords do their own credit checks but most will ask applicants to just bring their own. This is because it costs them money to pull each report. Some people use fraudulent/doctored credit reports. Don’t do this, if you get caught you’d be in a lot of trouble.
Your second best option is to pay a portion of the lease upfront. This means paying either the first three or more months rent upfront to the landlord instead of paying a deposit. In competitive cities, expect to pay the duration of the lease (12 months) in full. If you are trying to get a hot rental, you might even have to pay extra on top to close the deal. Try to avoid this.
If you still have cash flow and enough money this isn’t the best or worst option. While that money can be invested, you do not have to worry about rent for a whole year. This can allow you to focus on other aspects of your finances like debt or starting a business. Also not having the stress of rent each month feels great. Just make sure you save as much money as possible and invest (separate savings and investments). Once those twelve months are up, you’ll be back to paying each month.
Never pay a big deposit on a rental unit. Ever.
Yes the option to have someone else take on the liability (co-signer) usually exists, but lenders of any form dislike this opposed to someone who is trustworthy on their own. Of course, if you had a co-signer available you wouldn’t be reading this article!
Buying a home (for investment purposes)
Buying a home for an investment is a great idea. Getting a mortgage with a bad credit score will be tough. Most people do not have the cash to pay for a property without taking a loan.
One option is to buy properties before they are built. In short, you can buy a home before it is built (the builder needs money to fund the project) using cash and sell it before you have to mortgage it. This can be incredibly painless or complicated. It’s best to do your research. As with all real estate investments, you can lose some (or all) of your money. Become a real estate expert on your own and learn about the builder’s past projects as well.
No risk, no reward. This is a great way to invest in real estate without needing a strong credit score.
4. Rebuild your credit right away, the smart (free) way
There are sneaky ways of getting derogatory remarks (bad debts, missed payments) removed from your score. In the USA you can do something called pay for delete. Simply put, write a hand written letter to the company you owe stating that you’ll pay the debt in exchange for a deletion of the account from your credit report. If they agree to this (again make sure it’s in writing and not email), pay the debt and have it removed from your reports.
In other countries, pay for delete is illegal (one of the reasons why I people lament “the system). If you have a ton of cash saved up you can trick the system a bit.
For example, if you have a collections item for $500 with a cell carrier, this account is usually with a collections agency and not the actual carrier themselves. This allows you to get new services with them (insane yes I know). One trick you can do is to order a bunch of services from the provider and then use this as leverage to get them to either remove the collections item or to re-open the old account. This takes lots of patience and effort (as well as money) but it does work and is legal.
Not all debts are the same. Check with a non-for-profit credit counselling organization. Check reviews with of them and don’t be afraid to ask their past clients. They may charge you a nominal fee ($100 dollars). Do not go to a private credit counsellor. Non-for-profit organizations have the ability to work with creditors and get your collections item removed in a shorter timeframe (five years or less). After paying off your debts through one of these organizations, collection items will be downgraded from an R9 to a R7. This is incredibly helpful as some lenders will not work with people who have R9’s. Some jobs may not even hire you with an R9.
