150 points in two years: Advice

Question

Over the past couple years, my CS has gone from in the mid-500s to between 704 and 731, depending what’s consulted. Within the next 10 months, my two lates will be more than four years old, and my lone other derog will drop off. But what I’m posting to tell you is your CS isn’t all that important, or at the very least shouldn’t be your lone or main focus; it’s what’s known as a “lagging indicator.” Can’t buy that car or house now? Can’t get that cc with the super rewards? Tough tooties. You should do some hard digging and pruning on other things first. Those things are budgeting and your debt-to-income ratio. First a couple words about your income. I’m quite fortunate that my income has gone up about 25% in the past two years. And, no doubt, that fact certainly helped my ability to improve my credit score. More income means you have more options, but it’s hardly a guarantee of success. Wealthy people can be the most overleveraged. I run a financial literacy program for immigrants and some – not all – of them can budget and buy a house when make $9.50 an hour. So, the things you should focus on. You should know your debt-to-income ratio. This is the percentage of your gross income (income before taxes) that goes into debt payments, be they mortgage, credit cards, school loans, etc. I won’t go further into the calculation, as this is readily available. But if your DTI is over 40%, you are going to have a hard time digging out of that hole. If this is the case, this should trigger the hardest of decision. Rent out your house and live with your mom even though your 50 if you have to. Sell your car and take the bus to work. Moreover, even more than increasing your credit score, getting your DTI as low as possible will greatly improve your life. You’ll have tons more money left over. You can save up and buy things rather than taking out a CL and paying interest. My current DTI is a pretty high 34%. But I have a car loan and a couple of student loans with IRs ranging from .6% to 2.8%. Even though I focus on my DTI and would love to get them paid off tomorrow, I know I only have 2.5 years left on the car loan and five on the student loans. So, in good time, I’ll be freer – at a DTI of a very healthy 18% or so. After that, I seriously plan on never taking out another major loan except perhaps refinancing into a 15-year mortgage. The next thing you need to focus on is your budget. Start by keeping a monthly budget, and updating what you have spent every week. Excel has a pretty good generic spreadsheet, “Family Budget” that you can tweak to your needs with limited computer skills. The first step in meditation is to observe yourself breathing. Likewise, the first step in budgeting should simply be to watch how much money you take in and how much money you spend in each budget category. Don’t make any major changes the first month or so. Just watch. You’ll soon have some things jump out of you on your spreadsheet. For example, I was spending an inordinate amount of money on eating out, my morning coffee and bagel, and books and music. In fact, it was all going out faster than it was coming in. No wonder I was having problems making payments. Once you find out the trouble areas, do something about them. A lot of my eating out was simply about laziness, not enjoyment. So, I began doing much more grocery shopping. I also started focusing on reading the books I have before buying more. Voila, I began to have some money left over. I’d also recommend in as much as you can, using your ATM card rather than a CC. Obviously, for others, this may involve some harder decisions: a cheaper daycare for the kid, a different living arrangement, etc. I will also note, make sure you are putting away for your retirement. At the very least, if your employer matches your contribution, you should be getting the maximum match. When I started to focus on my DTI and personal budget after a few months, a funny thing started to happen. My credit score began going up. Slowly. There were months it would flatline, and then have a modest jump and then flatline again. I tried GWLs to all the creditors I had lates for, and they either didn’t respond at all or responded with a form letter. Yet, after I had months of steady payments, I disputed the lates and most of my creditors just erased them. The other funny thing is, even though my CS will probably go up another 30-40 points in the next year, I don’t really care.The important things are your DTI, budgeting, and investing in appreciating assets (i.e. home, retirement).

Answer 1

Excellent post! We just made some *hard* decisions regarding financial reality. It required sacrifice but also some benefits! I want to learn all I can. I was like an English major so this is not my nature but I'm good at running stuff down. I want to learn investment etc. too and the best thing about this Forum is learning, I've learned so much and feel less panicky. Can you recommend anything else besides Excel? I am not a spreadsheet person. Mint.com was confounding also. I do want to do a better job of budgeting. Financial Literacy? That sounds interesting. As I learn more, I'd love to help other people because I found it all so overwhelming and intimidating.