How to Rebuild credit from scratch : Concepts learned from real life scenarios

Fact Buster

Credit Education step1: Why is credit so important?

I know a lot of people who have struggled to find a successful, strategic and reliable way to build credit score and become successful at managing your overall financials. Credit building is as important as any other financial mumble rumble story we come across in our life. As we all know most of the population in the United States rely on debt pooling to improve their life styles, buying properties, treating themselves with luxury and many other things that we certainly can live without. 

What do i mean by debt pooling?

Debt pooling is the process of * one debt over other until we realize very well that we are doomed, our financial situation is big failure. I will discuss this in * later sections of this blog. 

First,I want to begin with own credit journey from low 400’s to over 800. I have to be completely honest when i express this feeling - “Its not easy”.  We all have interests and we strive so much to buy expensive branded clothes, expensive cars, eating out, going out with colleagues and friends every evening after work for few rounds of beer and the list goes on and on and on. You get the idea. Most of us get bi weekly paychecks and these paychecks are usually deposited into our accounts on Fridays just to be money ready for the weekend. After paying our monthly unavoidable expenses such as rents, car payment, phone bills, subway pass, meal pass and most importantly credit card minimum payments etc., etc., etc., what is left back in our accounts? A big dent. Why? Because we end up debt pooling without ever realizing how we can pay back all the debt and become debt free. If you are hoping to win mega millions lottery this weekend to clear all your debts and become over night rich, chances are you are going to have to see endless weekends just like this one. Yes, I do realize that real American citizens like us win mega millions lottery sometimes and become over night rich, but let us just call them the luckiest among the unlucky. I will save this topic for another day. 

Debt pooling phase of my life:

Now lets deep dive into our habits that resulted in debt pooling in the first place and how to overcome that habit and take control of our financials. I will start with my own story. During my early college days I used to be mindful about my expenses.My parents should be credited for putting those good financial management thoughts into my mind, For the first year or two I was working 2 different on campus jobs and a coffee shop right outside our college. My schedule was pretty darn busy and two years flew really quick. I was a pretty decent kid focused mostly on my study, grades, jobs and of-course girls. I did not have time to do anything outside of this. But things changed when i turned 21. I started drinking, smoking, started going to pubs regularly and the foolish me used to think of this as an opportunity to get to girls. The drinking habit slowly started picking up the roots of my brain, I almost had to have a drink every single day to sleep peacefully. This costed me one of my on campus jobs mainly because i could not manage to be out of bed by 7:00 AM to cut vegetables, proof the bread, prepare the line for the on-campus Deli. Obviously my source of income dropped, expenses went  up. One day the foolish me was attracted by a credit card advertisement that was published on sticker board at the campus center. Foolish me took a note of the customer service number, name of the bank and called them right away. I was foolish to believe that banks offer credit cards to students as a way to help them, but this is the worst lie i ever heard in my life. I was issued a credit card with $5000 credit limit, Within few months i ended up maxing out on my credit card and the next thing I did was to browse online for all banks which offers credit cards for students. I ended up applying for two more credit cards for $2000 and $3500 credit limits. It took me just few months to go from a no debt state to a full debt state of close to $15,000. I managed to pay minimum credit payments for few months after this, but at some point I lost a track of it. Luckily i did not go on a credit card spree.I stopped thinking about my credit card debts and started living on my debit card using the cash that is physically available in my bank account. This did not go very well especially towards the end of the month because there was never any money left in my bank account to cover for my expenses.  Good thing with my on-campus job is I was allowed to pack a full meal after my shift at the dining services. This meal was the biggest source of energy for my day. My housing dorm at the university offered free fruits, coffee and sometimes refreshments such as donuts and cookies. These were very helpful. Anyways I do not really want turn this blog into my troubled personal auto biography. I am not that big of a genius to write one. 

Now let us get back to my credit downfall. After a month or two since I stopped making the credit card minimum payments I started getting calls from all credit card companies I owed money. Sometimes the person on the call would politely advise me to make minimum credit payments and told me that my credit will be negatively impacted. Obviously I did not care. I answered first few calls and heard all the advises very patiently but that was only for the first few calls. When I started noticing a pattern in these calls I started ignoring and started blocking almost every single unknown number I got a call from. One day I even blocked my dads new work phone number. 

He was furious. But, no I don't want to talk about how foolish I was. 

Fast forwarding by few years to my days working as a part time clerk at a financial institution in Chicago downtown, I had a terrible time managing my expenses solely out of my debit card. I was paid once a month, most of money was gone within the first week or so. I had to seek help from my parents, my sister and sometimes even my friends. Oh boy those were not good days. I was so embarrassed at calling the same folks every month asking for more money. But the good thing is the money I always made sure to pay back the person the moment I get paid. Sometimes I stayed up until 3 or 4 AM in the morning to see the funds being deposited into my bank account just to transfer all the money to the people who I owe the money in the first place. Often times my bank used to deduct $35, or $70 or even $150 to cover for the over draft expenses or towards the bank fee i owe due to financial irresponsibility. It was very frustrating. At some point I realized that it impossible for me to not have a credit card as a backup for expenses when I run into emergency situation. I also did not want to keep asking people for money all the time. I started applying for credit cards online but only with banks I never had any prior relationship with. I was turned down on more than 20 credit card applications overs 1 single week. I tried to buy a used car worth $4,000 from a car dealer only to be turned down. I did not understand the reasons for rejections at the beginning, but I slowly started getting the big picture after all those letters from credit card companies showed up in my mail box. Every single letter begun with almost the same exact words, 

"We are sorry to inform you that we were unable to approve your credit card application at this time".  

the reasons - (I am listing down the most common reasons I had seen in those letters)

Serious delinquencies 

Bad payment history

Usage of credit

Negative remarks

 

This was a big eye opener for me. I realized the big mistake I did by not paying the minimum credit card payment. But the truth I was not in a position to make these payments on a month to month basis. I was too embarrassed to ask help from my family members. These credit card rejection letters made me devastated. I felt so miserable, embarrassed and hated the foolish teen me for making the stupid decisions. Soon, I realized how foolish I was as a teenager believing that the credit cards will help me financially, I even took this money for granted without ever realizing that I have to pay back every single penny and more. 

My subconscious mind signed up for a mission to build my credit back to good shape. But I was naive and had no idea what FICO score was and how it can be increased. I did not have any idea about accessing my credit report until one day when I spoke to a senior clerk at my work place. He said he was turned down on a mortgage application because of his low credit score. I naively asked him,

 

             "Can you tell me how to access my credit report"? 

He went on explaining me about some free portals that allowed users to sign up using their social security and few additional personal details and access their credit reports. I was really skeptical to sign up because I always thought that Social Numbers can be easily misused, but then again I was so desperate to access and review my credit profile. After a lot of browsing, I found a lot of portals that allow users to access their personal credit profiles for free. 

The 3 B’s- 

There are 3 credit bureaus in the United States Experian, Trans Union, Equifax. These 3 bureaus collect and maintain all your financial information. For Example, If you apply for a credit card, the 3 bureaus will receive a notification from the lender (your bank) and update your credit profile with a hard enquiry. Now each hard enquiry may cost you about 1 to 2 points of your FICO score. I will discuss the impact of credit enquiries in a later section. All the lenders in US are obliged to submit their customers financial information and personal information to these 3 credit bureaus. Most important fact is that every lender relies in these bureaus to get your credit scores and credit reports. I naively singed up and created online accounts with all 3 bureaus, Experian, Trans Union and Equifax. I only signed up for free trial that required me to pay just one dollar. I set up reminders on my phone to cancel all the 3 memberships within 30 days from the day of creating these accounts. I have reviewed my credit reports from all 3 bureaus in details. I was amazed to see the level of information that is reported and the fact is that my credit report had nothing positive. My credit score was on Experian was "430". Soon i started educating myself more about different credit scores from different credit bureaus and the importance of credit score for our financial well being. This was the beginning of my credit building journey. 

The meaty part of the story: How to rebuild credit from scratch

Credit rebuilding is not an easy task and requires a lot of personal and financial commitment. Personal commitment is key to maintain a food financial commitment. Personal commitment allows you to develop awareness, self control which will further help in helping you to reject your urges and not give up on your ultimate goal of credit and financial rebuilding. I can talk all about what to do, what not to do all my day! But, that is not my intention with this article. Anyways let us jump right into how I built my credit from scratch. 

I have started applying for secured credit cards from different banks. I have started with some of the most famous banks and received ’n’ number of rejections. I applied for secured credit cards from 20 to 30 different banks, but not a single bank was ready to offer a credit card with security placed against the money I am lending from the banks.  I started taking a note of my credit score every single day. Every time I apply for a credit card I noticed that my score started going further down the drain in the form of credit checks or credit enquiries. Eat h credit enquiry costed me 2 to 3 points from my credit score. I was naive to chase banks for credit card approvals. A week after I signed up on the never ending pursuit of getting a credit card approval, I gave up. I started educating myself more and more on how credit works. Rather than focusing on getting new credit cards, I decided to focus my attention on something more important. 

It is important for us to understand why banks would reject a credit card application. Banks are not some typical non profit organizations or some charity services. Their goal is to make profits. 

Now, think about it. How would a bank benefit from offering a credit card to a customer whose financial profile is filled with too many negative remarks such as collection accounts, missed payments, bankruptcy etc. It does not make sense to issue a credit card to bad and risky customers.

It is important for us to understand the basics of how credit score models work-

• Age of credit – this is your average age of your credit. Every-time you open a new loan account (credit card or any other loan) your average age of credit will go down. Lenders like customers who has a high average age of credit I.e customers who are not dependent on seeking debt regularly. 
• Payment History – this is a biggie. Every minimum payment that you make towards your credit card counts as a positive. However, if you miss making these minimum credit bank payments it counts as a negative. Your payment history can be accredited to 30 to 40% of your overall credit score.
• Number of accounts & Type of accounts – at any point you should not have too many credit accounts of the same kind. For example if some one has only 10 different credit cards from different banks, your future credit card lenders will consider this as a risk. But you may ask, why do I appear risky if I have many credit cards? Think about it logically, Credit card money is easy money and available at your finger tips all the time.
• Amount of credit used: credit models like borrowers to keep their credit usage below 30%. Example – if you have a credit card with a $1000 limit, you should make sure to keep your balance below $300. More credit used indicated a more risky customer. In simple words, If you use too much of credit, that means you are relying too much on the credit card money for your day to day activities and banks do see this as a bad thing.
• Delinquencies and other negative remarks – this should be pretty self explanatory. People with bad payment histories, collection accounts, delinquent accounts will be considered risky to lenders. Again I recommend you to think logically about this point as well – if you have lended money to a person ‘X’ and the person never payed back the money, but a month after he / she would come back to you for more money. Would you not see it as riskier to lend anymore money to ‘X’

Credit Rebuilding steps:

I began my journey with 430 FICO score and received way to many rejections fro many banks. But I never gave up my idea of rebuilding my credit. I started looking for pre approval credit card offers from various banks. Again I had no match from any bank. I was rejected for countless number of times, but I never gave up. Remember that credit card pre approval checks do not have any impact on your credit score. Always be sure to read the terms and conditions. I will always be thankful to Capital One as this was the only bank that allowed me to open a Secured Credit card account. 

Secured credit card accounts require deposits upfront from the customers and banks will typically issue a credit card with the amount that matches with the deposit . You’re losing on two fronts here. One, you can only borrow the money you have deposited. Two, you still have to pay interest and other financial fee of the banks may require. I know it does not sound like a great product. But, trust me there are not too many options out there to help rebuilding our credit. Banks such as Bank of America, DCU, Wells Fargo, CITI Bank, Discover and many of the banks have rejected my secured credit card applications countless number of times. It is important not to assume that banks will be open with free arms to issue a secured credit card to your even though you are willing to put in a deposit upfront. After chasing so many banks, I finally found help from Capital One. I will always be thankful to Capital One for their service.  I opened my first secured credit card application with capital one and deposited the maximum allowable amount of $2300. Capital One did take a month or two to process my request and mail my Credit Card. I was so happy seeing the first credit card with my name printed on it in a very long time. My subconscious mind knew at the time that I would not miss-use the opportunity of rebuilding my credit at any cost. Just like I promised myself, I have used the credit card with extensive care and commitment. I was doing a lot of transactions every month and made sure that to pay back every single penny I used before the monthly statement end date. This habit has proved very beneficial for my current building project. I started noticing my credit was going up few points every month. This is still very important for someone who only has negative remarks on the credit profile. 

A year after I once again applied for secured credit card from DCU and got rejected again. Obviously all the banks I have prior relationship with always rejected my credit card applications. This rejection was as important for me as an acceptance because It made me take it as a bigger challenge. I started asking myself, Why are these banks rejecting me to offer even a secured credit card with deposit placed against it? I had the answer right in front of my eyes - Too many negative remarks. I started on the most important step of my credit building process. I called every bank I had prior relationship and gathered the total amount of money including the interests I owed them. I made a good plan to pay bank every single penny. Obviously I was no where close to being able to payback all of my debt in one shot. I worked with the banks and signed up regular monthly payments. It took 3 years to completely become debt free. At the same time I continued using my only secured credit card with the same commitment I had on day 1. Finally as the debt started going down, banks began to mark the open accounts as closed and paid off on my credit reports. This was the most relieving moment. I was so happy to finally become debt free and my credit score started going up. But remember that once entered, most of the negative remarks remain on your credit reports for 7 years. This means even though you pay off every single penny, your past bad credit habits will still have good amount of impact on your overall credit health. 

• Finally, I let another year pass through before I considered applying for a credit card again. I was approved for a Bank of America cash awards secured credit card with a $300 deposit. I did not need another second to make my decision. I went ahead and called customer service sent in my deposit of $300 and received my second secured credit card in mail within a week or two. I continued with my good credit building habits such as keeping my balance of slow every month, making regular in time payments, keep checking my credit score almost every week. I did start noticing a positive trend in my credit scores, slowly the numbers are now over 500 and this made me feel really happy. I know this is not ideal and my goal is still a far reach but I have the confidence and belief to continue working hard towards my goal. I continued working with my two secured cars for about 2 to 3 years before I considered checking for three credit approval offers. This time my credit score was over 600 but it still shows a lot of negative remarks such as bad payment history, delinquencies and collection account. I was really skeptical to apply for real Credit Card i.e an Unsecured credit card. I still wanted to give it a try and applied for an unsecured credit card with DCU. To my surprise Dcu approved my credit card application for a $5000 credit limit. This was the result phase of my credit building exercise. Fast forwarding to few years, now my credit is in amazing shape with my score over 800 and 100% payment history. I always follow few basic principles in handling my credit cards and you should do the same – 
• Always make your payments on-time.
• Keep your balances to less than 30% but try paying back as much as possible every month. This helps you to save interest payments as well.
• Do not open too many accounts. In my opinion no one should have more than 4 credit cards.
• Payback every penny you owe to the banks even on your delinquent accounts, this is the most important thing. 
• If you have a financial trouble and cannot make a minimum, be sure to call the bank to inform your situation. This is crucial. Sometimes the banks would allow customers to avoid minimum payments for 60 to 90 days for good will. 

Happy credit building.