4. About Credit Repair
Common Questions About Credit & Debt Repair
Have you had enough problems going through being rejected for credit cards, loans, checking accounts? You are not alone! Over 62 million Americans can’t qualify for a loan, car, apartment, home, or credit card because of their credit problems. How do you expect to rent a car, hotel room, or make a reservation without a credit card? Over 85 million Americans are in debt so bad that over 70% of their income goes just to pay bills.
Credit In Everyday Life
A large percentage of Americans operate some part of their lives on a credit basis. You may have a car loan or a credit card. These are credit instruments. You may have a house, the major credit purchase in most peoples lives. Even utility payments are a credit transaction because you use the utilities services before paying for them.
Since credit is so prevalent in all our lives, it is vital that we maintain a good credit rating if we want our lives to ran smoothly. While it is possible to live with no credit or even bad credit, it severely limits your options in today’s society.
How To Get Good Credit
Given credits importance in society, how do you go about getting credit? How does your application get evaluated?
To get credit, you must make an application to a lender for credit. You fill out a form that asks for information about you, your job, your income, and sometimes your financial obligations (like the cost of rent/home mortgage, etc.). This information is analyzed by the creditor and if it is deemed positive, you are granted the credit you requested.
Types Of Credit
In general, there are two types of credit you can obtain; secured and unsecured. Secured credit means that the loan is secured by the merchandise purchased with that loan. For example, if you buy a car, that is a secured credit transaction because the lender can repossess the car if you do not repay the loan in a timely manner. Even credit card purchases are secured. This is because the credit card issuer can legally take back the merchandise you purchased if you default on the payments. But this is very rarely done for credit cards. The credit card issuer doesn’t want books and TVs, not to mention the meals and gas, etc. you charged on your credit card. So credit card issuers usually treat a default in the same manner as unsecured credit is treated. Unsecured credit means that you were lent money on the strength of your signature. This is usually called a signature loan. There is m specific merchandise backing the loan, just the lenders belief that you will repay the money.
The first step in getting credit is figuring out what you need it for. Are you trying to get a car, boat, credit card, or something else? Generally, if it is a major purchase, your lender (the car dealership, home mortgage lender, etc.) will help you fill out all the paperwork.
If it is just a credit card you are applying for, you must shop around on your own. Find a bank offering a low interest rate. Ask them for a copy of their application. Then fill out all the information they are asking for as accurately as you can.
How You Are Evaluated For Credit
The lender will then use this information for two things. First, the application will be used to get a copy of your credit report from one or mom credit reporting agencies. (In general, for larger loans, like a car Or house, two credit reporting agencies will be contacted and for smaller loans, like credit cards, only one credit reporting agency will be contacted). Second, your application, along with your credit report, will be used to “score” you. Creditors use a scorecard to evaluate your creditworthiness. If you score high enough and, in their eyes, can handle the additional debt load, you are granted the loan. If you score too low, you are rejected. If you are in the gray middle zone, it becomes a judgment call by the lender. If the lender feels comfortable about you, your marginal status will turn into an approval. If the lender feels uncomfortable with you, your marginal status will turn into a rejection.
Creditors like to see the following information items listed on your credit application in order of importance to them when evaluating your credit request:
- A positive, up to date credit report
- A home with a mortgage and up to date payments
- An American Express and/or Diners Club card
- A job you have had for more than one year
- An address you have resided at for at least one year which is in your name.
- A current or paid off bank loan
- A Master Card or Visa card
- A department store credit card
- A telephone/utility bill in your name
From these items and whatever additional information your lender uses, a decision will be made on whether or not to extend you credit. If you are just starting out or if you have bad credit, it becomes much tougher because you don’t score very many points on the lender’s scorecard.
Credit And Employment
One other surprising place you may find your credit report used is as part of an employment application. The law allows potential employers to examine your credit report as part of your employment interview process. They use the information provided in your credit report as part of their evaluation of you. Credit reports are being used by more and more companies to check out a potential employee’s “stability”. With all the job shifting going on now, this is another very vital reason to keep your credit report as healthy as possible.
What is negative credit? How is it repaired? Negative credit is created when you do not live up to your contractual obligations. It finds its way onto your credit report in many different ways. The majority of negative items are due to fiscal missteps by you such as paying your credit card late. A much smaller but still significant number of entries comes from errors, fraud, and other abuses of the system. Lets look at each of these categories in a bit more detail.
Fiscal missteps, the most common cause of negative credit, are caused by actions often originated by you. This could be something as innocent as misplacing a bill and missing a payment as a consequence or it could be something as devastating as the loss of a job which leads to your house being foreclosed upon or you needing to declare bankruptcy. Anything you do which generates a late payment or causes a collection action to be taken against you will probably show up as a negative item in at least one credit reporting agencies report on you.
Errors can be caused in many ways. A loan payment is made on time but the bank made an error when they credited it. Or perhaps a credit reporting agency entered incorrect information on your credit report. These are both examples of the types of errors that may occur.
Fraud occurs whenever someone else uses your social security number on a credit application. By doing this, the lender is accessing your credit report and will make a decision based upon it. If the person doing this is committing fraud, that person will use that credit card until it is frill and then walk away from it. When the bank doesn’t get paid, it reports to the credit reporting agencies that you are in default and you now have a negative credit entry through no fault of your own.
Abuses are a subset of fiscal missteps. Basically abuses are usually credit card abuses. Some people have trouble controlling their spending and soon find that they have $20,000 or more in credit card debt and not enough money to cover the bills. These abuses generally end in bankruptcy and destroy a person’s credit rating for a very long time.
The good news is that no matter which combination of the above problems faces you there are solutions. You can definitely remove 100% of all efforts and frauds with a few letters. Any you will find that many of your personal problems can also be removed fairly easily. And, if you are not 100% successful, there are always simple ways to rebuild your credit in a reasonably short period of time.
Protecting Your Credit
Given the turbulent nature of the economy where losing a job is a very real possibility, what can you do to further protect yourself The best way is to build a sizable nest egg to ride out the bumps that may get put in your path. But, that is hard for many people to do.
It is not the purpose of this article to discuss this matter in detail. There are many excellent personal financial management books on the bookshelves that deal with this situation.
If you ever get laid off or otherwise find your source of income has dried up, contact everyone to whom you make payments. I mean everyone! Call your credit card companies, the bank with your car loan, the bank with your home mortgage, your utility and phone company, etc. Talk to the credit manager or equivalent person at each place. Explain your situation and ask if you can skip a few payments.
You may state something like “I just was laid off from my job and don’t have an income. Its going to take some time for inc to get a new job and get back on my feet. Is there my way I can skip a few payments until I get that new job and can start paying you again?”
After this, let the lender talk. He or she will discuss options with you. Some will not be able to give you any bargaining room while others may give you a 1-6 month grace period from payments. You don’t know what you can get until you ask.
After calling them all, you now know what bills you have to pay and what ones can wait for several months. If your unemployment and savings can cover the “must pay” bills, your credit rating will stay healthy. And, if you find that replacement job in time, your good credit rating is preserved, just as though there were no financial crunch.
With this disaster planning and a bit of luck in the job market, you will get through these troubles with your good credit intact. And, if things don’t work out well and it takes a bit longer than expected to get back to work, this method will at least minimize the damage done to your credit rating. And this will make the subsequent cleanup of your credit report much easier to accomplish.
Building and Re-building Your Credit
When a lender extends credit, several elements of your credit life are examined before making a decision. Before discussing methods of obtaining credit, I want to take a moment to explain many of the things of importance to creditors. It will give you a better understanding of how they evaluate your creditworthiness
A creditor scores you based on your credit and job history as well as your income and current debt/payment load. Owning a house is worth points, having a credit card is worth positive points, having bad credit is worth negative points, etc. If you have a high enough positive score, you get the loan. If not you are rejected. If you are in the gray area in between, the impression you make with the lender is often the deciding factor between acceptance and rejection.
Just to give you an idea of the relative importance of the various items a lender uses to score you, the following list is presented, Items represent the most important to least important on your loan approval score card.
- A positive up-to-date credit report.
- A house with a mortgage.
- An American Express or Diners Club card.
- A job you have held for mom than one year.
- A current or paid off bank loan.
- A place where you have lived for more than one year.
- A Master Card or Visa card.
- A department store credit card.
- A telephone in your name.
By examining each of these items, you will get an idea of how a lender perceives you. If you rank highly, it is very easy to get a loan (assuming your debt load is acceptable to them). If you rank poorly or have none of the above items, it is more difficult.
There are a variety of ways to build a positive credit rating. Although there are many similarities in both sets of techniques, there are enough differences that each has been given its own section.
Establishing credit for the First time
Around the time of getting your first job or perhaps before then, you may be thinking of getting that first credit card or first car loan. Or perhaps you have lived your life on a cash basis and now want to expand your lifestyle beyond what you can afford out of your normal cash flow. In either case, this can be a difficult time. ‘The lending institution has no easy way of evaluating your creditworthiness. So, how do you get credit if you don’t already have credit? There are many easy techniques you can follow to get credit issued and get that first important credit entry on your credit report.
First, lets discuss how a lender will evaluate you. The lender uses a scoring system that is used to evaluate the creditworthiness of any applicant. Lets take a look at the scoring system as it applies to you.
In describing this, we assume you have no entries in your credit report at this time and you do not have a co- signer on your loan credit application. In this case, the creditor will look at the following items in making a decision:
- Your income
- How long you have been at your job
- How long you have had a bank account
- The typical balance of your bank account
- How long you have been at your current address
- Whether or not a telephone and utilities are in your name
[NOTE: If you apply in person, a neat appearance and good manners can go a long way towards approving a marginally acceptable application]
From these items, the creditor evaluates you. If the creditor feels you are an acceptable risk for the amount of money you are requesting, you will he granted the loan.
If you use a co-signer, the situation is very different because the credit rating of the other person is used to evaluate the loan. If you make enough money to service the loan, and the other person has good credit, you will very likely get the loan. Co- signers are usually parents helping their children when they are in college or just starting in the workplace or a husband and wife going to buy a house or car.
A new wrinkle in easy credit that has come about in recent years has been banks soliciting college students to increase their credit card business. The assumption they operate under is that a college student has good prospects for a high paying job upon graduation. The (future) diploma has a cash value to the bank that they decided was good enough to make these people worthy credit risks. Given that it is possible to get that important first bit of credit, what are some techniques that can be used to get it? Some techniques are:
- Get a Co-signed loan
- Get a local department store credit card national department store credit card Visa/MasterCard Card
- Get a American Express/Diners Club automobile loan home loan
- Get a local furniture/appliance store collateral loan secured credit card collateral loan signature loan
- Each of these items is described in detail below with suggested strategies to improve your chance of qualifying.
Getting a Co-signer for a loan or credit card is an excellent way to get established in the world of credit. Often, when you are just starting out in the world of credit, you are not yet established. You haven’t been on the job long enough or you haven’t lived in one place long enough. This is a very common situation among young adults just finishing school and getting started on their own. A Co-signer, usually a parent, is basically telling the lender that he or she will stand behind the applicants ability to pay for the loan.
The downside of this method is that if you, the applicant, do not pay the loan in a timely manner, the lender will go after the co-signer for payment. The upside is that the loan is evaluated on the basis of the co-signer as well m the applicant. If the co-signer is a good credit risk in the eyes of the lender, the credit will be granted 99% of the time.
Local/department store credit card
Many mom and pop type stores offer credit cards that can be used for merchandise in their stores only. They are willing to do this because it generates extra profits for them. Normal credit card purchases on Visa, etc. cost local merchants approximately 1.5% of the purchase price of the merchandise. By giving out their own credit card, they again get full price for their merchandise plus they collect interest on the money they lend to you at a very high rate (18%). Because of these two reasons, mom and pop stores have a strong incentive to get people to use their store credit card rather than a Master Card or Visa.
How does that help you? You can use their desire to have you as a customer as leverage to get that credit card. The very best way to get one issued if you have no credit is to couple it with a major purchase, assuming you need something relatively expensive (in the range of several hundred dollars) at this store. You basically approach the owner or store manager with your filled out application and express your desire to get issued their credit card so that you can buy item X. If the store operates on commission, let the floor salesman for that department work for you.
He will do all he can to get that credit card accepted so he can get his commission. It is possible you would have been approved without all the extra steps. And it is possible you may get rejected if you follow all these steps but most of the time, the personal touch described here will work wonders for you.
National Department Store credit cards
National department store credit cards include companies like Sears and Macys. I also include gas credit cards like Mobil in this section. National department store credit cards we a bit harder to get than local credit cards because you cannot deal with a “real person” to get your credit card. Credit card decisions are made by people and computers in the credit department of corporate headquarters for the company, not at the store where you apply. These places are generally not good places to apply for your first credit item because they generally have pretty strict guidelines. And if you are fortunate enough to get one, it will usually be for a small credit line of only a few hundred dollars initially.
About the only way to get one of these items as your first credit account is to have a co signer or to show a stable employment and residency period for over a year. If you can’t do either one of these, I recommend you find another source for your first item of credit.
As tough as national department store credit cards are to get, getting a Master Card or VISA used to be even tougher. But with growing competition and increased profits, many issuers are actively soliciting your business and are willing to overlook an empty credit report and many even overlook negative entries on your credit report. Once, the se cards were hard to get. That is no longer fine. If you have had a job for a year (and in many cases for less than a yew), you will almost automatically get one just by filling out the application. You may have to apply to a few places because some Master Card and VISA lenders still follow strict guidelines. The best applications to use are the ones that come in the mail saying you are “pre-approved”. These applications almost always result in a credit card being issued to you.
American Express/Diners Club
American Express and Diners Club and similar credit cards are what I call high end or luxury credit cards. ‘These cards require the balance to be paid off every month. If you charge $100 for a given month, you owe the credit card $100 for that month. If you charge $1000, you owe $1000. They do not let you carry forward balances the way MasterCard and VISA, etc. do.
Because of this requirement, these types of cards are generally very difficult to obtain. The issuers need to be convinced you can pay off your charges each month. That is something difficult to prove if you have no credit history or have a low paying job.
Although it is possible to get one of these as your first credit card, it is very likely you will be rejected. Because of this, we strongly advise against trying to start your credit history with one of these cards.
Car loans are a great way to establish your first entry in your credit file. If you make enough money for the car you want to buy, you will get the loan. The only way to get rejected is if you buy too much car for the money (i.e. trying to buy a $20,000 car when you only earn $1 000/month). These loans are easy to get because the loan is backed by the value of your car. If you don’t make your payments, they repossess the car. putting down some cash with the deal will be a definite help in getting that car loan, especially when you are buying a mom expensive car. Dealerships are so willing to work with someone who has no credit, they even have special programs for first time car buyers.
The one warning we give here is that many dealerships offer a buy here/pay here finance program. The program is good. It helps dealerships sell cars and it helps people buy cars. But as someone who is trying to establish credit, you need to ask a question before using a buy here/pay here option. Ask the dealership if this transaction is reported to the credit( bureaus. If it is. go ahead and make the deal. If it is no(, you may want to look around a bit more first. After all, one of your goals is to establish a credit file on yourself If the car dealership doesn’t report the transaction to a credit bureau, this goal will not be achieved.
A home loan is one of those types of loans that have so many variables, no universal statements can be made about them. If you approach a bank and say “I want a house loan and I want to put a 40% down payment on it”, you will get the loan regardless of any other factors. In fact, they will roll out the red carpet for you. However, if you are like most of us and only able to put 10% or so down, it becomes a bit tougher.
A home loan can be your first credit entry and if you have always lived on a cash basis before this, it may well be. If, in the bank’s eyes, you are a good credit risk, you will get the loan. A good credit risk to them in these circumstances is someone with a stable (preferably growing) bank account, a stable, long term job, and a long term residence, preferably in your name.
If you don’t have these things, it is going to be very difficult to get that loan. If your goal is to buy a house and you have the time, I strongly recommend that you use some of the other techniques in this chapter to build up a credit rating before trying to get a house. If not, talk to several lenders. Present your case and see if one is able to work with you. Or, get someone willing to co-sign the loan and then in a year or so, get the loan reassigned to you.
Another option is to find a home with an assumable non-qualifying loan that you can assume. For about $50, anyone can assume the loan, regardless of job or credit history. And best of all, it is looked at the same as if you received a new loan by the credit reporting agency and future creditors.
Local Furniture/Appliance store collateral loan
This is a variation of the local department store credit card discussed above. The main difference is that this is an actual loan for the price of the purchase, not a credit card. The loan is very easy to get because it is backed by the collateral and the strong desire on the store’s pan to make a sale. If you have a job and can afford the payments, you are almost guaranteed to get this type of loan.
Secured Credit Card
If you have some extra cash and want the convenience of a credit card but cannot get one, consider a secured credit card. It can serve many useful purposes. First, what is a secured credit card’? A secured credit card is really a debit card. That means if you open a secured credit card account with $1000, you now have a credit card with a $1000 debit line of credit. This means you can charge up to $1000 in merchandise before putting mom money into it.
You may be saying “Why not just pay cash for my purchases?”. Remember, your goal is to establish a credit rating. To the credit world, a secured credit card is the same as a real credit card. They don’t know your purchases have already been paid for. All they see on the credit reports is that you have a credit card and a good payment history. This is an excellent first step to getting other types of credit. The only drawback to a secured credit card is that the annual fee is a bit higher than a normal credit card charges.
A collateral loan is a loan secured by an item or items of value. For instance, if you have $100,000 in jewelry in a safety deposit box, the bank will be willing to give you a loan for a portion of the value of the jewelry. During the loan repayment period, you would not have access to your jewelry. The bank would be holding it as collateral against repayment of the loan. That is a drawback only if you need constant access to the merchandise.
If you don’t need frequent access, this is a great way to get a loan. Since it is backed by something of value, you have a very high probability of being approved for the loan.
Signature loans are difficult to get because they are not secured by a house, car, or my other item of value. Basically, a signature loan means a bank is giving you money based on their perception of your credit history. Because you have none at this point, this is a very difficult type of loan to get. If you have done business with the same bank for a long period of time and keep a decent balance in your account at that bank, you have a chance of getting a signature loan from them.
In general, we would strongly recommend using another means of obtaining credit. This type of loan is not very friendly to first time applicants.
These are many of the common sources for getting your first loan and first credit entry. With a little effort, you will soon have your first credit card, car loan, etc. Just choose what makes sense given your current needs and use the easiest way possible to secure your credit. Once you get this first item, you are on your way. After this, future items will be much easier to get.
Re-establishing Your Credit Rating
After following all the steps outlined on how to repair your credit report, you may find you could not get every negative item off of it. You may still be a person with bad credit, a poor credit risk.
Don’t despair. There are many simple techniques you can use to rebuild your credit. These techniques will slowly establish you as a good credit risk even with those negative items on your credit report. The first step is to write a letter to the credit bureau to be placed in your credit report, This letter explains why these negative items are there. This letter is explained much mom fully in the chapter on the credit repair process.
The second step is to take an inventory of where you are today. What do you have to work with? What are your strengths; weaknesses? The third step is to take positive steps to rebuild your credit history by getting new credit items in your credit report. Both steps two and three are expanded upon below.
Taking an inventory of where you are today is a relatively simple process. Make a list of every credit item you have; car loan, credit cards, house loan, etc.. This is your credit inventory. Each of these items can work for you to improve your credit health. If you have credit cards but do not use them, begin to do so. Potential creditors like to see credit cards being used. It shows them you make your payments on time.
NOTE: This inventory is very important to you. Part of getting and keeping a healthy credit report and credit life is to make timely payments. It is very important that you keep payments on all these obligations current. The third step, taking positive steps to rebuild your credit, can he handled in many ways, from very passively to very aggressively. Lets look at a few cases.
Case 1: You just went through a divorce and had your credit rating mined. Your credit inventory after the divorce was pretty good. You have a house with a mortgage, a new cut with a car loan, and two credit cards. You also have a job that lets you support these loans and live a comfortable life.
In this scenario, you might not have a need for any new credit for several years. If during this time, you keep your payments current, it is very likely that you will be granted the new credit on the basis of your current payments on your preexisting loans. In this example, time is doing the work for you. You need do nothing except live your life as you normally do.
Case 2: You just had a bankruptcy. You lost your house and your car. Your credit card accounts were all canceled. You were lucky enough to find an apartment that didn’t do a credit check.
Lets take a look at your credit inventory. You have a job. Lets assume the bankruptcy taught you some lessons in financial frugality and you are able to save some money each month.
The first thing you need is a car. Look in your newspapers for dealerships willing to work with bad credit risks. Make a list and call them to see which ones report their loan information to credit reporting agencies. Go to one of them and buy a car. Do not be surprised when they charge you a higher than normal rate of interest. This is to compensate them for the added risk of the loan they me making.
This is step 1.
Step two is to somehow come up with approximately $1 000$2000 in a bank account, When you do that, go to the bank loan officer and tell him you want to borrow the amount in the account and leave it as collateral (i.e. if you have $1500 in your account, you want to borrow $1500 and leave the money in your account as collateral against repayment).
If they ask you why you want to do this, be honest. Tell them you are trying to rebuild your credit rating. You will get the loan because it is 100% covered by the money in your bank account. If you default on the loan (which you will not do), the bank will claim the money in your account as payment.
[NOTE: Some people recommend that you take the loan money, deposit it in another bank and repeat this process over and over again in a matter of days. This is not really necessary and it can be very confusing to you, and possibly illegal.]
A better approach than the above note, if you have the time, is to repay this loan in two monthly payments and then repeat the process at the same bank, trying to borrow a larger amount each time.
At the same time as you are doing the above, get a secured credit cad and use it, Don’t worry about how high a credit limit you get on it. It is not important,
After six months, your credit inventory looks much better. You have a car with a loan, a current credit card, and several progressively larger bank loans. All loans are being paid in a timely manner or are actually paid off.
At this point, you are ready and able to get a regular credit card. You may have to apply to a few places to get one but you will shortly be issued one.
From this point, you are again legitimate and don’t need to do any “tricks” to get loans, etc..
The only type of loan that would be tricky to get at this point would be a house loan. If you “need” a house quickly, I strongly recommend finding a non-qualifying assumable mortgage to assume unless you have enough cash for a 20% down payment. If you have that much cash, you will be able to find a lender willing to give you a loan.
This is a brief analysis of two extremes. It is wry likely that your own credit was place you someplace in between these two scenarios. If you haven’t read it yet, mad the preceding section on establishing credit for the first time for mom ideas different techniques to use to secure additional credit.
The key things to remember when building or rebuilding your credit are to be assertive and positive. Credit rebuilding is a numbers game. If someone wants your business bad enough, you will get credit issued to you.
These guidelines would not be complete without a few words on fiscal responsibility. By now, you are aware that good credit is something that you must earn and protect. It is not something that is a right. We also assume that you know what it is like to have to live in this society with bad credit. It can be pretty tough.
Now you have everything you need to know to have another chance in the credit world. Use it wisely and conservatively. Leant how to manage your finances so you limit your exposure to life’s bumps. Study financial planning and use what you learn to keep yourself on a sound fiscal and credit footing. Its easy to do. It just takes a bit of knowledge and discipline. In fact, it can be summarized in this short phrase “Don’t spend more than you make! “. If you do, you will get yourself in trouble. Don’t do it!
Contacting Credit Bureaus
Dealing with the Credit Bureaus does not always have to be an unpleasant experience. Remember that many people are looking for a quick fix to their credit problems. Those who do usually fall prey to the many schemes that just tell you to dispute debts that are valid and hope the credit bureaus mess up along the way. We recommend a professional approach as well as an honest approach. Your goal is to work with the Credit Bureaus and reach a common goal: to ensure that the information being listed is correct. Here are the Big Three Credit Bureaus:
National Consumer Assistance Center
P0 Box 2106
Allen, TX 75013-2106
Credit Information Services. Inc.
P0 Box 740241
Atlanta, GA 30374-0241
Trans Union Consumer Relations
760 West Sproul Road,
P0 Box 390
Springfield, PA 19064-0390