Bounding Back

You don’t have to tell April and Gabriel Raines that financial missteps can have a lingering effect. “We’ve learned the importance of how you use credit,” says April. She recalls her college days, when she always paid $100 on her credit card bill. Not necessarily a bad idea, but April, now 27, would wait until she had exactly $100 to make a payment rather than pay the minimum amount due each month. Those late payments tarnished her credit rating.

Her husband, Gabriel, has a different problem. At age 30, he hasn’t established any real credit over the years. Having little or no credit history means that there’s scant information available to help lenders determine if he’s a good risk.

Such credit confusion has cost the Albany, Georgia, couple. When they began looking to purchase their first home a year ago, a mortgage broker advised them to pay off their credit card debt first in order to boost their FICO scores and qualify for better financing terms. Although the couple paid off $5,000 in debt, they still have sizeable student loans, and their scores only showed minor improvement, still averaging around 550. Though there are exceptions, in general, scores below 620 mean that a borrower may be required to carry a subprime mortgage — one that carries an above-prime interest rate.

The Raines family is now racing against the clock, working as fast as they can to build savings. April and Gabriel — along with sons Jordan, 6, and Justin, 3 — are paying $485 a month to rent a two-bedroom apartment that’s bursting at the seams. “The place has no yard and we have no equity,” says April. “Getting out is critical.”

The couple has shopped around, and they estimate that a three- or four-bedroom home with two baths will cost them about $150,000. If they qualify for a Federal Housing Authority loan, they will need a 3% down payment of $4,500, which they hope to save within six months. April and Gabriel have already saved roughly $1,000 and are confident that they’ll reach their goal because of their income: April makes $40,000 a year as a business manager at a hospital, and Gabriel earns $52,000 as a tire assembly specialist.

The couple is ready to make the sacrifices necessary to reach their financial goals, and together they are scrutinizing monthly spending for waste. Fortunately they’ve reduced one big cost: childcare. Now that their older son is in school all day, their childcare expense of $900 a month has been cut in half.

Although their immediate objective is to buy a house, April and Gabriel have additional goals, including saving for an emergency fund and increasing contributions to their employer-sponsored retirement accounts, from roughly 4% of their salaries to 10%. They are also looking to beef up savings for their sons’ college educations. But the couple’s debt load continues to hinder their savings and investing plans. They still owe $1,000 in credit card debt, $6,500 on a car note for April’s 2000 Honda Accord, a medical debt which is in collections, and $80,000 in school loans. April holds a bachelor’s degree in allied health services and an M.B.A. Gabriel has a certificate in industrial electrical technology and plans to get his associate’s degree in business administration this year.

Despite their challenges, the Raines family remains optimistic. “We have learned a lot,” says April. “We’ve seen the impact of not doing what we need to do.

The Advice
BLACK ENTERPRISE had financial adviser Pierre Dunagan, president of The Dunagan Group in Chicago, take a look at April and Gabriel’s situation. He says the couple’s financial future should be positive because youth is on their side, and they’ve learned from their early mistakes. Dunagan suggests the following:

Enhance credit scores. There are two steps they can take to improve their credit scores. First, because Gabriel has a limited credit history, he should open two charge accounts and consistently pay them on time. Second, April should take $1,000 of the contest winnings and pay off her medical expenses. Dunagan believes she can negotiate a reduced amount. Once the debt is paid, she can get payoff letters, send them directly to the credit bureaus, and request that they record payment and clear it from her report.

Negotiate smartly. Dunagan believes the couple will meet their targeted savings goal of a 3% down payment in short order, especially considering they will likely receive a $5,000 income tax refund this year. He adds that they may save money on the home purchase by asking their real estate agent to negotiate for the seller to pay the closing costs.

Increase savings. April and Gabriel need to get serious about saving for retirement and give their money time to work for them. Dunagan says unequivocally that they need to increase their retirement contributions to 10% of their incomes. He adds that their cash flow should not be dramatically affected if they also increase their payroll deductions.

Because Gabriel recently paid off the loan on his 1997 Grand Cherokee Jeep, the couple has an extra $250 in disposable monthly income that can be put toward building an emergency cash reserve of at least three to six months of expenses. Dunagan suggests putting the other half of the contest winnings in their emergency fund.

Fund the childrens’ college education. The couple should begin saving $150 monthly per child in a 529 plan using an index fund. They can achieve this by reducing two discretionary bills. The family currently spends $115 a month on cable TV. Going without some of the premium channels will reduce that bill by $50 a month says Dunagan. They rent multiple movies a week that they don’t have time to watch. Paring back could cut that cost in half. The couple was planning to save $75 a month in two mutual funds but Dunagan suggests they divert that money to the children’s 529 plans.

Financial Snapshot: April & Gabriel Raines

*According to Kelley blue book