Credit Score of 505 With Negative Entries - What to Do?

Reader Question: "I am a 22 year old, and when I first turned 18, I applied for tons of department store credit cards and never paid anything. I currently have a credit score of 505 and have 37 negative items on my report, all from 2004. I have since gotten married and become more financially stable, with no current credit cards, no car payments, or anything of the sort. I am having trouble raising my score to buy a house. We would really like to buy a house ASAP as renting isn't working out as well as we had hoped. Do you have any advice to me, or should I just wait until 2011 when the negatives will be removed?"

Based on the information you've provided, there are several things you need to consider:

Item #1 - The Possibility of Mortgage Qualification

Could you even get qualified for a mortgage loan right now, with a credit score in the 505 range? Given the current economic situation, I think anyone with a score less than 600 is going to have trouble getting approved for a home loan. It might be possible, but it's probably unlikely.

So if the answer to this first question is no, you know what you need to do. You'll need to find some way to improve your credit score. More to follow on this.

Item #2 - The Affordability of Your Monthly Payments

If you eventually get approved for a home loan with a credit score below what's considered a good FICO score, you will pay a higher interest rate. This is the key disadvantage of buying a home with bad credit -- it typically means you'll pay a lot of interest. Of course, this means you'll have a larger mortgage payment each month as well. So once you get past the approval question, you have a question of affordability. In most cases, getting a home loan with poor credit is a bad idea.

Item #3 - How to Boost Your Credit Score

If you decide it's best to improve your credit before you apply for a mortgage, then the next question becomes: "How can I improve my score as quickly as possible?" You seem to realize that your negative credit items will come off after seven years (in accordance with the Fair Credit Reporting Act). So this should automatically boost your score by removing that information from your credit reports.

Negative items tend to have less of an impact on your credit score over time. But having so many of them may limit the degree to which your score can increase. Still, it's a good idea to make sure you're doing everything possible in the meantime to maintain a good score and (ideally) improve it. Here's an article that explains how to go about it:

How to Boost Your Credit Score as Quickly as Possible

Item #4 - How Does Your Spouse Factor In?

You said you were married now. How is your spouse's credit, income and debt level? If you plan to apply for the mortgage together, then your spouse plays a role here as well -- hopefully in a positive way. Here's an article that talks about this subject:

My Credit is Bad But My Spouse's is Good

Obviously, I can't tell you what to do in this situation. But I'm willing to bet you already know the answer to that question, deep down inside. I hope this information helps you make an informed decision. Good luck.