Editorial Policy

Recover from bad credit to buy your next home

Erica Sandberg

February 21, 2014

QHi Erica,

My credit scores are not good. They are in the mid-500s. I am trying to rebuild my credit to ultimately buy a house. I have four medical bills that are over 1 year old. Will it help much to pay them off? Also, I need to establish a new account and pay on it for a year minimum. I thought about one or two credit cards and paying them off every month, charging about $25 on each. What would build my score quicker — one or two cards? I thought that two would be better to open. I prefer an unsecured card with the lowest application fee and monthly fees. –Steve

ADear Steve,

The scores you're quoting are probably FICOs, which range from 300 to 850. If so, yours are indeed on the low end of the scale, and they will be a road block to getting preferred loans and credit cards.

Thankfully, credit scores are not static; they fluctuate with the activity that is listed on a consumer credit report. Recent information on those files matter more than what you did long ago, so the better you treat credit now and into the future, the faster your scores will rise.

FICO scores play a major part in mortgage loan qualification. Besides your assets and income, lenders look to them to see what kind of borrower you've been. Low scores indicate serious problems, so they won't appeal to a financial institution.Ask Erica

To rebuild, you have two main tasks: Pay those delinquent medical bills, and open a credit card. You'll use that to establish a great payment history.

Let's get them done.

Satisfy collection accounts. Unpaid medical debts rarely remain with the provider, as doctors and hospitals are not in the business of extending credit. If they don't get paid within a reasonable amount of time, they'll usually sell the account to a third-party collector. Collection accounts, especially when they're new, are lethal to a FICO score. However, if you pay the debts in full, you'll see an upwards tick in your scores. Evidence of the collection activity will remain on your reports for seven years, but when the balance is satisfied and you allow time to work its magic, its damaging effect will gradually lessen. Note: Pay the medical bills before moving to the next step.

Acquire a credit card. Your proposal is perfect: Obtain a fresh card, and charge small sums that you pay in full. That's my credit repair mantra! Once those medical debts are deleted, check your scores again. Then apply for one credit card, in your specific scoring category:

Bad (599 and below)
Poor (600-649)
Fair (650-699)
Good (700-749)
Excellent (750 and above)

Most of the accounts that are available for people with bad to poor ratings are secured with a cash deposit, which you don't want. Yet, if your numbers haven't risen enough, they may be your only option. In fact, they're probably your best bet, as they're fairly easy to qualify for and you can get a jump on positive charging. Just make sure that any secured card you apply for reports its activity to the credit bureaus. If your scores are fair, more unsecured cards are within reach, but the super low fees are unlikely. They're typically reserved for people with good to excellent credit. However, if you don't carry a balance from month to month, you can avoid incurring any interest charges — no matter how high they are.

As for getting multiple accounts, it's fine, but not necessary. “Types of credit” is a FICO scoring category, though at just 10 percent of the score, its impact will be marginal. So, focus on one card. Borrow and repay with it regularly for at least a year. By doing that — and taking care for those old debts — enough positive data should be reported to make a significant difference in your FICO scores. At that point, you'll be far more attractive to a mortgage lender.

Got a question for Erica? Send her an email.