The Credit Repair Guide

Transcription

1 The Credit Repair Guide A Consumer s Guide to Debt Repayment and Financial Solvency All Rights Reserved. Photo Credit Tax Credit (@)Flickr Page 1 of 30

2 Table of Contents 1 Current Situation Solution Objectives Approach Benefits Why Your Credit Score Is Important Factors That Make The Credit Score The Credit Report Break Down Group Factors Weighted What Does Not Influence Credit Most Important Steps To Improve Credit Payment History Amount of Credit Owed Other Options For Reliving Debt New Credit Accounts Credit Types Credit: What The Numbers Mean The Impact Of Identity Theft On Credit Conclusion Page 2 of 30

3 Credit Repair begins by recognizing that debt has become a problem. 1 Introduction Statistics Show that debt has become a huge economic problem. In the U.S. according to reports issued by the Federal Reserve along with the Joint Economic Committee and Credit Reporting Bureaus, nearly 15% of households have an amount of debt that exceeds 40% of their income. Another 26% report their debt has climbed within the past year. The average household debt is over $50,000. If these numbers alarm you, it is probably because you have decided it is time to pay off debt. Perhaps your debt has finally impacted your credit rating. Most consumers find that too much debt for too long has a negative impact on their credit. Debt has a way of doing that. When debt becomes excessive, it can become unmanageable. When debt becomes unmanageable, as is often the case with prolonged high debt loads, it often goes unpaid or underpaid. This can have longlasting impacts on one s credit. 2 Current Situation According to the FDIC, debt has become staggering in recent decades. The average credit card debt has climbed to an alarming $15,266 among households, with the average student having as much as $32,559 in debt and the average mortgage holder having at least $149,667 in debt. The U.S. as a whole has over $11 trillion dollars in debt with a total of more than $850 billion dollars in total credit card debt. The picture is overwhelmingly dire. The Federal Reserve shows that in just the last few months credit card debt has risen.13% and that number continues to climb from 1-2% annually. That amounts to thousands of dollars of debt each year. While most consumers are interested in lowering their debt, for many debt continues to climb. Page 3 of 30

4 3 Solution These days it seems like everyone has some type of credit problem. Whether it is one late bill or late mortgages, credit cards, and medical bills that have piled up leading to bankruptcy, delinquent bills and payments can all spell trouble when it comes to your credit. Many times lenders and the agents that you owe money to will take adverse action if you owe them money. This may come in many different forms, including many late notices, account closures, or reporting to a collection agency. If your take too long to respond to an agency, your delinquency can be delivered to consumer reporting companies. Credit agencies become involved when debt becomes too high and unmanageable, and goes unpaid or underpaid. This has a damaging effect on your credit. 4 Why Your Credit Score Is Important Credit scores are important for many reasons. This score determines an individual s qualifications for many different important events or purchases. Your credit score may qualify your application for credit cards, home and automobile loans, it may influence your student loan, an apartment or home loan rental eligibility and many other important factors. When applying for a bank account one of the first things considered is a credit score. Some individuals find when they apply for a bank job or a position in the financial services industry that one of the first things considered is the credit score. Why is this important? The credit score provides lenders and other agents with an impression of how reliable your credit history is and whether you have the ability to pay back loans and other debts that you are managing. 4.1 Factors That Make The Credit Score There are many factors that determine your credit score. It is important to understand how these factors interact. Your credit score follows your unique credit history. It will examine your credit history from past to present. The interest you pay and the score you have relate to one another as they are inversely proportional on a one-toone ratio. So if you work diligently to improve your credit score they you will find your monthly payments decrease as the interest that you owe decreases. If you want to purchase a new vehicle for example, with financing and were to take out a 48 month fixed-rate auto loan that was $20,000 dollars and your credit score was already very low, about 598, then you would have to pay a rate close to $400. Someone that is purchases a car with a credit score of 720 or 750 which is a very high score, will have a monthly payment that is closer to $250, Page 4 of 30

5 mostly because his credit is better according to information gathered from myfico.com. Why the tremendous difference? This is because if you have a record of paying on time then you are rewarded with lower interest because you have shown that you will continue to pay on time. While it may seem like a backwards system, it works to reward those individuals that pay their debts on time. In the meantime if you have not paid your debt on time, you end up in a backwards spiral of high interest and bigger payments. 4.2 The Credit Report Break Down The FICO score contains information from many different pieces of your personal credit information. This data is calculated using five separate categories or groups. These particular groups may contain good and negative information that will raise or lower your credit score accordingly. Good information and negative information is combined to help calculate our credit score. One of the best parts of the FICO score is that it is not permanent. You can work to improve it any point in time. A history of working diligently to make payments on time every time will always result in positive points and raise your credit score. Here is a listing of the groups that FICO looks at when it calculates your credit score: Your personal payment history. Amount of money owed in sum. The length of time you have had a credit history. Any new credit that you have acquired or applied for. The type of credit that you use, whether long-term, credit cards, car loans etc. The FICO score is then calculated based on the percentages of each of these categories. Let s say for example you have a history of credit in long credit categories, like mortgage credit and automobile loan credit. You may have a history of paying these on time, every time. The FICO score will look at this information and provide you with a higher score than a lower score because you are paying your credit regularly, on time, over a long period of time. This is a breakdown of what this looks like to the FICO system. Page 5 of 30

6 FICO Group Credit Score Determinants Types of Credit New Credit Applied For Length of Credit History Amount of Credit Owed Series1 Long Term Payment History 0% 10% 20% 30% 40% Figure 1.1 Percentage of influence each credit score determinant has on credit score. The chart above shows that long-term payment history is the largest determinant of credit score, closely followed by how much credit an individual owes, and the length of credit history. Smaller influences on credit include the types of credit one has and any new credit applied for. Every aspect of your credit score is inspected, examined closely and weighed. 4.3 Group Factors Weighted Each of these categories has their own influence, and is weighted by FICO before a final determinant is made of what your credit score will be. Some people who do not have a lengthy credit history may have one group weighed more heavily, like new credit, than someone that has an established credit history. How important one group is over another will ultimately depend on the overall credit report that you have. Everyone s credit report is very unique. If someone has a very long history of paying long-term debts on time, but then acquires a shortterm debt they have a problem managing, may not have as bad of a credit score as someone that has several short-term lines of credit that are paid on time, but one long-term debt they have consistently paid late or very late. You cannot measure with precision the exact way one group or factor will impact your credit because credit is explored uniquely, and used as a picture of someone s practices over time. Page 6 of 30

7 There are minimum requirements to have a FICO score. These include: One account that has been open and paid for a minimum of six months. One account that the credit bureau has been monitoring, and that you have not disputed. No report of a death. Let s look at each of the individual factors that the credit report weighs more heavily: Paying your debts on time your payment history is the single most influential factor in determining your FICO score. A lender wants to examine whether you have a history of past credit accounts that you have worked to pay on time. This is important. The debts you owe a lender will also look at the amounts that you owe to specific accounts. This is the next most important factor in determining your overall credit history. Your FICO score may be lower if you have high credit amounts owed to several organizations. However, if you have several credit accounts, this does not necessarily disqualify you or mean that you are a high risk. You may have several accounts and pay all of them on time. Credit history the length of your credit history is influential. If you have a long and established credit history, this will result in positive marks on your credit report and may increase your credit score. Some people still have a good credit score however, even without a long credit history. There are some factors considered that include how long a particular account has been established, and how long you have used certain accounts. If you have accounts open but have not used them in a long time, the FICO score may reflect this in a positive or negative way depending on other factors in your credit report. Credit Types Your FICO score depends on the mix of credit that you have. If you have a good mix of credit your score is likely to go up. This may include long-term loans you pay on installment, credit cards, retail credit or loan accounts and accounts with mortgage companies or finance organizations. New Credit Accounts This is also considered but not as much as other factors. You can hurt your credit score by opening many different credit accounts very quickly. This often happens with people that do not have any credit history. However paying on these accounts over time and on time, will help improve your credit history. Page 7 of 30

8 4.4 What Does Not Influence Credit Just as it is important to understand what does influence credit, it is important to understand what factors do not influence credit history. Some people have many types of misunderstandings about what influences credit. This is a listing of the factors that do not influence credit history. No matter what you do, none of these factors will act positively or negatively on your credit history. Your gender or related factors. The U.S. Equal Employment Opportunity Commission and other federal agencies including the Consumer Credit Protection Act works diligently in business and in employment to prohibit the credit score from affecting someone based on their race, color, religion, national origin, sex, their marital status, their disability status or other factors. If you are receiving any form of welfare or public assistance, and using your public rights as protected under the Consumer Credit Protection Act, these factors cannot influence your credit score. That means if you are receiving any type of public assistance, this is not something that will be recorded and used as a negative or positive factor on your credit report. Age. Your age cannot affect your credit score. While the length of time you establish credit is a factor, your age does not. Some people do not establish credit until later in life, so a good credit score is not necessarily an indicator of age. Other individuals have very good credit established very early on at life. So do not think that your age will necessarily influence your credit score. Salary, employer, dates of employment. Your job history is not a part of your credit score. While employers sometimes run background checks, which may include a copy of their credit record, this credit report is separate from a federal or state criminal background check. Your criminal or other history is kept separate from your credit history and is not related to your history of paying your debts on time. The FICO score is not related to this type of information. Your location. The FICO score does not take into consideration your personal residence. Whether you live in an apartment, a house, or a shared living arrangement, this will have no influence on your FICO score. Interest rate. While some banks and credit card providers will look at your credit report to determine your interest rate, the interest rate that a credit card or other agency charges you cannot directly influence your FICO score. Credit cards will report your payment Page 8 of 30

9 history to your credit bureau, but this is separate from your interest rate. Inquiries related to certain events. Some inquiries are reflected on a credit report. But your score will not include consumer-based inquiries, including requests that you make for your credit report to verify the information in it or check it. It will also not include promotional inquiries which are requests that lenders may make to see if you can be pre-approved for a credit offer. There are also what are considered administrative inquiries which include requests by lenders to review your account, to help see if there are methods for improving your score, or to review information in your report. These inquiries will not count against you. Employer-related inquiries to verify your credit prior to making a job offer also do not count as harmful on your credit record. Many people do not realize that these inquiries are harmless, and may fear having someone check into their FICO report for ordinary and customary business reasons. Credit counseling. If you are participating in a credit counseling program, this will not necessarily show up on your FICO report. While it is good that you are taking steps to improve your credit, there may be no indicator on your credit that you are in a consumer credit counseling program. This does not directly influence your score. If by taking a counseling program you pay your debts on time, this may influence your FICO score by raising it. 5 Most Important Steps To Improve Credit If your credit record is less than perfect, it pays to take action to correct your credit score. However, working to improve credit is not something that happens overnight. It is much like any home improvement project. It takes time. There are no quick solutions for bad or negative credit, despite many advertisements and programs that would try to tell you otherwise. You can pay a lot of money for programs that promote quick credit fixes, but most of these or many of these are not accurate. Rebuilding credit requires that you work diligently to manage your debt over time. Once you have been working to repair your credit over time, you will see positive impacts on your credit. 5.1 Payment History Because payment history is such a big influence on credit score, it is important that you work on your payment history as one of the Page 9 of 30

10 number one factors for improving your credit. This contributes to roughly 35% of your credit score. This has a large impact on your FICO score. The less you pay your bills on time, the less of a good score you will have. Here are the most important tips for maintaining and re-establishing a good credit score by paying attention to credit history. Make sure to pay new bills on time. This is important. When you have late payments, this will affect your credit score the most. Avoid having payments go to collections, which will negatively impact your credit. Get current on your bills.the longer bills sit, the more time they have to affect your credit score negatively. While older bills will impact your credit less than newer bills, it is still important to catch up. Your first step is to become current with the bills you have now. FICO is going to look at whether you are paying the bills you have currently. So examine the bills you have now, and start making payments on them. Avoid Collections. Know that even if you pay off a collector, this record will stay on your report for 7 years. This can have a long-term effect on your credit record. There is no way to remove it from your account. Seek credit counseling. If you are not able to pay your debts, and have financial issues, find a good and honest credit counselor. While this may not improve your credit score right away, a legitimately credit counselor can help you learn to manage your credit and find ways for you to pay your bills on time. With time a credit counselor can help you develop a plan that will improve your debt. Credit counseling may not directly benefit your FICO score, but over time you will see improvements. When working on repairing your credit, the most important detail to pay attention to because it accounts for 35% of your score is your payment history. This cannot be emphasized enough, and thus is repeated frequently. Many people will jump through hoops to find other ways to improve their credit. But, realistically, the best thing you can do is pay bills often, and routinely. While having late payments is not the end of the world, it certainly is the most important thing to start working on fixing with regard to your credit score. So, to start fixing your credit score, you should start by trying to fix the most current (late) bills first. This will have the most dramatic effects on your credit score. Page 10 of 30

11 You may have bills from many years ago that you still need to pay off on your credit report. These may include old school loans and medical bills. Despite this, you should look at the most current late payments that are reflected on your credit report. This is because the credit bureau will look at these first and weight these more heavily. These have the greatest weight on your credit score. Lenders will also look at these, because these reflect your current situation, and not your past payment history. If you want to make a good impression, you will want to pay these first. You may explain to a lender that you made some past credit mistakes, but you are working on improving your credit payments now. If you have a record of making payments on time now, this will be reflected on your credit report by the payments that you are making to the debtors on your most recent late bills. This is why these payments are reflected as most important on your credit record. This will help you have a more positive credit record. No matter how bad your credit score looks now, it can look better if you work on this aspect of your credit record. Does improving your credit score now and making no late payments mean eventually you will have a perfect credit score? No it does not. There are a good percentage of credit scores with no late payments that still have a not perfect score. Remember that ultimately many factors impact the credit score and that the payment history while important still affects 35% of the score and other factors will impact the rest of the credit score. When calculating your payment history, look at the overall information on all of the accounts that you have. These will include your MasterCard, Visa, American Express, Discover and other credit accounts that you have. These may include other installment payments which may come in the form of retail accounts (Target Credit Cards, Wal-Mart, Macy s, other retail accounts), and retail accounts. You may have installment loans with other corporate accounts, anywhere where you are required to make monthly or other partial payments. These are all financed accounts that have the greatest impact on your credit. Any place that you are required to make a 30, 60, or 90-day payment arrangement is likely to be reporting to the Federal Credit Bureau and thus you should work on keeping these accounts current and making payment arrangements. If these accounts are delinquent, you need to address these payments as the first step in repairing your credit. Page 11 of 30

12 There are other records that can be quite serious and damaging to your credit report that you should also address immediately if you want to repair your credit as soon as possible. These include: Collection accounts. Public record accounts such as liens, bankruptcies, and wage attachments. Judgments (financial) against you. Suits, legal accounts. If these items are older they will count less against your financial credit score. If there is less money owed they will also countless against you as opposed to accounts with more monies owed in them. FICO always looks at (1) How old a missed payment is (2) how much is old and (3) whether you are making payments now on delinquent recent accounts. Another consideration is whether you have recent accounts that have no late payments. This will have a HUGE impact on your credit record. If you want to repair your credit, have accounts that you are paying that have no late payments. This is one of the best ways to repair your credit. A track record of making payments on time will work quickly to improve your credit. This shows fiscal responsibility. Lenders will look at this too as a sign that you can make your payments and that you are working toward debt repayment. Quick Reminder Tips: Keep your credit card balances within reason. Having too high balances or credit card balances that are maxed out will result in a low credit score. This suggests that you are unable to manage your debt. You do not want a high outstanding debt. Pay off your credit card debt. Pay it off in small chunks but pay it off over time. Try not to transfer debts to another account. This only prolongs the inevitable. Avoid closing credit card accounts. Your credit history in the short-term will look better if you have accounts that are open and accounts being paid off. Avoid scam credit repair services. These services that claim to remove negative information, as this information generally stays on your report. There is no real way to remove information. You have to prove that you will pay your debt over time. The only real way to improve your credit score is to have a record of making payments over time. You can only remove false information. Page 12 of 30

13 The only way to remove information from your credit information is if there is false information on your report. If there is false information on your report, information about an account that you do not own, or a collection account that you paid off before it should have gone to collections, then you can file a legitimate dispute and have this information removed from your credit report. This information can be removed from your credit history, which may improve your credit score. However, there is no way to legally remove negative information otherwise. There are some companies that will charge high fees for their services, claiming that they can improve your credit score and remove negative information from your credit history. Most of these services are glamorized credit counseling services that cannot offer what they claim to offer. Be on your guard, and avoid paying for services that will likely get you more in debt that you already are. There are government consumer counseling agencies that provide accurate and legitimately counseling services. These services are often provided free or very low cost to help you if you cannot repair your credit or pay your debts on time. They also offer free financial planning services and courses such as budgeting and record keeping. These services are beneficial, and can teach you how to keep a budget and maintain a good record of your finances so you can manage the debt you have and learn to balance your debt to income ratio. This is the kind of information that will be useful to you as you learn to repair your credit. Rather than try to have someone magically repair your credit for you, you would be far better off learning to manage your finances and learn to budget the income that you have coming in. A legitimate credit counseling agency will tell you that you can dispute inaccurate information on your credit report by sending a letter to the credit agency, or by filling a request online to each of the three credit reporting agencies. These are Equifax, Experian, and TransUnion. You can visit annualcreditcreport.com or call toll free at to order a report of your credit free each year to find out what information you need to dispute. Sometimes information needs to be disputed due to identity theft. It is a good idea to check your credit report to make sure the information on it is absolutely correct. It does not cost anything at all to dispute any mistakes or any information that is old or outdated on your credit report. A bankruptcy for example, should be discharged after 7 years. Page 13 of 30

14 You can dispute this if you acquire a copy of your credit report to find the information is still on there. You may need to send a notice of your discharge paperwork. It is important when repairing your credit that you take complete charge of your rights. When you write to a credit card agency whether online or in a formal letter, you need to include what information you are disputing. You should include relevant copies of any documents that you have (like discharge paperwork) of the information that is not correct. If you are a victim of identity theft you may have to include police paperwork that you have filed that proves that you have been a victim of identity theft. You should always include copies and not your original paperwork because you will not get your paperwork back. If you file a claim online then you will have to mail copies of paperwork to support your claim. You will need to include information about dates, times, and any action taken. You are the individual that is solely responsible for disputing information. If you are providing evidence about a debt that has been paid on time, then you need to provide a receipt, information about the person that you spoke to if you paid a debt with a company or made payment arrangements. Be aware that FICO will confirm this information. Sometimes disputing information on a credit report takes time and perseverance. There is no reason however that you cannot handle this on your own. You have rights, and you are able to do this. When you send a letter to each of the credit reporting agencies you should do so by certified mail so you are sure that your letter is received by each of the credit reporting agencies. This will ensure that you do not have to dispute the receipt of your letter. Here is a sample of a letter that you can send to dispute information in your credit report: ATTN: RE Complaint Experian Address To Whom It May Concern: I am writing in regard to information I would like to dispute on my credit file. The items I would like to dispute are highlighted on the attached copy of my credit report. I am requesting that this item be deleted because it was discharged on 3/15/2013 as per court order. Enclosed are copies of the discharge paperwork. Page 14 of 30

15 Please investigate this matter and contact me. Thank you for addressing this issue. Regards, Jane Smith After you submit a report a credit agency will have up to 30 days to investigate your claim. The credit agency will forward your dispute to the appropriate organization. The agency will also provide you with information regarding the results of their investigation. A free copy of your credit report and any corrections will also be provided to you. Anyone who received a copy of your report during the last six months including people that denied you credit must also receive a copy of your credit report. You may request that anyone who received an incorrect copy of your report however, over the past two years receive a corrected report. If the investigation does not resolve a discrepancy however, you may have a record of your dispute placed on your report. If you do go with a credit counseling agency because you have difficulty managing your debt, seek a reputable agency that offers certified counselors. There are many non-profit agencies that offer free information. You can check into them with a State Attorney General Office or a local protection Agency. They will be able to verify any complaints. A list of agencies is available at the U.S. Trustee Program which is part of the U.S. Department of Justice, available at Justice.gov/ust. To contact each of the credit reporting agencies, use the numbers below: o o o Experian (TRW) , Equifax: , TransUnion: , Amount of Credit Owed This is another important category on your credit score. It is critical you work next to improve this category as much as possible as this influences your credit a large percentage, nearly as much as your payment history. Here are some recommendations that can assist you in repaying your amount owed. Page 15 of 30

16 Pay off debt.this is another important detail that is repeated frequently. It is amazing how many people forget to pay off debt even in the midst of credit repair. Some individuals get into the habit of transferring their balances to lower interest credit cards rather than paying off their debt. This may seem like a good short-term solution, but the best long-term solution is to simply pay off debt. Debt will always remain debt until it is paid off in full. The best way to handle it is to pay it off. Credit score will only improve if you pay the amount that you owe. If you open more accounts and move your debt into them, this will reflect on your report and it may not reflect in a positive manner. Keep balance low on revolving credit cards. These are credit balances that automatically renew when you pay your balance off, and include credit cards. Your credit will improve automatically if you keep these balances low. Keep credit cards open. If in the short-term you want to improve your credit rating it is best to keep your credit card accounts open even if they are not used. This is a short-term strategy that will help improve your credit score. Don t open new accounts. While it may seem like a good idea to open new accounts, this may actually harm your credit. If you don t need a new account avoid opening one. A debt management plan is another way to manage debt or credit owed when you are trying to repair your credit. You can always decide to enroll in a debt management program. While this is not the same as credit counseling, it is a way to help pay down your debts and start to repair your credit. Using a plan like this, you are able to deposit a small amount of money every month using a certified credit counseling program. Then the credit agency uses the money that you deposit to pay each of your unsecured debts. This may include debts associated with your credit card bills, any student loans that you have and medical or related bills. These bills are paid on a schedule that a credit counselor arranges with your creditors. When you come up with a plan like this, typically a credit counselor is able to arrange a lower interest rate than you would by yourself, or wave the fees normally associated with having large outstanding debt. You may want to check however, first with your creditors and debtors to make sure that they are actually agreeing to the arrangements and fee waivers that a credit counseling agency says they are offering. Page 16 of 30

17 To make a debt management plan work, you have to make on time payments. This type of program will typically take 4 years or more to complete. There are reasonable questions that you should ask before you agree to sign up with a debt management program. These include: Are there other options available?there may be other options available to you besides a debt management program. If there are no other options available through a credit counseling service besides a debt management program, then you should switch to another credit counseling organization. Some other options should include money management and creating a budget that you can use to pay off your debts. How do you calculate my payment?find out how the credit counseling agency will calculate your payment, and make sure that you can actually afford the payment. Figure out what you can do if you cannot pay the amount they calculate. Debt management will do you no good if you cannot afford the payment. How often will I receive updates?find out how often you will receive status updates on your account. Find out if you can receive online or other updates for your accounts. What tools are available for lowering interest? A good credit counseling agency will always have a way to lower interest and finance charges. They should also lower or eliminate late fees. If they do not. Then find another agency to work with. If they do claim to lower interest or eliminate late fees, then call your creditors to verify that the fees they claim to lower are actually lowered. Do I have to make payments to creditors?find out what the actual stipulations of the plan are. Will my credit be affected?find out how enrolling in a debt management plan affect your credit. Some debt management plans will suggest that they can fix negative information on your credit but this is false information. A debt management plan can help you pay down your debt. Over time this can help you improve your credit. Make sure your debt management plan sticks to the facts. If enrolling in a plan be sure their payments are made before your due dates on your bills or you will be subject to fees and penalties. If a debt management plan claims to waiver these fees make sure that this is the case. When you get statements from creditors make sure that your debts are being paid in a timely fashion. Part of the appeal of using a debt plan is that it should lower fees and interest or finance charges. If it Page 17 of 30

18 doesn t then consider a different option; a good plan should help you negotiate certain difficult circumstances with your creditors. Make sure you find a company that can work with you and help you in difficult circumstances. 5.3 Other Options for Relieving Debt There are other options for repairing your credit and relieving your debt load. You are not left with leaving a credit counseling company to do all the work for you fortunately. Many debt companies and corporations will work with you. Try calling your credit card agency even if they have not talked with you in the past. Most after some time will work out a plan with you rather than having your bill go unpaid for extended periods of time. Find their telephone number, and politely ask if there is something you can do to pay off your debt. Explain your circumstances, and try to work out a payment plan that will be within limits that you can manage. If your debt is not paid for 180 days it is written off and your credit score takes a plunge, so negotiate your debt with your creditor before they write off your debt. There are also debt settlement companies that for-profit companies rather than not-for-profit companies offer. They will negotiate with creditors for you to help you settle your debt. This will result in a lump sum payment to help you settle your debt. This will be less than the full amount that you owe. This may require that you have a certain sum of money available to pay to settle your debt. This may be a certain amount of money that you have set aside in savings to pay off your debt. A settlement may be significantly less than the actual amount you owe on your credit card or other debt. These programs encourage clients to stop all payments until a settlement is reached. This will allow enough time to accumulate the money needed for settlement. This can be a risky decision and may not repair your credit in the short term. This can actually do more damage than good, but it may reduce your debt. Be cautious when considering debt settlement. If at all possible work by yourself instead to negotiate a payment plan with creditors which will at the very least show positive initiative to settle your debt and that you are making honest efforts to pay back the money that you owe your creditors. 5.4 New Credit Accounts New credit accounts also impact credit and your credit score. If you are trying to repair your credit there are several steps you can take to approach new credit accounts. Here are several to consider: Page 18 of 30

19 Shop for the best rate when applying for new credit. Some new credit accounts provide the best interest rates for a period of time. Make sure you look for the credit line that will give you the best rate for the longest period of time. Re-establish credit history. There are credit applications that are specifically created for individuals that need to repair their credit history. Some of these have higher introductory interest rates. However, if you have a record on your credit report of paying these off on time when you make purchases, you will gradually get the opportunity to shop around for a card or other line of credit that has a much lower interest rate. Check credit. Know that you should keep up with your credit record. If you are denied a new account you can request a free copy of your credit record and you should. You should be keeping a record of your credit report. Check into it periodically to see what is going on with your report. Make sure that the accounts you open are benefiting your account. If there is incorrect information on your account makes a note of it to correct. Often people will have new inquiries related to getting new credit. They worry that new inquiries will damage their credit. Inquiries may remain on your credit report for two years, although a FICO credit score will typically only consider inquiries that have been recorded for the last 12 months when calculating your credit score. The good news is that inquiries are only considered if they have a high credit risk. Thus only the inquiries that impact your credit will be considered as related to your credit score. Most of the time inquiries have no if any impact on your credit. Many are ignored including personal or consumer inquiries that you generate, or inquiries that lenders generate for pre-approved offers and similar inquiries. That is good news for consumers, who often worry that such inquiries will damage an already hurting credit. You can rate shop and check your credit in order to shop around for new credit. So do not worry too much about this. However, if you plan to apply for new credit as a result of pre-approved offers, then your credit score will drop, although it may eventually increase because you acquire new credit and begin to pay your debts in time. What is important to remember, and what most people have a hard time grasping, is that credit is a cumulative process. You cannot improve or repair your credit overnight. It is something that you have to work with over the long-term. Thus, if you work on your credit, you can improve it, but not overnight. Page 19 of 30

20 So, let s say you apply for many new credit cards, and you do so in a short period of time. This will result in many requests for your credit report. These are all inquiries. These will appear on your credit report. This is referred to as shopping for a new credit report. This many considered high risk activity. However, this will not automatically impact your credit score. In fact, the odds are that it will have no impact at all on your credit record. However, if you are then awarded with a new credit card, or more than one, your credit score will then drop for a short period of time. You might think that your score will automatically go up. But this doesn t happen right away. For your score to improve, you have to show a record of making purchases with your credit card, and paying them on time. If you get into debt with your new credit cards, and do not pay them on time, then your credit score will go down. For inquiries that do have an impact on a FICO score, the impact is typically small. It may take less than 5 point off of a credit score. According to FICO, people that have six or more inquiries are more likely to declare bankruptcy. So it is a good idea to limit inquiries into your credit report. However, inquiries are one of the less important determinants of risk on a credit report. Again, the more important determinants of risk are whether someone pays their bills on time coupled with debt ratio and burden. There is also a timing factor involved with inquiries. FICO generally does not consider inquiries made within 30 days of scoring. So if someone looks for a loan within 30 days of rate shopping the score will not consider it. Thus if you are seeking a loan with a lender try to compare all loans with lenders within a day period to avoid having your credit score impacted. That way having more than one inquiry into your credit score will not impact your credit score by a few points. Sometimes while just 5 points does not seem like a lot, when shopping for a mortgage loan it can mean the difference between a very high interest rate, a very low interest rate, or approval and no approval. Mortgage lenders are very selective in who they will provide loans to and who they will not. Banks are not interested in providing loans to high risk candidates. They want to make sure that they select from individuals that have good credit histories. If that is not you then you will need to work on improving your credit score. Remember the best ways to begin working on repairing your credit score despite a number of inquiries into your credit score include the basics of credit repair: Pay your debts on time. Page 20 of 30

21 Check your credit report regularly before applying for any type of new loans. When you are trying to repair your credit, you should not consider buying expensive or big ticket items. It may be an idea to open a new account if you are trying to establish credit. But this is not the time to start purchasing bit ticket items like a new boat, or a hot tub. This is not the time to consider redoing the kitchen or taking out a loan to invest in that motorcycle that you have always wanted. While it is fine to want these things, and even budget a plan for them, your first goal should always be to pay off your debt first. The number one mistake that most people make when trying to pay off debt, is buying things. Many people transfer debt with the intention of paying it off, and then see things that they want, and use their freshly clean credit card (the one they transferred debt to) in order to buy something. Worse, they get a new account, and they use that instead of building their credit or as part of their credit repair program, and purchase some big item. While it is fine to buy small things as part of your debt repayment program, you should avoid buying big and expensive items. If you do this repeatedly, you will have a difficult time paying off your debt. In fact, you will simply be adding on to your debt a little bit at a time. Ultimately, you need to set up a budget and stick to it. You can take advantage of a debt counseling program to help you create a budget and stick to it. One thing that helps many people is to create goals for themselves. If you want to invest in a motorcycle for yourself for example, create a plan of action. Make sure you agree to pay off a certain number of debts, before you can invest in a motorcycle or other big ticket items. Many subprime lenders may it too easy to get a loan to buy automobiles and other cars, despite what one s debt load or actual financing may be. That means that even if you really cannot afford it, you still may be able to purchase something and create a new account. While this may make you feel good temporarily, it will not make you feel good when the time comes to start paying on that debt and you realize that you cannot! 5.5 Credit Types Credit types are another category that may influence your credit record. Here are some tips for repairing and updating your credit score using different credit types. Page 21 of 30

22 Use credit sparingly. You shouldn t apply for a lot of different credit types simply because they are available. Having many different types of credit is something that people build up over time. But if you do not have a long credit history and attempt to apply for many different types of credit out of the blue, this can affect your credit in a negative way. Credit types and having a good credit mix is positive but won t raise your credit score as a credit repair measure automatically. Manage credit cards. Manage your credit cards and do so responsibly. Using credit cards and making timely payments is an important part of repairing your credit and having a good FICO score. This is also a great tool for credit repair. Someone that has absolutely no credit cards may pose a questionable risk to lenders. Don t close accounts randomly. Just because you close an account doesn t mean it will disappear from your credit report. Remember that your credit report contains your credit history. So if you close something lenders may look at this and wonder why you have done so. Many records stay on your credit report indefinitely. Bad accounts or collections can stay for 7 years. So think wisely before you close an account. You can always leave a credit account open but not use it which may reflect more positively and give you a higher score than simply closing an account. This means that you know how to use your credit responsibly and won t randomly use credit that you do not need. Remember that building and repairing your credit is a disciplinary process that happens over time. So many different factors will be taken into consideration. 6 Credit: What The Numbers Mean The first thing that happens when you pull your FICO Score is you seen numbers. What do they mean? Page 22 of 30

23 Approximate Credit Score Numbers Bad Credit Fair Credit Good Credit Excellent Credit Credit score numbers will vary depending on what an organization is looking for. One organization may consider 600 bad whereas another may consider 600 fair. Here are some average credit score ranges to consider. Below 629 = Poor Credit. This type of credit score is more likely associated with a foreclosure, bankruptcy, a lack or credit history, or consistent lack of payment of bills on time. Some individuals have found themselves in this bracket for a combination of reasons. If you are in this range you are probably seeking to establish credit or looking for credit repair choices. You can choose to get a secured credit card if you are in this range. This can help you re-establish your credit. Since most corporations and other establishments typically require some type of credit these days, this may be your best bet. A secured card may be your best bet at helping you reestablish your credit = Average or fair credit. This is the most common category. Many people fall into this category because they have a lot of bad debt, where they have a lot of debt they are working on paying off. If you fall into this category, you may still have to pay a higher interest than someone that has paid off most of their debt, or has more debt in the longer debt categories like mortgages. You still want to work on paying down your most current debts in order to take advantage of lower interest rates = Good credit category. This is considered good credit and will secure you a good interest rate. You may qualify for most credit cards including private retail credit cards at this credit level. You can open a bank account and secure a good interest rate. You can get a mortgage at a reasonable interest rate, or secure other types of loans with relatively little trouble. You can also sign up for Page 23 of 30

24 credit cards that earn reward and take advantage of other special offers. Be careful not to sign up for too many credit offers. Many individuals with good credit are approached with many credit deals and pre-approved offers which can become tempting and overwhelming if they aren t managed properly = Excellent credit. There is virtually nothing you cannot do with excellent credit. It seems as though this would give people a lot of power. In a nation that is managed by credit, finances and debt, having excellent credit wields a lot of power. This type of credit comes with a lot of perks and rewards. It is associated with many privileges. The American Express card offers individuals a card for premium individuals that are associated with an elite membership. This suggests that individuals can manage and pay off their debts on time. These credit scores can change at any time, and will based on an individual s ability to pay. A small thing such as a large medical bill or a job loss or layoff can impact one s credit rating dramatically. Unfortunately the FICO scoring system is not sympathetic to the plight of one s circumstance. If you have a large medical bill or illness or lose your job you cannot appeal your situation to the credit rating system. Instead you have to appeal to your creditors if you cannot pay your bills on time. Otherwise your tardiness and lack of ability to pay your debts will end up as dings on your credit. This can last what seems like a lifetime, or at the very least 10 years in some circumstances. Often the lack of ability to pay one s debts has a spiral effect, and spreads like a virus into other areas of one s life. Since the recession and general economic downturn more and more people are realizing the impact that credit scores are having on their lives. Scores have had a dramatic impact on the lives of consumers. In the past 620 was a good indication of a reputable credit, but now a good number is considered well into the 700s. Why the change? There are a lot of factors that determine credit scores. Credit bureaus are a private and for-profit industry like anything else. There are private industries that also calculate credit scores including an agency known as VantageScore, which uses a completely different range than the traditionally three credit agencies which use a range score. For example, VantageScore uses a range credit score. This unique range is because the agency uses a different model to calculate credit, which it believes is healthier than the other agencies. Perhaps credit is becoming more of a business than ever before, and so is the business of calculating credit. As credit scores and calculations of credit become more of a profitable business, the Page 24 of 30