Photo (cc) by Vectorportal
Have less-than-perfect credit? You’re not alone. According to this 2010 Wall Street Journal article, nearly 1 in 4 Americans had a FICO credit score of less than 600.
With a better economy, however, comes better scores: According to Equifax, in the third quarter of 2012, there was a 2.1 percent decline in sub-prime (credit score less than 620) borrowers compared to 2011.
Still, however you slice the numbers, there are millions of Americans with bad credit – a situation that can be inconvenient, costly, and last for years.
That’s the bad news. The good news: There are things you can do to ease the pain, and things you can do to make it stop sooner.
Before we get started, check out this video from Money Talks founder Stacy Johnson; it’s about getting help with debt…
1. Getting a job
Applying for jobs is stressful enough; it doesn’t help if you’re afraid a potential employer may require a credit check. Many do, but not as many as in prior years. The Society for Human Resource Management conducted a 2012 survey of 544 HR professionals. Of those surveyed, 53 percent said they don’t perform credit checks. A similar survey in 2010 found only 40 percent didn’t.
And bad credit doesn’t equal defeat. Of the 47 percent of respondents running credit checks, 80 percent told the SHRM they’d hired a candidate with negative remarks on their credit report.
So, if you’re faced with a pre-employment credit check, here’s how to deal:
- Don’t panic. Let them run it – you’re not the only one with bad credit.
- Don’t back away. Everyone has something in their past they’d like to erase.
- Be honest. If it comes up, admit to past mistakes, say you’re working on it, and explain how the experience has made you a better person.
2. Renting an apartment
Many landlords will run a credit check before approving you as a tenant, and showing up sub-prime can present a challenge. Here’s what to expect:
- It’s unlikely, but the landlord may deny your application.
- You may have to pay a higher security deposit.
- You may be asked for a co-signer.
Co-signing isn’t something I’d recommend for renting, borrowing, or in any other situation. Why risk a personal relationship when there are landlords willing to rent to you on your own?
If you have to pay a higher security deposit, so be it. I called a landlord in my hometown (New Orleans) and she said she normally charges half a month’s rent for a security deposit, and a full month’s rent with bad credit.
You may not get around the higher fees, but you can make things easier…
- Make sure you’ll get a refund. Check the lease. If the full amount you’re paying isn’t listed as refundable, don’t sign.
- Ask the landlord to break the deposit into payments. Landlords are human too; they understand financial struggles and may be willing to divide the security deposit over two or three months.
- Ask if you can get the excess deposit back when your credit improves. The simple fact that you’re expecting improvement in your life will reflect well on you as a tenant.
3. Finding wireless service
Wireless providers are in the credit game too. You won’t get a wireless contract without a credit check and if your numbers aren’t great, you’ll probably be asked to pay a deposit. A quick survey of some personal friends and their credit scores showed deposits are all over the board. For example, one paid a $100 deposit, another paid $250, and one friend with a low score was asked for $500.
But you have options. If you don’t like the idea of being penalized with a high deposit, go with a prepaid plan. They’ve improved in recent years: You’ll pay full price for the phone, but the monthly service is reasonable. For example…
- T-mobile Monthly 4G No Annual Contract – Ranges from $30 a month for 1,500 talk and text minutes plus 30MB of Web access to $70 a month for unlimited talk, text, and 4G data.
- Sprint No Contract Plans – Ranges from $50 for a basic unlimited talk and text plan to $70 for unlimited talk, text, and data.
- Straight Talk Wireless – Ranges from $30 a month for 1,000 minutes, 1,000 texts, and 30 MB of data to $45 a month for unlimited talk, text, and data.
4. Borrowing money
One of the worst impacts of bad credit is the added cost to borrow. Lenders love sub-prime borrowers because it allows them to charge ridiculously high rates. The best way to avoid those high rates is to resist borrowing. But that doesn’t mean you should ignore credit tools that might improve your score.
If your bad luck or bad behavior is truly in the past, start building good credit by getting a credit card, using it, then paying the bill in full every month. If you can’t find a card that will take you, check out secured credit cards. As the name implies, this is a card secured by a bank deposit equal to the credit limit. Since the card company has nothing to lose, even those who filed bankruptcy last week can get one. But make sure it reports your on-time payments to credit reporting agencies – not all do.
Another option is credit unions. While getting a credit card or other type of loan may not be a walk in the park, credit unions tend to have looser standards and better terms than banks. See our story 7 Reasons You Should Join a Credit Union This Week.
5. Repairing your credit
Now that we’ve talked about living with bad credit, let’s talk about living without it.
Most bad marks will remain on your credit history for seven years – a Chapter 7 bankruptcy, for 10. But it’s not as bad as it sounds, because the older the bad stuff gets, the less it matters. Plus, there are things you can do to speed things up.
For example, one of my friends dreamed about buying a house. To get the ball rolling, she ordered her credit reports and scores, only to find she fell in the sub-prime range. For the next year, she worked on repairing her credit: She disputed five items, repaid two loans ranging from $500 to $2,500, negotiated with three different creditors to have collection accounts removed, and diligently paid her bills on time and in full.
She said she spent a ton of time, but it was well spent: After one year, she was a prime borrower – something that saved many thousands in interest when she got her mortgage loan.
The bottom line: You’ll have to work hard to raise your credit score, but if she can do it, so can you. We’re here to help; check out the links below.
Have you struggled with a low credit score? Share your inspirational experiences below or on our Facebook page!