Settling Old Debts and Repairing Credit Score

Loans and Mortgages - Credit and Debt - Repairing Credit Score - Planning a Budget - Other Finance

Q. I'm a female in my mid twenties trying to fix up my very ugly credit. My husband and I are now trying to buy a house, but my credit is a big issue. When I was younger, I did a lot of stupid things with it. On top of lots of smaller issues, I believe I have a repo on my report. My mom cosigned on a car for me when I was about 18 years old. At that time I had no credit (was trying to establish credit) and my mom had not so good credit (she was trying to make hers better).

Because of our credit, we got a bad deal. We got a very high interest rate and for a very long time. She was going to make the car payments and I was going to make the insurance payments. That went on for about two or three years, then she ran into some financial issues and stopped making the payments and didn't let me know. I also found out I still had a few more years left to make payments, but we had been paying on the interest and barely touched the principal. It had been about 2 or 3 years and I owed almost as much as I had originally financed. I owed double the car's value.

I told the finance company to come and get it, that I couldn't pay for it. I have no paperwork on it. I believe they came and got it sometime when I was not home. My other issue was when I got in a car accident when I was 16 years old. I think the bills are on my credit. I don't think they should be because I was a minor at that time and they should have been collected from my parents or the insurance they had at that time.

A. The first thing for you to do in all of this is to pull your credit report. Be sure to get a tri-merge, or 3-in-1 reports that will combine information from all three bureaus. You can get this from www.equifax.com. You might go ahead and get the version with credit scores. Being informed of what lenders will be looking at is the first step. Do the same for your mother. If you were both on the loan, this is being reported on both of you. Those medical collections shouldn't be on there, don't worry about that. As for the car, here is where you are:

They got the car and sold it. You and your mother are still liable for the remaining balance, which may include collection fees, repo fee, the regular interest through the end of the loan period plus any interest from then until now, at whatever rate your state allows (it will vary, but probably lower than your original rate). They may not have even kept up with that. Have they contacted you or your mother with the remaining balance? How long ago? Look at your credit report and see what is showing. You need to know how long ago your last payment was, which could be considered the sale of the car and the money applied from that. They have three years from that date to take action. Beyond that, they are helpless other than showing the balance on your report, hindering your credit.

To get rid of this, you need to settle the account. If it has been longer than the three years, you are in a good position. They can take it or leave it. Figure out how much you have (start ridiculously low), and send them a letter (don't call) with your settlement offer. Add a line that they are to reply by mail with acceptance. A verbal acceptance on the phone does you no good, and will put you in a bad position. Get it in writing; send a check for the full amount back with the letter. Of course, document everything. Keep a copy of the letter and a copy of the cashier's check made out to them for whatever you settle for. DO NOT start a payment plan. You start the 3-year period over that way and they can come after you. After this is done, wait about a month or so and get a new copy of your credit report. That trade line will still be there, but you want it to show a 0 balance now. It will stay there for 7 years, but it will hurt your score less and less every month. With no bad debts showing, you improve your chances of getting a good mortgage. Waiting for it to hit the 7-year mark to age off of your credit can seem like a lifetime. It's probably best to try to settle this for one lump sum.

On the other hand, you can go the route of a "non-conforming" loan. This loan accepts that you have rough credit and compensates for the risk by giving you a higher rate. You probably won't have any mortgage insurance, though, so that helps. Many of these lenders will only look at your last 12-24 months' credit history. That means that if this was charged off over 24 months ago, it may be disregarded entirely. Lenders vary in policies and guidelines, so don't take that as the general rule. The rate may be up there a good bit, but you still take advantage of the lower rates these days to an extent. The rate may be 3-4% higher than conventional loans, but that's a much lower rate than you would have gotten a few years ago. This doesn't help you in other situations where you'll need to have that taken care of, such as buying a car.

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