CREDIT REPAIR 101
In the past 50 years, American society has been radically altered by the "credit revolution." Everyone has credit cards, uses credit to buy cars, furniture, clothing, and even food. No longer are items bought with cash but rather on a line a credit or some type of financing. How much you are worth is often tied directly to how much you can borrow. Having a bad credit rating can hinder your ability to buy, especially in regards to home ownership. Too much debt can and has trapped people into a life without savings where they are chained to scrapping by to just make the minimum payments on their credit cards. In this section, we are going to look at what credit is, the problems you might encounter, and how to solve them.
With millions of transactions reported daily to the credit bureaus, the chances of an error or false information reporting on a credit report is increasing common for the average consumer. This guide has been designed to assist you in correcting wrong, erroneous, mistaken or false information that reports on a credit report.
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Credit Issues- the overlooked fallacies of credit reports
Credit Issues-the overlooked fallacies of credit reports
1) Debt. Debt is a word the financial industry uses to describe any situation that you borrow money. "Too much debt" is how the industry describes situations where people borrow more money than they can easily repay. There are a lot of types of debt: credit card debt, department store debt, charge accounts, auto loans, student loans, mortgages, and money that you may owe the Internal Revenue Service. You might also borrow from parents, relatives, and friends, although those debts may not be reflected in your credit report.
Your ability to borrow more money or to have your credit extended is directly reflected by how much debt you carry. Mortgage lenders, for example, determine your purchasing ability by applying a debt-to-income ratio (a ratio that is calculated by totalling your monthly debt payments plus the proposed monthly debt payment divided by your gross monthly income). Too high of a debt-to-income ratio reflects greater risk with the loan and may result in rejection of the credit application. Most mortgage lenders will allow you to pay up to 42 percent of your gross monthly income in debt service. Of course this may vary depending upon the loan size, the type of loan, and the type of property you are purchasing.
2) Late payments. If you're chronically late in paying your bills, you've got a late payment problem. It can be a severe blemish on your credit report for lenders prefer to lend money to people who repay debt in a timely manner.
How late is late? If you don't pay your Visa bill by the due date, you're late and it may show up on your credit report. If you fail to make a payment all together, a past due notice will be sent to you and you may be assessed a finance charge. If you're so late that you stop paying entirely on the account, it is likely that the matter will be turned over to a collection agency, that will be reported on your credit history as well as a late payment notice.
How long does a late payment stay in your credit history? Typically, a late payment will appear for two years, though credit bureaus may keep them on your credit report for up to seven years. However if you missed only one payment in the last two years and you have been current on the account for the past 18 months and you have a reasonable explanation for the late payment, it is unlikely that a lender will deny you of credit solely on the basis of the late payment. How you are coping with current credit issues is far more important.
3) Bankruptcy. Sometimes the financial burdens of life become so overwhelming that a person is left with only one choice-to file for bankruptcy. A tragedy may have occurred in one's life, such as the loss of a spouse or a job, or a person may have foolishly over extended their credit and is no longer able to keep up with their debt. The reasons are many and the consequences are severe. Once you've been declared bankrupt, a judge discharges your debts and, to a great degree, wipes your financial slate clean. Sounds easy and simple but it is not. Bankruptcy can be expensive and time-consuming and forever you will feel the stigma of it. Most negative information on your credit report is kept for up to seven years; a bankruptcy can stain your credit report for as long as 10 years.
Bankruptcy is a significant credit hurdle, but it can be overcome. The key to overcoming a bankruptcy is to re-establish credit and show that you are no longer a credit risk. Most people are left only with the option of secured credit cards where they must closely monitor their spending habits so not to over extend themselves again or must suffer from higher interest rates on loans so that they can put themselves on the road to a good credit profile.
4) Errors. Because of the volume of information that is being cataloged and entered daily into the credit databases, errors have been known to have happen. . Many people have been turned down for credit because a $5,000 collection account appears on their report for a credit card that they never had. This is most commonly seen when two people share the same name (like a father and son) or have similar social security numbers. However, one good reason for checking up on your credit report is that someone else may be using your social security number or credit card numbers and playing havoc with your personal credit history.
5) Repossessions. If you buy a car, furniture or appliances on an installment plan (where you pay a little bit of interest and principal each month), and you fail to make a payment or two, the company that sold you the item may require you to give back the merchandise until it is paid for. If you refuse to give it back, the company may come by and take it (repossess it). Repossessions are usually noted in your credit report.
6) Accounts turned over to a collection agency. If you don't pay a bill, you will probably receive a threatening letter from a collection agency hired by the creditor to collect the overdue amount. This is considered a collection account. If you receive such a letter, it should tip you off to a potential problem with your credit history. Not only will the creditor report to the bureaus that your account is delinquent, but collection agencies usually report to the bureaus of the collection account as well as their efforts to collect on past due bills. It is important to remember that if you pay off a debt from a collection agency that you make sure you have them send you a letter stating that the debt has been completely satisfied and no further action on their part or the creditor is necessary.
7) Too many credit inquiries. It is common place, for example, to have several car dealerships to pull your credit information whenever you are out shopping for a new car. Whenever you apply for a new charge card, a loan or to have someone extend you some form of credit, an inquiry is reported on your credit report. Seems harmless but lenders become worried if you appear to be on a credit-gathering spree for it could mean that you are out to expand your credit quickly for a specific purchase or that there are new credit obligations on your report that are not showing up. Too many credit inquiries can spell trouble which would make you a bigger risk than what they would be willing to undertake. Credit inquiries stay on your credit report for two years (but most lenders are particularly interested in the inquiry activity within the last six months).
8) Too much available credit. One of the easiest credit issues to fix is having too much available credit. Even if you have never carried a balance on any credit card and if you have a lot of cards, creditors simply add up the balance as potential debt you could take on at any moment.
9) Absence of credit. Again, this is another credit issue that you can easily overcome. Many young people, for example, often fall prey to not having a sufficient credit history built up and as a result are turned down for credit. Many lenders do not want to take the risk of extending debt when they don't know how well someone can pay back their obligation
Within the last year or two, creditors have become increasingly dependent upon credit scoring. Credit scores (also known as risk scores) are a numerical interpretation of your credit profile. The score predicts how likely consumers in a specific score range will repay their debts. TRW, for example, uses the Fair Isaac Model (FICO) to determine a risk score with a range from 200 to 900. The higher the number, the better the credit history.
With the advent of the credit scoring revolution, many lenders require borrowers to have acceptable credit scores to obtain a mortgage. In late 1996, for example, the Federal National Mortgage Association (Fannie Mae) instituted minimum acceptable credit scores for all loans they purchase. Many people who once qualified for a mortgage under Fannie Mae guidelines now have to turn to alternative sources for financing a home. This translates into higher interest rates, prepayment penalties for early retirement of the loan, and a larger down payment on a home purchase.
Every aspect of your credit profile affects your credit score. Since your credit score is a statistical interpretation of your credit history, certain behaviors will either have a positive or negative impact upon your credit score. Consistently paying your bills late, declaring bankruptcy or carrying a large number of credit cards will dramatically lower your score. An inquiry, for example, will lower your FICO score by nine points and if you are out looking for a car and allow 20 dealers to look at your credit, your score will be lowered by 180 points! That could be the difference between a 7% interest rate on a mortgage and a 13% interest rate with a much larger down payment. Conversely, positive behaviors will help increase your credit score such as consistently paying your bills on time, keeping your overall debt at a reasonable level relative to your income or responsibly using several credit cards.
Credit Repair
If you have ever dreamed of owning a home, buying a new car or sending the kids to college nowadays, you are going to have to have fairly good credit. Having excellent credit (as opposed to fairly good credit) means you'll be able to get a mortgage, car loan or other form of credit with the least amount of trouble at the most favorable interest rate and terms. If you are not there, do not despair for many of the problems that were mentioned before are fixable. The key is doing something about it.
It may take some time to work out all of the credit problems you have. As some credit counselors like to say, the road to credit heaven is paved with obstacles and frustrations. It takes, for example, an average of 23 weeks just to make a correction to your credit report. Here are some things you can do to improve your credit:
1) Take stock of your current credit situation. Start by ordering a credit report from all three of the major credit repositories-TRW, Trans-Union and Equifax. While waiting for them to arrive, budget your expenses by coming up with how much you're spending on fixed living expenses and debt payments.
2) Scrutinize your credit report. It shouldn't take more than two weeks or so to receive your credit report by mail. When it arrives, look it over for errors such as someone else's debt posted to your account. If you are listed as delinquent on several accounts, and you're not, copies of your canceled checks may be accepted as proof that you paid on time. Look for other problems: too many credit inquiries, too much credit, or other inaccurate information. If you have a joint credit account and your partner has a credit problem, it could become your credit problem. If you co-signed a loan, for example, for a friend or relative who has a late payment pattern or has used your name to apply for a line of credit, you could have a real problem on your hands.
3) Fix credit report errors. If you discover inaccuracies or errors in your credit report, write letters to your creditors (send copies to the credit reporting agencies) and enclose documentation that supports your claims. Surveys in California, for example, have found that 62% of the people polled found inaccuracies in their credit reports (in many cases as a result of divorce). Mail the letters certified and once the problem is corrected, obtain a letter from the creditor stating that the reported information was in error and will be corrected. Keep copies of all correspondence made. Once fixed, order new credit reports to see if the creditors are reporting the accurate information.
4) Pay off your debt before you apply for credit. You don't need to be debt-free to get approved for a credit card or a mortgage, but it certainly helps boost the amount lenders will allow you to borrow. Analyze your budget for additional ways to save money then use that cash to pay down your debts faster. Cut out almost all luxuries. That may mean cutting out your second daily newspaper or eliminating your afternoon cappuccino fix. Maybe it means sharing rides or taking public transportation to work instead of driving your car.
5) Freeze your credit cards. If you fear that once you pay down a credit card you will only charge it back up to its limit, call your creditor and close the account or lower your maximum credit limit. That way, you will still have them to use if necessary but will be less likely to get yourself all the way into debt.
6) Cancel unused cards. If you have too many credit cards on your credit report or have cards you rarely to seldom ever use, cancel the accounts-in writing. A few months later, double-check to make sure the cards have actually been removed from your credit history and have not just been labeled "inactive." This move alone will add points to your credit score. However it is important to note that you should keep at least three accounts open. The older the account and the higher the credit limit (assuming you have a low to no balance on the card), the better your credit score.
7) Re-establish an excellent credit history. If you recently discharged a bankruptcy or have little to no credit history (less than three "tradelines" on your credit report with six months or less history), build up your credit history by applying for credit. The easiest and most common means is to apply for a secured credit card. Charge only a few dollars a month (e.g. a gas purchase) and pay it off. Don't allow yourself to get behind or to over-extend your repayment ability for that will only get yourself into trouble again. In addition, don't allow 40 people to inquire on your credit. Remember, each inquiry will lower your credit score and it takes two years for an inquiry to disappear from your credit report.
8) Work with your creditors. If you are carrying too much debt for you to currently pay on time, call your creditors and inform them of your situation. Let them know that intend to pay but currently do not have the means to make the payments. Work out a plan with them to get yourself back on track. If the account has gone to collection, you may be able to negotiate the debt down and have the negative information removed from your credit report. The age of the collection account as well as the amount you owe will have a significant impact on how easy you can negotiate down the debt. It is important to keep in mind that collection agencies typically work on a commission basis and to receive some money is better than none at all. Also, remember to get everything in writing and keep copies of all correspondence between you and the creditor.
9) Know when to get professional help. If you're finding it difficult to create a workable budget or put together a workout plan with your creditors, consider getting some free or low-cost professional help. The non-profit Consumer Credit Counseling Service offers free or low-cost credit, debt, and budget counseling. Beware of credit repair companies that will charge you whatever arm and leg you have remaining to "clean up" or "erase" a bad credit history. These companies can't do anything more for you than you can do on your own. Don't get suckered in by promises that your credit slate will be wiped clean. The only way you can do that is by declaring bankruptcy, and your bankruptcy will stain your credit history for 10 years (and not too many companies will want to lend you money after that).
The way to fix any credit situation is to work diligently at cleaning up your credit history as much as possible before you apply for credit. The key is having enough discipline not only to do something about the problem but making sure that it doesn't happen again. Pay down your debt and resolve any issues that could stand in the way of your approval for credit. It's best if you (and your spouse) have a minimum of weak links so that you will qualify for the cheapest and most favorable terms and rates.
There are a number of things that you, the consumer, can do to repair, improve or clean up your credit history. In the following section, we will outline several ways to go about doing this.
First, it is important to remember that if you have applied for credit in any form, your credit report was pulled, and you were subsequently denied credit, you have the legal right to examine your credit history within 30 days of the denial for inaccuracies or reasons for which to reply. In addition, each and every time you are declined credit, that agency or institution that rejected you must provide written notice of the rejection along with a reason which the credit bureaus will base this denial.
In addition, the law states that a credit bureau must inform you of what is contained in your credit report upon request. It does not state that they must show you the actual report. If you have been denied credit, you should be able to receive a copy of the report upon request. Remember you have 30 days to do so. If you fail to meet the deadline, you may be charged a nominal fee from the credit reporting agency, normally around $8.00.
Upon reviewing your credit, look at the time involved in the negative information. By law, derogatory or negative information must be removed from your credit history after a certain time period. Recognizing that most people will fall victim to the occasional mishaps or late payments, the law allows people to recover from their mistakes so that they do not haunt them for the rest of their lives. Bankruptcies generally will last for ten years. Other negative information, such as judgments, liens, etc., must be removed after seven years from the date of occurrence. Inquiries only remain on your credit profile for one year.
The law also mandates that any and all negative history on a consumer's credit file must be investigated and resubstantiated at any time the consumer requests the agency to do so. This technicality has become the basis for many credit repair companies throughout the country (and making a nice profit doing so). If you compose a letter claiming you disagree with certain items on your credit history and these items are "injurious to your credit rating" and mail this complaint by certified mail to your credit bureau, they have a "reasonable" period of time to investigate all disputes the consumer claims. Typically this period last for about four to six weeks.
The credit agency is required to contact individually each subscriber and ask for a reverification of the charge. This can be advantageous because many subscribers do not feel it is worth their time or effort to respond to the high number of inquiries from people doing just this thing and will not answer the letter in the required time period, especially if they have already written off the debt.
Many companies, especially larger financial institutions, keep records for about two years. If you are disputing a late payment or a charge-off that happened after they have thrown away or put away into storage their records of the transaction, their is no way they can prove the fact that this transaction is still bad. Or, you might have paid off a delinquent account and since the records are no longer available and have no record of that, they typically will not respond to the letter.
If the first inquiry still does provide you with the results that you want, there is no legal limit to the number of letters you can submit . Each time you submit a letter, the credit bureau must contact the creditors and the creditors must answer within a reasonable amount of time allowed. The first time the subscriber fails to answer the letter within the reasonable amount of time, the negative item is removed from your credit report permanently.
If you reach a point where the creditor will not remove the information, it is often advisable for you to contact them personally. The creditor has the legal opportunity to cancel any negative information they have provided, with or without the assistance of the credit bureau.
If you have a late payment or a series of late payments to a subscriber and you have since paid them off and have continued a mutually agreeable relationship with the creditor, the effort involved in contacting them personally will often impress the creditor enough that they will agree to remove the negative history because you have now proven yourself a reliable consumer. They may want to keep your business.
Also, you can point out the fact that they do not necessarily have to respond to the credit bureau asking to remove negative information, but can simply choose to ignore it to an upcoming inquiry from the bureau that you will initiate. Or, another approach is to offer the subscriber payment in full (or for pennies on the dollar) for any debt or balance remaining on your transaction if they will in turn remove the entire transaction from the credit bureau's report. The key, though, is to be sure that they understand and agree to remove the transaction from your report or not respond to an inquiry rather than showing the problem has been paid in one lump sum. If they only accept payment without removing the transaction, the payment record will continue to report on your credit history and subsequently defeat the purpose of negotiation the problem off of your credit history.
If all fails and you are still unwilling or unable to resolve the problem(s), write a brief (under 100 words) detailed statement and ask for it to be included in your credit report. A credit bureau by law must include such a statement. It may not necessarily negate the effects of the problem, but can help to add credibility to your credit history for future creditors.
· Unless there is a problem with one spouse refusing to pay or an account was opened based strictly on one spouse's income, a creditor cannot request a new application on a jointly held credit card or credit account simply because of a divorce or separation.
· On the average, Americans spend approximately 75% of their income each month repaying loans, debts and credit cards.
· It normally takes four to eight weeks to be issued either a secured or unsecured credit card after filing the application.
· Up to 80% of all bankruptcies in this country are recorded with inaccurate facts at the courthouse.
· If credit cards are lost or stolen, the owner's liability is limited to $50 per card.
· If you have an error in billing on a credit card report, do not write about it on a bill. Chances are it will not be noticed. Send a separate, preferably certified letter to the issuing institution.
· Forms to file your own bankruptcy can be purchased at any large stationary store and some bookstores.
· If you use a post-dated check to pay a creditor or collection agency, be certain to write the term "post-dated check" in large letters on the check. Otherwise it may clear the bank and they will do nothing about it afterwards.
· If you are attempting to settle or delay payment to a creditor due to an inability to pay, it is wise not to mention marital problems as a source of your financial problems. Acceptable problems include loss of job, medical bills, etc. Marital problems tend to alert them to an upcoming divorce and they may file legal collection procedures sooner than they normally would.
· Regardless of what they say, most collection agencies or retailers will not take a debtor to court unless it is a fairly large debt. Court fees, attorneys, and time is expensive and court settlements do not necessarily collect the money if the person is unemployed, has no assets or is a professional deadbeat.
· If a collection agent or creditor does sue you, they may use a trick call inconvenient venue, meaning they will file in a court as far as possible from you. They need to have a branch business in this city to do it but if they can file in the county and far from you, it makes it difficult for you to appear at the courthouse to defend yourself.
· Collection agencies will often settle for a small percentage of the debt in return for listing the account as closed or paid, especially if they see you have a reasonable defense and/or you have no assets or income that can be easily seized or garnished.
· Even though a debt is paid off, if it is overdue it will be listed on your credit report with a notation "paid off after write-off" or something similar. It does not disappear from the credit report automatically.
· It is possible to ask an issuing company to suspend your credit card for six months or so until you pay off the amounts owed them in a series of payments. This sometimes prevents negative credit reports and returns the card to you that otherwise would have been cancelled.
· Even if a merchant or retailer has a policy of no refunds-no exchanges, a consumer can legally dispute and win any reasonable claim if the purchase is made on a credit card. For this reason, if there is any suspicion of an up-coming problem with the service, transportation company or merchant, one should pay with a credit card and not with cash or a check.
· It generally takes three to five days to replace a lost or stolen credit card with the exception of some premium cards which will do an emergency replacement in two days or less.
The following are addresses and phone numbers where you can contact the three major credit repositories. Remember that there may be a fee charged in order for you to obtain your credit history.
Trans Union
Consumer Relations Center
PO Box 390
Springfield, PA 19064
(800) 888-4213
Experian (formerly T.R.W.)
PO Box 949
Allen, TX 75002
(800) 442-4879
Equifax
Credit Information Services
PO Box 740193
Atlanta, GA 30374
(800) 216-1102
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