How Should I Improve My Credit?

Finally after five years from graduating college, I have finally begun my career recently which I plan on staying with for the next 20+ years until I retire. It’s a civil service career, so it’s a “safe bet”. Over the past few years since college, I worked a lot of horrible and bad paying jobs, which in turn impacted ability to pay bills, and also my credit.

Currently my credit score is 579 (went up 15pts in last 3 months, woohoo!) . I have $29,000 in college loans that I have been deferring over the years (and won’t have to make a payment on until October.) When these loans get off deferment, my minimum payment will be around $375/month.

I also have a $7,000 loan from Sallie Mae which I defaulted on, and a $2,500 Perkins loan thru my college which I also defaulted on. Thru research, I’m aware that I can pay a portion of these loans (about 75%) as a lump sum payment to have it gone forever. Talking around $7,000 to pay off almost $10,000 in defaulted loans. Originally these loans were for $3,000 and $1,500 (damn I’m so stupid for not just making the minimum payment on these!!) It’s my goal to have this amount saved in a year to pay these off, or if I’m able to take out a loan to pay these (if possible?) so these can get off my credit report.

Other than this, there is nothing else on my credit except for two things that went into collection that totaled $1,000 that I just paid off this weekend.

My new career will pay me about $60-65k on average over the next two years, and about $75-80k on average for the three years after that, and about $125k after year 5 when I reach “top pay”. My deductions (taxes, pension, 401k, union dues, etc.) are about 40%; therefore my take-home is about 60%.

My current monthly bills are rent, cell phone, car insurance, cable, gym, gas, and food which I would estimate to be around $1,800-$2,000/month.

It’s my goal to within 2-3 years to buy a condo, and I want to improve my credit as much as I can with a decent down payment. I plan on going thru the FHA for this condo/co-op.

So my questions are mainly this. What can I do to improve my credit these next couple years? Would it be possible to take out a loan to cover the defaulted loans so they can get off my report fast? Any suggestions on anything to pertain to my situation? Any help is greatly appreciated, thanks!

The bad news is that your defaulted loans and collections issues will stay on your credit report for 7 years, I believe. However, they’ll have less impact every year, and that clock won’t reset as long as you keep making payment on your defaulted loans. Pay them off as quickly as you can to get that debt reduced, but most importantly, don’t miss another payment or they’ll default anew. If you can get a better interest rate on a new loan, by all means, refinance so that your payments are lower…but there shouldn’t be any difference to your credit score as long as you pay.

You didn’t mention any credit cards - do you use one? If not, get one with no annual fee and pay it off every single month. The single biggest impact on your credit is usually the amount of credit available to you, since prospective lenders like to see that someone else was willing to loan you money and all went well. I used to pay everything with a debit card, then realized that that did nothing for my credit score. I began to use a credit card for every day purchases and to pay it off in full every single Saturday. That way, the credit card never carries a balance and you’re never charged interest, so you don’t pay any more than you would otherwise.

Also, ask for an increase in your credit line whenever you can get one, even if you’ll never use all that credit. It’s better to have a $5000 credit card limit and never reach it than to have a $2500 limit, since it indicates that the credit card provider has more faith in you.

Finally, CreditKarma has been recommended on the board before and I definitely echo the endorsement (my apologies if that is inappropriate, mods). It tracks your credit score and is entirely free. Even better in your situation, it will display a credit “report card” that tells you how you’re doing in various categories and how important each category is. You can also simulate how your credit score would change if you took various actions, such as paying off debt or consolidating what you owe. I’ve found the simulator to be surprisingly accurate.

One more thought after all - 3 years is a good amount of time to build a strong financial picture for a mortgage. Lenders have to comply with heightened regulations and impose stricter requirements nowadays, but they’re still human…they’ll understand the change in your employment situation and appreciate good faith efforts to borrow responsibly. An above-average down payment also goes far in making up for below-average credit. Maybe you can talk to a mortgage professional to get an idea of the proportion of paying off debt quickly versus saving for your down payment that would be best in your case?

Your credit history doesn’t sound too bad. In addition, if you’re currently renting an apartment and paying the rent on time, that will help you a lot. I agree with the above post, that it would be wise for you to get a credit card and pay it off every month, as that will show potential creditors you are making timely payments.