Bad credit is a way of life -- It shouldn't be!

Posted: Nov 25, 2006 12:00 AM

As a former member of the BC club (bad credit) I speak with too much experience. During the younger years of my being, with children and debts growing hand in hand, I was up to my eyebrows in financial problems. It culminated when I sold our house to buy another one that had more room for the children and my nerves, and we couldn't get a loan until three weeks after the old house had sold and closed (I wasn't in the business at that time). Have you ever spent three weeks in a hotel with three teenagers? Something had to give, and it was my resistance to cleaning up the mess that had started with the Savings and Loan debacle in the mid 80’s, which shut down my development business. I had lived with the thought that things will turn and all would be better. It didn't happen until I took massive action to make it happen.

When I tell you that your credit problems can disappear, I am speaking with experience and not reading you a line from a book. When I say that you can start answering the phone at night, I am speaking with the knowledge that all the threats in the world didn't turn me around – three normal teenagers and a fierce determination to end the nightmare did.

When I speak about sacrifices, I am not talking about giving up eating; I am talking about giving up the old ways and going in a different direction.

If you own a house the solution is much easier. If you don't, then start thinking about getting one and making your life easier. Lease a house with an option to buy it. After one year of lease payments made on time, you can get a loan using the equity that was created, if any, during the time you were leasing as your down payment. This will make the purchase easier. You should be able to create some equity just based on the fact that the seller doesn't have to pay a real estate commission and can give you that savings.

Why is it important to own a house? In this country, housing generally goes higher year after year based on higher building costs, limited land availability and inflation. Some areas obviously are better than others, but in the long run they are all good. The increase in the equity in your house means your balance sheet will become more balanced. Your asset side, which includes the equity in your house, will grow to meet the liability side and help you get even quicker. You can use the equity in your house at any time to start getting out of debt, and although many will write and say how foolish that is, they obviously haven't lived with credit problems.

A friend of mine who had been single for many years after a divorce had run up almost $100,000 in credit card debt and wondered what he should do. He asked for my advice and I told him that he probably couldn't pay the debt off with his income during his lifetime. I believed at that time, about 15 years ago, the only choice was bankruptcy or buying a house and letting the equity build-up (appreciation) work for him. He remarried and bought a house and seems to be without the black cloud that accompanied him at all times.

Another client of mine didn't do as well. He called me one day and said he couldn't go on with his credit card nightmare ($120,000) and so we talked about a refinance, pulling cash out of the house and paying off the debt. He had the equity to do this and his credit hadn't deteriorated at that moment. He knew it was going to, because he couldn't make the payments any longer. He resisted my advice for about three weeks after we had met and then, after exhausting every other avenue, went forward. He was delighted as he told me that he had already discounted some of the debts pending their payoff from the refinance.

Three years later he called to refinance into a better loan, as his prepayment penalty was up. I ran his credit and was horrified: He never paid off one of the debts and they were all either charged off or in collection! I called him and told him that I couldn't help him.

For a long time after that incident, I felt responsible for his actions. I wasn't, but I still felt that maybe I had done something wrong. I didn't, and finally realized that even if I had forced him to pay the debts off through escrow, he most likely would have run them up again.

Yes, I realize that some people are like that, but that will never stop me from helping the majority who aren't. I cannot live my life with the thought that people aren't inherently responsible.

The battle to keep your credit in tip-top shape isn't easy, especially for young people.

The billions or maybe trillions of dollars being spent in advertising to show you how easy it is to live today and worry about it tomorrow trumps a lot of people's resistance. The credit card companies didn't get as big as they are by accident. They know how to push your buttons and they do!

Now back to the problem: poor credit. Poor credit affects you in so many ways because it limits the alternatives you have when money is short and problems aren't. There isn't one simple formula that will work for everyone. My critics will tell you that all you need to do is quit spending unless you have the cash, but they obviously haven't been there when your child is sick and needs medicine that you can't afford. They weren't there when you lost your job and your hope at the same time. They do not know what the constant phone calls can do to your psyche.

Sit down and make a real list of your bills, leaving nothing off. The list should include the amount and the monthly minimum payment. Now list all your income leaving nothing off including any financial help from your parents, friends or relatives. Now get a real idea of what your house is worth. Now you have the entire puzzle and you can start to figure it out.

“Seek help” is not a saying, it is part of the solution.

For those who have never been in financial trouble, the above sounds infantile. It isn't, because the hardest thing you have to do is face the truth, uncover the mess and then try to solve it. Not part of it, but all of it.

The missing ingredient to recovery is the need to include reserves in the formula, as it will not work without reserves. Why, because the first problem that arises will trigger the old solution. Once you have reserves, your chances of recovery are ten times greater than without them. They must be a part of the plan.

What I have written today is not a happy subject, but it can be. Take action and it will be.