I’ve made the argument a good credit score doesn’t matter much anymore. The post gave examples of renting an apartment, finding a job, buying a car, and getting into school where the credit score didn’t help or hurt at all. Even SoFi, one of the largest emerging student lenders announced this year they are doing away with the FICO score when analyzing a loan.
If you can strategically foreclose on your home as a CFP, while still being employed by the NY Times as a columnist, get two financial advice book deals, and get invited to be a keynote speaker at a financial conference, who cares if you welch on your debt?
But like so many things, there’s always another side to the story. Let’s have a read of what one Financial Samurai reader wrote about how he was negatively affected by bad credit.
HOW BAD CREDIT CAN HURT YOUR CAREER
Recently I was affected by my bad credit. My credit took a downward turn during the last recession. I purchased a distressed house as an investment for roughly $100k. I spent another $100k fixing up the house. The original rehab estimates were much less, around $60-70k. However, as we worked on the house, we found more issues that added to the price tag.
The goal was to sell for $230k before the repair cost went up, but by the time it was ready to sell the market shifted for the worst. It was a calculated risk where I paid its price. Now, a house that we spent 200k on was worth less than our purchase price. And the value continued to diminish. So, I tried to rent the house out instead.
I managed to find a renter, but I was coming up short about $700/month that I had to pay myself (I also had my own mortgage to worry about). And this was only the beginning of my problems.
The A/C unit was stolen one day, of all things. That cost time and money. Then the roof started leaking. More costs. Then my renters moved out and I couldn’t find anyone else to move in. Now I was paying +$1700/month plus my own mortgage.
Folks trashed the backyard. City sited me for trash violations.
Then the house next door flooded in the middle of winter. The overflow flooded my basement to knee-high levels. More money departing… and I got a sore ass from slipping on ice.
Then, drug addicted squatters camped out inside the house. I had to send some folks to kick them out, clean out the needles, and finally board up the place.
I tried to short-sell it. The bank wouldn’t entertain it because I was current on my payments. Then after two years of hemorrhaging money, I made a choice. Either continue to lose all my money, or lose my credit, all because I tried to make some money on real estate. I wiped my hands clean and walked away from my mortgage.
A few years later, I decided to go to business school. I went to a top tier school thinking I could make up some of the money I lost in the long run if I could get into an investment bank. I did that for a short while.
Then I got a job offer at a regional bank. I left to go on our honeymoon. When I got back, I listened to a voicemail from this regional bank that they can’t proceed with hiring me because of the foreclosure on my record. I’m getting penalized for a mistake I made 8 years ago when I bought the place. I had even turned down a bulge bracket bank to take this offer.
When I asked the regional bank to explain their decision, they told me it was a bank-wide policy not to hire anyone with foreclosure above $12k, which is ridiculous if you ask me. Who has a foreclosure for $12k or less?
I went back to the bank I turned down and they don’t have that kind of bank-wide policy, only for certain positions like loan origination.
I’m not making excuses for having poor credit. I made some bad decisions, like taking a risk on real estate that just didn’t pan out. For those of you so ready to judge our foreclosures, think about how you would have handled it if put in the same situation. You might not have ever been in the situation to begin with if you are completely risk averse (and now I am definitely risk averse). But sometimes, you take a risk and lose. That’s life.
When you make a bad investment, do you continue hemorrhaging money so you can save your credit? Unfortunately, I’m still paying for this mistake, since we couldn’t move back to my wife’s hometown. But considering how much more money I would have lost if I had kept the house, I still think letting go was the right decision.
PREPARE FOR BAD BREAKS
Holy smokes! Talk about a series of unlucky breaks. If I was in the reader’s shoes, I’m not sure I would have kept on losing $1,700/month on an underwater property. That said, I don’t think I would have taken myself out of the work force for two years to get my MBA with so many bills to pay. Instead, I would have gotten my MBA part-time in order to keep getting a steady paycheck.
It’s true that certain employers will review a potential candidates credit report and deny him/her employment if bad things come up. The reader clearly had a case of bad luck and bad timing. We’ve all been there. The upside is that with so much bad luck, how can it get much worse? There’s plenty of room for improvement.
I’ve had a lot of bad luck happen to me when I was younger. And frankly, a lot of my bad luck was due to poor choices. The upside to making mistakes is that we tend not to make the same mistakes again. Screwing up young is better than screwing up when there’s a lot more at stake when we are old.
The importance of developing financial buffers is real. Something bad will happen to us eventually when we least expect. Welching on your debt might very well be the only alternative left. Perhaps you’ll experience a sense of shame at first. But if you’re allowed to do so, and you understand the repercussions, then who are we to judge?
Recommendation: Check your Experian credit score here for a buck. Experian is one of the three main credit score agencies, and the most regularly cited. I check my score once a year due to credit errors that are unbeknownst to me and most people. There was one time my credit score dropped to 610 from 810 without me knowing because I had a claim against me for an $8 unpaid utility bill from three years ago! Why the utility company didn’t just call or e-mail me for the $8 bucks is beyond me. The mixup almost derailed my mortgage refinance in its 3rd month. If I checked sooner, I could have avoided the heart attack. The FTC states that roughly 20% of consumers have inaccuracies on their credit report!