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Topics addressed on August 6, 2008:
Pay medical debts, credit cards before buying a house
I am trying to buy a home, but my score is low due to some medical bills that I got behind on as well as my two credit cards, which have balances of only $1,000 and $600 but are almost maxed. What would be the fastest way to gain a few points on my credit score; paying down the credit cards or paying off a few of the bills?
I’m concerned that you want to raise your credit scores quickly so that you can get more new credit. That translates into more debt, and that’s the last thing you need right now.
Unpaid medical bills and high credit card balances, even when your limits are low, are both important indicators of serious credit risk. You need to address both issues to improve your overall creditworthiness. Until you have your medical bills paid and your credit cards under control, you should not even think about applying for new credit.
Home ownership adds the additional expense burden of maintenance and improvements. You definitely don’t want to take on that responsibility without a nice cushion of savings to see you through emergencies, such as broken pipes, a new water heater, or more medical bills.
Your first step should be establishing a sound budget. Establishing a budget can be a difficult, soul searching process because it must be based on your actual income, real expenses and true needs.
The challenge is separating “needs” from “wants.” Most of us confuse what we want with what we actually need. While it may not be fun, you can live without your “wants,” which will free up some funds to put toward your existing debts. You may be surprised at the amount of money you have available after the budgeting process.
If you need help, there are many organizations that can assist. City governments, community colleges, church, and non-profit credit counseling agencies often offer free services. Once you have a budget, you need to pick a debt to pay off.
Because your credit card balances are relatively small, I would start there. Apply all that you can to pay off the $600 balance while you continue to make on-time payments on your other debts. When that balance is paid, add the entire payment amount to your other credit card payment each month.
Doing so will help you pay off the other credit card faster, and it will be relatively painless because the amount you spend on monthly bills will not change.
After your credit card bills are paid, you can increase your payments toward your medical debts with what you were putting toward the credit cards and their interest fees. That will help you pay off those debts even faster.
Only after you pay those debts and build up your savings should you consider taking on new debt. By that time, your credit scores will have improved, reflecting the changes you’ve made in your personal financial management.
Thanks for asking.
- The "Ask Experian" team