ATTORNEY ADVERTISING

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1 ATTORNEY ADVERTISING

2 Some jobs are best not delegated. Improving your credit score and putting your finances in shape are best handled by you not by an ill-informed, uncaring, and heavily-marketed debt-settlement or credit-repair agency. These agencies are frequently fraudulent and virtually-always expensive, whether for-profit or non-profit. Handling these relatively simple financial tasks yourself will keep you from being taken advantage of, teach you important life skills, and put you on the path to financial stability. The two tasks also go hand in glove. Raising your credit score will help you improve your finances, and shaping up your finances will further improve your credit score. 1. Repairing your credit A - How credit scoring is used The majority of lenders use FICO s rating system when determining creditworthiness, so your FICO score is what you want to work on improving. [The name FICO comes from Fair Isaac COrporation, the rating system s creator.] If you raise your FICO scores to an acceptable level, your credit scores from other raters will follow. Here is the national distribution of FICO scores (FICO scores range from 300 to 850, and higher is better): 1% up to 499 5% % % % % % % 800 plus Lenders use FICO scores to predict credit problems. By analyzing past data, they believe they can predict future default rates. Here are delinquency rates by FICO credit score: 87% up to % % % % % % % 800 plus A higher FICO score will not only help you qualify for a loan, but will also get you a lower interest rate.

3 B - Factors that go into a FICO credit score The primary determinants of your FICO score are: (1) payment history 35%, (2) amounts owed 30%, (3) credit history 15%, (4) new credit 10% (5) type of credit used 10%.

4 (1) Payment history 35% This is the most important factor, counting for 35% of the score of the average person. The last 12 months of payment history carries the most weight. For example, a single recent late payment can lower your score by points, and missing the payments on all your bills one time can drop your score 150 points. Accounts that go to collection or judgment can lower your FICO score by more than a two-year old bankruptcy. Consecutive late payments are weighted more heavily than individual late payments. For example, paying three different bills late does not hurt your FICO score as much as missing three payments in a row of the same on the same bill. (2) Amounts owed 30% The second most important factor is the credit balances you maintain. FICO analyzes these numbers as a percentage of the credit balance. E.g., a $1,500 balance on a $5,000 credit limit is 30%. The account with the highest balance relative to your credit limit is given the most weight. Your FICO score is negatively impacted less if your balances are spread among multiple accounts than concentrated in one account. It is better to owe $900 each on three $5,000 limit credit cards ($900 / $5,000 = 18%) than $2,700 on one card with a $5,000 limit ($2,700 / $5,000 = 54%). (3) Credit history 15% The older your credit accounts, the more this factor will help your FICO score. At minimum, you must have one account that has been open longer than six months and that account must have been updated sometime in the last six months. Recent activity on your accounts helps. (4) New credit 10% Every time you apply for credit, the prospective lender makes a credit inquiry. Each inquiry reduces your score. That means every department store card you sign up for in order to get a merchandise discount is initially reducing your FICO rating. Of course, a positive payment history on that department card will ultimately raise your FICO score. Multiple inquiries in a short period, say when you are rate shopping, will only be counted as one inquiry. Making an inquiry yourself will not count. (5) Type of credit 10% Borrowing from a lower quality lender like a finance company will lower your FICO score. As a general rule, FICO will downgrade you if you are paying higher interest rates than others.

5 C - Raising your FICO score (1) Check your credit history You cannot clean up your credit record unless you know what is in it. Every 12 months you are entitled to a free report from each of the three major credit reporting agencies: Equifax, Experian, and TransUnion. Obtaining your credit reports yourself will not count against your FICO score as an inquiry. Obtain one or more of the Big Three reports from the Annual Credit Report Service at AnnualCreditReport. com, , or P.O. Box , Atlanta, GA You will need to provide your name, address, Social Security number, and date of birth, and will be asked several questions to make sure it is you asking for the information. When you receive your report, check for inaccuracies. Look especially closely at the payment histories, watching for notations of being late when you believe you paid on time. As discussed above, recent payment history has a larger influence on your FICO score than any other single factor. Also look for: Credit inquiries more than two years old Credit accounts that do not belong to you Duplicate entries, e.g., a collection agency is listed separately from the original creditor Closed accounts listed as open Account closed by you that does not say closed by consumer Credit histories for someone with a similar name Premarital debts of your spouse Paid accounts listed as unpaid

6 (2) Pay special attention to items that will get you denied The following items appearing on your report can get your application for credit denied: In the last 12 months, more than 30 days late two or more times or more than 60 days late one time A bankruptcy in the last 24 months with no new credit A judgment against you in the last two years (longer if it remains unpaid) Large number of revolving accounts (accounts like credit cards or line of credit which can be repeatedly accessed) More than three credit inquiries in the last 12 months No physical address or telephone No bank accounts or credit references Less than six months at your current job (3) Look for inaccuracies and dispute them If you find an inaccuracy on your credit report, you can dispute it online, by phone, or by mail. Contact information is available at AnnualCreditReport.com. Explain exactly what is wrong and if possible support your claim with documentation. Disputing a credit report entry is free. The credit reporting agency must make a decision within 30 days (45 days if working from a free instead of paid-for credit report) and notify you within five days of making its decision. If the furnisher of credit cannot verify the disputed information, it must block the information so it does not reappear on your credit report. Sometimes the furnisher is too busy to respond. If you find an error at one of the Big Three reporting agencies, check with the other two to make sure they do not have the mistake on their reports. Each time your credit report is improved, obtain a corrected copy. Corrected copies of your credit report are free. (4) Negotiate with the credit furnisher This is by far the most effective technique for removing bad credit items from your report. At the same time you are tackling debt reduction and debt collection, so the benefits can be larger than just an improved FICO score. Your negotiating goal, in descending order of desirability, is: The account is changed from a negative to a positive The current rating is replaced with one based on future performance A negative rating is replaced with a neutral rating, or The account is removed from your credit report If you owe money, you have something the credit furnisher wants and thus something to bargain with. A common settlement figure is cents on the dollar. Begin your negotiation at cents. Don t pay the agreed-up number until you have received a satisfactory offer in writing. Make sure the writing clearly states your credit report agreement; merely saying Paid Settlement is an adverse entry that will hurt your FICO score. Most creditors are willing to remove adverse history in exchange for payment, so don t give up if the first staffer you talk to declines your offer. Ask to speak to a supervisor with authority to deal.

7 Detailed information may be obtained from our free ebooklet Tips and Letters for Negotiating with Creditors which is available on the home page of our website. (5) If a third party owns your debt The task is more difficult when a third party has purchased your debt, but you can still get adverse items removed from your credit report. Employ these tactics: Consider opening a new account with the original creditor. Keep it in good standing, and then appeal to the compassion of an understanding staffer. Dispute with the credit bureaus any debt that has been sold. Sometimes debt sellers will not bother affirming the debt since they receive no benefit. (6) Stop paying late Trying to repair your credit while still paying late is like running on a treadmill; you won t get anywhere. Recent late payments will lower your FICO score faster than you can raise it, so you have to immediately begin paying your bills on time. Period. (7) Be sure positive information gets reported Maybe you have an old installment, revolving, or student loan that does not appear on your credit report. If that loan is in good standing, obtain documentation from the creditor. Have the creditor send a letter to the credit bureaus and a copy to you. (8) Re-establish credit Obtain a new credit card. If you cannot qualify for an unsecured card, obtain a secured credit card (requires a cash deposit) and convert it to unsecured after the minimum period has passed (usually six months). Many providers report secured cards as unsecured; be sure yours does. Open both checking and savings accounts, and use the checking account to timely pay your bills. Obtain overdraft protection if you are concerned about bouncing a check. (9) Use creditors who report to all three bureaus Many creditors do not report to the bureaus. Especially if you are seeking to repair your credit, be sure to obtain new credit only from providers who report to each of the Big Three. Otherwise you are wasting your efforts at re-establishing a good payment history. (10) Raise your credit limits Ask your creditors to raise your limits. Limits can usually be raised every six months.

8 2. Fixing your finances A healthy percentage of the population will encounter financial trouble at some point in their lives. It might be caused by job loss, medical bills, predatory loan, divorce, or family member in need, but the end result is the same debt has grown to a troublesome level. Regardless of the cause, the initial steps to moving past your financial problems follow this general path:

9 Assess your situation You need to tally up your total debt burden. Remaining in the dark about the extent of your financial trouble will only make it worse. Total your past-due credit card and loan payments, plus any regular monthly obligations like electrical and telephone. Raise cash Cutting expenses and selling assets are usually your best avenues. Ruthlessly examine what you spend and you own, and do without as much as you can tolerate. The quicker and further you can get your outflow below your income, the more you can devote to reducing your debt. And all the cash you can raise from sales can be put immediately against arrearages. Borrowing is usually your worst choice, for adding debt is rarely the solution when you have too much debt. Think long and hard before taking out another loan, or borrowing from your retirement account. Negotiate with your creditors If you are in serious financial trouble, a lowrisk proposition for you is to ask your creditors to reduce your outstanding balances in exchange for immediate payment of the negotiated sum. Your FICO rating will be affected, but the sooner you settle the debt the quicker you can begin repairing your credit. There is an art to negotiating with creditors, which we describe in detail in our ebooklet Tips and Letters for Negotiating with Creditors. It is available instantly and free on our website. Consider bankruptcy If you are overwhelmed by your debts and cannot make headway against them, then you are a candidate for bankruptcy. See our website for dozens of articles on bankruptcy, including its pros and cons, which type of bankruptcy is for you, the legal process, the key forms, and numerous tips. Once you have assessed your financial situation and taken the initial steps to improve it, it is time to focus on a permanent solution.

10 A - Create a budget and stick to it We wish we had a more innovative and palatable suggestion for you, but getting your finances in shape permanently is a lot like losing weight and keeping it off planning and self-discipline over the long term are required. The planning part of fixing your finances is a three-part process: (1) tally your current spending, (2) make a budget, and (3) stick to your budget. Your goal is to reduce your spending far enough below your income so that you have available a material sum each month to apply against your outstanding debt. Once your debt is clear, this monthly surplus should be devoted to building up your savings. It is only by saving money every month that you will obtain financial stability and security. (1) Tally your current spending The simplest way to accomplish this is to for two or three months keep a daily diary of your expenditures. Alternatively, you can go back through your check register and credit card receipts to reconstruct your spending. (2) Make a budget You need to pare your expenses low enough so that you can set aside 10-15% of your net income for debt repayment and then saving. The older you are, the higher this percentage should be. (3) Stick to your budget The easiest way to make sure you set aside the target percentage is to have it deducted from your paycheck. It is harder to spend it if you don t receive it in the first place. Start with a small percentage one you can stick with and then periodically increase it. While you whittling down your accumulated debt, you will have to each month turn this money over to your creditors. But as each debt is paid off, you will retain more and more of these deducted funds. Eventually you will be able to keep the entire payroll deduction, and that is when you will start getting ahead. B - Stay out of financial trouble Understand your financial weaknesses, and work to stay clear of them: If overuse of credit cards got you into trouble, try living without them for awhile. Removing cash from your wallet at purchase time makes it clear how much you are spending, unlike swiping a credit card. Once you believe you can avoid using credit cards for items you would not spend cash on, try using a card for the basics gas, groceries, and staples. If high-risk investments have cost you money, then stick to safe ones like money-market accounts, bank CDs, and short-term bonds. If luxury purchases are what break your budget, get some new low-cost hobbies. Stay out of the malls, off the online store sites, and out of restaurants.

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