More Lessons Learned: How to Raise Your FICOScore.

When you're in debt, you need to look at all your options. One thing we were looking at, was the possibility of selling the house and downsizing.

We have enough equity in the house to pay down 60% of my consumer debt, and still have enough left over for a 10% down payment on a new house, plus closing/moving costs.
Trouble is, I am self employed, and the past few months for me have been rough and my FICOscore is now down to 576, so I needed to find out if we could get a mortgage in spite of the positives.

I called my mortgage broker today to ask him what he thought, and he told me that my chances of getting a new mortgage, even with my current lender With whom I have been since 2001, and to whom I have never missed or been late with a payment, were just about nil. My only chance would be with a subprime lender, (and there are fewer of those around than there once were!), and the mortgage , if i got it with that score which was dicey, would be prohibitively expensive.

So what to do? First understand what affects your FICOscore, and then take immediate action to start setting things right: Timetable 1-2 years to get the score up to 650-680.

How did I get to this miserable state in the first place? There are three main reasons:

1) I have gone over the limit on two of my cards.
2) I have made too many applications for new credit. (this happened last December and January when I was shopping around for 0% -2.9% balance transfer deals) every time someone makes a hard enquiry to the credit bureau, it costs you 15 points. That alone has done me in.
3) Most of my cards are at or near the limit. Ideally they should be at 35% of the limit.

So the advice I was given:

Priority 1: On cards where I am over the limit,get down below the limit as soon as possible.

Priority 2: Pay at least the minimum payment on all accounts and pay them on time insofar as that is possible.

Priority 3: Spread the payments around your accounts with a view to bringing down the debt ratios to 50% and then 35% of credit limits. If you can top off any minimums with extra,all the better
Last week, It was suggested to me that I reduce my income to debt ratio by asking for credit limit reductions on some cards, which I did. However, by so doing, my debt to credit limit ratio became far worse than 35%, so I called them back to have my decision reversed without their consulting the credit bureaus. One creditor complied, and the other did not.

Priority 4: Do not make any applications for new credit for at least 6 months, and then only, if I have been paying all acounts on time for that period, and then only with serious lenders who can offer really low balance transfer deals, preferably an increase on a line of credit, and then transfer your high interest consumer debt over and attack them aggressively.

This goes against the popular theory of the debt snowball advocated by Dave Ramsey and his followers, but I guess it all depends on what your goals are. In our case we were thinking about moving within 2-5 years anyway, so our kids can be closer to a university, so being in a position to get a mortgage is a priority for us. While it would have been nice to downsize and pay out debt and have our freedom back sooner, it is not an option for us at this time. If you are thinking of a downsize to get out of debt , make sure you talk to a trustworthy mortgage broker first, and find out what's what. Get your credit report and know what's there, most notably the FICO score, and speak to your broker or banker, armed with the facts. The last thing you want is to sell your house, then get turned down for a mortgage and end up apartment hunting instead.
When you ask for your credit report it does NOT affect your FICO score.

Today's Life Lesson: Unused Credit Goes Against Your Debt-to-Income Ratio

So far, no calls from creditors today!

I called a bank today to explore the possibility of consolidating some high interest credit cards into one lower interest payment. I did not apply since I knew I would likely be turned down. I explained my situation to the person I spoke to and he was very helpful. We took a look at the situation, and he determined that my debt-to-income ratio was too high and that would make approval a virtual impossibility. He went on to explain that though my actual debt alone would not preclude me from getting the consolidation, the problem was all the unused credit I had on some of my accounts!Your credit limits are considered a part of your debt! For example, I had an $8000.00 limit at one of the major furniture stores, and my actual used credit was only about $2000.00, so that $6000.00 difference was one of the things standing in the way! I had that reduced. I also have a Sears card with a $6900.00 limit of which I have used less than half, so I was able to reduce my limit there by almost half. I also closed an account outside the province which had a $5000.00 limit, but which had a zero balance and had not been used in two years, nor would ever be used again.
Even with these accounts reduced or closed, I would still have a problem since my debt-to-income ratio was still too high, so I will have to attack a few cards according to the debt snowball plan. It was also reccomended that I close the accounts once they are paid too, since the bank would be reluctant to provide the unsecured loan on the other balances against the risk that the cards could be run back up again.
The other advice he gave me was to make sure that all my accounts were paid on time for the next 3-4 months, and combined with the reduced debt-to-income ratio, my FICO score would be on its way up again.
I have decided that once I am debt free, I will never, ever , ever go into debt again, so the only reason I care about my FICO score is for the next time I apply for a mortgage, I will qualify for the best rate possible. However, consolidating my high interest debt into a low interest LOC will make the actual payoff that much easier.

Today was not a good day, but at least I learned a few things

Like yesterday, the Ides of March crept up on me again with yet another phone call from a creditor, responded to with hastily made payment arrrangements that I hope those who pay me will allow me to meet (I'm behind on several payments because commissions have been late coming in) .

It is so frustrating knowing that in 3 weeks time, I will be receiving enough money to propel me on the first leg of the journey to eventual financial freedom, but that I have to get through the next three weeks, during which my "best friends" will be accounts receivable personnel at my cell phone company, two credit card companies, and the phone company. The main thing is to survive those 3 weeks without having phone service cut off, or a credit card charged off.

I would not wish this kind of living hell on my worst enemy.

Today, I contacted the local credit union to discuss what possibilities there were to roll over some high interest debt over to a low interest loan so as to reduce monthly payments with a view to making debt repayment, and day to day life easier, but to no avail. I would have to join the credit union, and bank with them for a year to qualify for an unsecured loan, especially given my FICO score. (IMHO, Isaac is NOT Fair!) . However the girl on the phone was helpful in terms of educating me on how to play the game , and thinks it possible that I can raise my FICO score to acceptable levels within 6 months, buy sticking to a debt repayment plan, and MAKING ABSOLUTELY SURE that for the next 6 months I Make ALL credit card payments by the due date and NEVER exceed the credit limits of any card. Apparently that can ding your score like nothing else, even if you go over limit by a dollar!
My intention is to never borrow new money again, from this day forward, but within 6 months, I would like to get a 0% balance transfer card so I can shift as much high interest debt as possible to them and pay it down aggressively over a year. The cards whose balances I would transfer over would of course, be cut up and the accounts never used again. I will not close accounts until my FICO score is back at an acceptable level.