Bad Credit: Not So Bad After All?

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The authors of a new book make the case that life can be good—great, even—while your credit score is in the dumps. In spite of bad credit, you can still buy a home, take a vacation, start a business, and most importantly, not be depressed all the time. And the writers should know what they’re talking about: One of the authors had to declare personal bankruptcy a few years back.

The book’s title gets right to the point: Living Well with Bad Credit. Written by Geoff Williams, who regularly contributes to WalletPop, and Chris Balish, an Emmy Award winning broadcast journalist and author of How to Live Well without Owning a Car, the book doesn’t bother giving tips to help people maintain good credit ratings. For the readers this book is aimed at—an enormous group of people, really, whose ranks have only grown in recent months—it’s way too late for that. Instead, the focus is on the practical logistics of life when you’ve already got bad credit and don’t have a clue how to dig yourself out.

Geoff Williams was kind enough to answer my questions, to explain why typical personal finance advice like “pay yourself first” drives him nuts, and to open up about his own extensive experiences with debt and bad credit.

Some readers may find it odd that the author of a personal finance book has himself had to declare personal bankruptcy. But is having this experience actually helpful to discussing the topic of bad credit and understanding the mindset of people who struggle with spending and debt?

Geoff Williams: I think so. I’m not really sure how anyone can understand the mindset of people who struggle with spending and debt if they haven’t been through it, frankly. That doesn’t mean that a personal finance expert who has never been in debt can’t have great advice, of course, and there are a lot of great experts out there who Chris and I both like and admire—but I used to cringe, for instance, when I would hear an expert on TV say something like, “Pay yourself first.”

That’s very solid advice, but it’s depressing to hear and almost useless information when you’re living paycheck to paycheck, and you have creditors calling you up, demanding to be paid to be paid now, and incidentally, your kid has a birthday party she’s just been invited to, and you’re trying to figure out how to pay for a gift for a perfect stranger’s child, when you can barely afford to buy anything for your own kids.

And, by the way, if you’re behind on your mortgage and your electric bill is going to be paid off tomorrow, you really need to pay that first, and then worry about socking a little money away.

Anyway, I think a lot of personal finance experts—at least in the years leading up to the Great Recession—sort of forgot that not every household has a steady stream of income, $50,000 in their savings account, a robust 401k and an IRA. Many do, but plenty don’t. And before our economy almost imploded last year, I rarely heard personal finance experts speak to people like me—people who wanted to save for rainy days and retirement but were completely overwhelmed with credit card debt.

And that, by the way, is what’s so insidious about debt—it robs you of your options. When you have a debt that’s unmanageable and will go further out of control if you don’t keep feeding it, it can almost be impossible to make smart financial decisions—like paying yourself first.

Anyway, I guess it’s the answer you’d expect, but I think my experiences are definitely an asset for a book on living well with bad credit. Now if this were a book about being rich? Not so much. In fact, if you see any book in the near future titled How to Make Millions of Dollars with my name on the cover, please run far, far away. But living with and surviving bad credit? Yeah, I think I can bring plenty to the conversation. Look, I wish this wasn’t the case, but I have a feeling that I’m one of the few personal finance journalists out there who can discuss the pros and cons of payday lending loans, not just because I’ve crunched the numbers but because I’ve actually used their services.

(Read: “How to Outsmart a Debt Collector.”)
What are the most important factors to figuring out how to live well with bad credit? Does it come down mainly demonstrating income over time? Is it demonstrating current, steady income? Demonstrating a good recent credit history?

GW: In a way, it’s none of the above. Not to sound sappy, but a lot of living well with bad credit is about attitude and feeling good about yourself regardless of your situation, and realizing that you’re not a terrible person just because you have bad credit. Your credit score or actual worth has nothing to do with your self-worth. It’s so important to remember that—beyond the fact that it’s true, it’s really hard to motivate yourself to improve your situation if you believe that you’re a hopeless lost cause.

But beyond that, pragmatically speaking, when it actually comes to getting a loan, it’s a bit of everything you said. Just as beauty is in the eye of the beholder, a good credit risk is in the eye of the lender.

A lender will be encouraged to see that you’ve had steady income over time, but he or she won’t be excited to wave their magic wand and give you money if you’re still missing payments left and right. Your best shot of getting a loan with bad credit is to show that you finally have steady income—and that lately you’ve been making your payments and keeping your creditors happy. At that point, especially if you’ve been doing this for, say, six to 12 months, living with bad credit is almost a breeze, because the older your debt, no matter how bad it was, the less relevant it becomes to lenders.

And, by the way, lenders are good at math. If your income is steady, and you have been making regular payments on your debt, but this next loan is going to mean you’ll have too much to pay back, they’re probably going to deny you. In the old days, they didn’t do the math as much, but, boy, are they now.

But, really, if that happens, they’re doing you a favor. Honestly. I mean, recently, in what I assume was a very weak moment, my wife applied for a credit card with Victoria’s Secret, and when I found the rejection letter in our mail, after getting over my surprise, I was relieved. Actually, I was overjoyed. I’ll probably get in trouble for saying this—but all I could wonder was: “What was she thinking? Did she learn nothing from our experience? The last thing we need right now is a store credit card—or any credit card.”

The idea of “living well” is pretty subjective. Is that why you included some fairly unusual tips in your book, like living in a yurt and renting in a bad section of a town? Thoughts?

GW: It is subjective. I frankly don’t love the idea of renting in a bad section of town, which someone we interviewed suggested, and I wouldn’t do it or encourage anyone to if we’re equating bad with dangerous. But if bad simply means rather shabby and drab and not a neighborhood you’re really proud of, but, hey, the house or apartment you’ve found doesn’t leak, why not? Why not trade down your home, at least for awhile, if that means trading up when it comes to having enough income to live on? And I say that as someone who has lived in a couple apartments that my family and friends considered a dump.

And living in a yurt, never in a million years would I have thought I’d want to live in one until I interviewed a young woman in the Pacific Northwest just starting out. She made it sound a wonderful adventure—she was living in this yurt in her parents’ backyard with her husband and their two-year-old, planning to eventually move into a more traditional home when they could afford it, and I think that’s just great. I wish I had considered something like that when I made the transition from an apartment to a house—not necessarily a yurt, but I wish I had considered a smaller home, or sticking with the apartment life a little longer. I like our house, but I think we probably would be better off if we had bought it five years later than we did.

But back to being subjective. You’re absolutely right. A person can make $200,000 a year or more and have bad credit, and a person can make $20,000 a year, and both might have lousy credit. Because everyone’s going to have their own ideas on what “living well” with bad credit even means, we tried to offer solutions for just about everyone and recognize that what works for some people won’t for others.

(Read: “Homeownership: More Nightmare Than Dream?”)
The book mentions the possibility of buying a home not long after your prior home was taken in foreclosure. It’s interesting to see that this is possible, but what should a potential buyer expect in terms of mortgage rates and down payments? I’m imagining the terms are tough, but are they?

GW: They are tough, but buying a house is getting difficult for everyone, whether you have good credit or not. That’s why we suggest home buyers with bad credit work with nonprofits, government organizations and real estate agents who are accustomed to helping people with bad credit, so at least they can steer you to the best terms possible.

But the terms are tough for everyone. Increasingly, lenders want to see home buyers putting down 20 percent of a down payment, whether you have good credit or not. Fortunately, maybe the one bright spot in the housing economy is that while the value in homes are dropping, houses are definitely more affordable than they used to be, so getting a down payment is more realistic than it used to be. And again, like any loan, so much of whether you get an approval with bad credit depends on whether your life appears to be on the upswing, thanks to a new job or having recent paid off debts. If there appears to be no progress, and your finances are still a disaster, the odds of you buying a house are obviously going down.

And just because it is possible to buy a house on bad credit, that doesn’t mean you should do it. That’s one reason we put in as many unconventional housing suggestions in the book that we could come up with, because chances are, if you’ve lost your home and your credit is still a complete mess, you probably shouldn’t be buying a house. And I don’t mean that person should never buy a house—it’s just that after going through a financial grinder as taxing as a foreclosure, do you really want to complicate your life like that? Take a breather, live somewhere more inexpensively and figure out what your next step should be. I think we get home ownership way too much tied up into our identity.

(Read “Strategic Mortgage Default: The Irresponsible, Amoral, but Best Strategy?)
I think it’s great to try and help folks with bad credit. But do you worry that one of the book’s messages, that bad credit can happen to good people, might be used as something of an enabler? Bad credit also happens to irresponsible, careless people, and I’m wondering if taking the “Good Will Hunting”/It’s-not-your-fault approach may encourage more irresponsibility. When does someone with bad credit need helpful support and encouragement, and when do they need a dose of really tough love?

GW: I initially did worry about that, yes. Chris, my co-author, is a super guy and very optimistic, and if there’s a big dose of cheerleading in the book, that’s probably his influence, and in passages where we come down to Earth, that’s probably mine. That’s not to say that Chris only sees things through rainbow-prism glasses, and that I’m a complete curmudgeon, but I think we strike a nice balance in the middle ground, I hope. If he had written the book alone, I’m guessing he would have painted a far rosier picture of life with bad credit than should be presented, and if I had written it without Chris, quite possibly the reader would have finished the last page and then said, “Right-o. Now, where can I find the nearest, tallest bridge…?”

I hope we hit a middle ground. And I agree with Chris wholeheartedly—often, bad credit isn’t a person’s fault, particularly if we’re talking about medical bills that have gone awry, and certainly in many cases, the blame can be shared. We live in a society where people who have plenty of money generally get the best interest rates, and people who don’t have much money, get the worst. That’s understandable. People with a good financial history and are considered a good credit risk are rewarded with low interest rates. If you’ve been irresponsible with money, you shouldn’t be rewarded by being given more money and at a fantastically low interest rate.

And yet plenty of good, decent people will take out loans for a car, or a house, or they think they need a credit card and will use it, but because a lender decides their income isn’t as robust as they’d like to see, or they’ve had a few missteps in their credit history, or they just have too much debt already—and then they get these high, punitive interest rates. So while I understand the bank’s reasoning to a point, from the very beginning of the loan, the bank has just made it harder for this person to pay them back.

I know that when I kept struggling year after year with my credit card debt, I kept agonizing and thinking, “I want to pay you guys back—but with you’re constantly jacking up the interest rates, and refusing to work with me, you’re making it very hard for me to do that. Do you want me to not pay you back?” That’s what it felt like. So I’m very sympathetic to a lot of people who wind up with bad credit.

But I’m the first to admit that while I had help getting into my financial pit, I’m the one responsible for making the stupid mistakes that I made. When I was 23 and bought a car way out of my price range, that wasn’t because a banker put a gun to my head, led me into an auto dealership and said, “OK, make a purchase, or it ends here, Buddy.” No, that was all my doing. But I think the way credit cards and banks work, they often make our mistakes worse. But, again, I made mistakes and am perfectly fine with admitting that. And I think most people are happy to own up to their mistakes, and want to pay off their debts, without, hopefully, having their lives destroyed in the process, and those people are the ones I feel need support and encouragement.

Now, all of that said, I’ve known people who are complete idiots with their money. I guess we all have. But I can think of distant family members and acquaintances who are always borrowing from friends and family and never paying them back, who can’t hold a job, who can figure out a way to buy beer but not a book for their kids, and who really have no interest, unless it can be done by winning the lottery, in getting out of debt. And, of course, they’ll whine the entire time about never having enough money. But, you know, this book wasn’t written to help them.