Lost Teacher Wanting To Rebuild....and buy a house

[Anonymous]

Ok, so I know my dream to buy a house might be a while away. But goals are good. So I was doing ok in credit up until last summer. I was in between jobs and receiving no income.  Things went haywire and I couldn't pay bills, I got frantic and signed up for some hardship programs where they closed my account and offered me to pay balance monthly at 0% APR. Good news is my wife started working for first time in our marriage and our income is now the highest its ever been. There will be additional funds to start attacking debt but I don't know strategy. Lets assume I'll have $1,000 a month to pay debts. I may have more. 

Here's some dat

Open Accounts

Barclay Card--> $2,812 Balance on a $2,950 Limit

Amazon--> $768 Balance on a $890 Limit

Shell Card --> $444 Balance on a $500 Limit

Target--> $0 on $500 Limit

Closed Accounts

Cap One--> $5,254 balance on $5000 Limit --> This account has a $702 past due and is not in a hardship program as of yet. Should I do a hardship program or reopen the account?

Citi--> $2754 on $3,000 Limit---> Pretty sure this is on a hardship program with a 0% APR and $50 monthly payments

Wells Fargo/Brookstone--->$1511 Balance. This is on a dumb purchase I made with 0% APR. Needs to be paid off by December 2018

FedLoan Student Loan---> $50,000 currently in a deferment

The goal is to get a home. My credit score shows 540 on Karma and I need to get to a 640. What's the best strategy going forward?

[Anonymous]

First, don't rely on Credit Karma (CK) scores. They are for entertainment only and mine as an example were off by 200 points.

Second, I am just learning this process so hopefully more experienced will come along, but I would start with your open accounts of the lower balances to pay off such as your Amazon and Shell. Leave them open at 0 balances. Then take Barclay down to less than 9% and keep it there.
If you can reopen Cap one, take Barclay to 0 and pay Cap One in as large chunks as possible to get below 9% Utilization (util). I would do Wells Fargo next, then citi followed by student loans.
You want to keep all your cards reporting at 0 except for 1. Have that one report at a util of less than 9% of your available limit. Don't open anything new or do anything requiring a hard pull credit check. You are going to be spending this year fixing and gardening. The faster you pay everything off the faster your score is going to grow. So dinners out, fun stuff, etc., cut it and apply the funds to the debt. It is only short term in the grand sceme of things.

Pull your free annual credit report from there and if you have anything that shoulf not be there, dipute it. That will also help if it comes off.

[Anonymous]

I'd first suggest spending time at the dining room table and working out your budget so it's locked down for the next 2 years.  Most folks I've helped over the years make a non-sticky budget and then fail at their goals.  Your budget has to be locked down and followed every day.

If $1000 is the best you can do, you first have to catch up anything that is past due before you do anything else.  After everything is caught up, you have to attack anything that is overlimit, and once that is done, pay down anything that is over 88% utilization so you get below 88% utilization even after interest posts.

Once you're there, pay the minimums across the board and use whatever is left to pay down the highest interest card.  Continue to do that every month -- in fact, I suggest making payments with every paycheck so less interest posts.  Making 2 payments a month does save you more interest than one larger payment.  If you get paid weekly, pay down highest interest debt weekly.

You also want to STOP using your credit cards except for one card that you never charge more than you can pay off right away.

Beyond all of that, you also need an emergency savings account even if it costs you more interest over a year or two.  I suggest 10% of income into emergency savings, every paycheck, like clockwork.  If you can't save 10% of your paycheck, you need to start looking for second incomes -- Uber or Instacart or Dolly for example.  10% isn't a goal, it's a requirement, if you want to never get into this position again.

[Anonymous]

Thanks for the advice! Currently I have $1,000 in the savings. My current wondering is: should I use that $1,000 to pay down debt that is accumulating interest or should I let it sit in the bank account that is accumulating no interest. Logic says to pay down the debt but there is value in having cash for emergency instead of having the mindset that I can just use my card. What do you guys think?

[Anonymous]

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@Anonymous wrote:
Thanks for the advice! Currently I have $1,000 in the savings. My current wondering is: should I use that $1,000 to pay down debt that is accumulating interest or should I let it sit in the bank account that is accumulating no interest. Logic says to pay down the debt but there is value in having cash for emergency instead of having the mindset that I can just use my card. What do you guys think?

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The logic and math on using savings to pay down dent is 100% wrong.

While saving some interest now might make sense, how much anxiety will you have when you don't even have $5 to cover a job loss or injury?  In my opinion, $1000 is too low but it's a great start.

I've been preaching the idea of "saving up 6 months of income versus paying down debt faster" because I have hundreds (if not thousands) of data points from people who tried my method and said that even with huge student loans due forever, they feel 100% less stressed and anxious as soon as they hit the 3 months income saved mark.  Period.  EVERYONE who has tried this method has said that their anxiety just disappears because they know they can survive for many more months if necessary because they have savings.

I tell people all the time: aim for 6 months income saved even if it means a few thousand extra in interest over your life.  Once you get to 6 months, the interest stops being a stress because you know you can pay the minimums for 6-12 months once you get there.  And that's freeing, like chains released.

[Anonymous]

ABCD, you are the man! Wondering your advice on whether I should attempt to reopen my closed accounts that are on a hardship program or keep them on the low APR program?

[Anonymous]

Everyone's experience is different, but usually accounts closed in circumstances like yours cannot be reopened.

[Anonymous]

Never hurts to ask but the answer will likely be NO.

Don’t sweat the past. Focus on today and tomorrow. Prove to yourself that you can set a budget and live by it and the only way to prove you can do that is if your emergency savings account grows each month or your debt total shrinks.

Preferably both!

[Anonymous]

I read you. 11 things to do abcd. If I want to get my account up to 640 ASAP. What should be some gimmicks I do. You mentioned something about having a balance at the time of card billing due date. What else?

[Anonymous]

You want to report a SMALL balance on ONE card at STATEMENT date, not due date.  These are different!

One thing that can help, but I don't usually mention it, is if you bank with the same company where you want a mortgage from.  Go into a branch and sit down with a mortgage lender and ask them if it helps underwriting approval if you show a consistent savings account deposit every month.  Some banks and credit unions will loosen underwriting standards slightly if they see a customer with a history of making a payment to themselves each month/paycheck.