HOW TO ESTABLISH CREDIT
If you don’t have a checking account, potential lenders become very skeptical about the way you handle your financial affairs.
When potential lenders see a savings account on your credit application, it gives them a good feeling, regardless of the amount you have in your account.
OPEN A CHARGE ACCOUNT WITH A DEPARTMENT STORE
These accounts are usually the easiest to get when you are new to credit.
TRY GETTING A LOAN FROM A FINANCE COMPANY
Financial companies are usually more receptive to individuals who are just starting out in credit. The interest rate is a lot higher than a bank, but your chances of getting started are greater. Be sure you talk with your banker first to see the chances of getting a loan from your bank before applying to a finance company.
Try to get your parent to co-sign a loan for you.
BUILDING YOUR CREDIT USING YOUR CURRENT BILLS
PBRC connects people who lack a traditional credit history with lenders who want to reach them. They document and verify rental, utility, phone, and other recurring payment that aren’t reported to other credit bureaus. Pay Rent, Build Credit, Inc. (PRBC) is an FCRA compliant repository that enables consumers and small business owners to build a credit file and score, based on their history of making rent and other reoccurring bill payments, which can be used to demonstrate creditworthiness when applying for housing, credit, insurance, and employment.
WHAT AFFECTS YOUR FICO?
Your FICO score can be found on your credit report, so you first need to obtain a copy of that. There are three major reporting agencies in the US: Experian, Equifax, and TransUnion.
You will want to get credit reports from all three, as they may all have slightly different information on them. All three credit bureaus use credit scores, but FICO is specific to Experian and TransUnion. To get a free copy of your credit reports from all three credit bureaus, you can visit Annual Credit Report, FreeCreditReport.com (a website owned and operated by Experian), or you can call 1-877-322-8228. You can also write any of the agencies directly. Note that while the credit report is free, the companies charge $6-8 each to give you your credit (FICO) score.
The point system used technically ranges from 0 – 999, but all or nearly all actual scores fall between 330 and 850.
330 – 619: Poor credit. In banker jargon a person with a score in this range is considered a “Credit Leper.”
620 – 659: Sub-prime financing will be available to you.
660 – 720: Prime financing will be available to you.
721 – 750: Prime – x% may be available to you. That is, you may be able to get interest rates on loans that are even lower than the prime rate.
751+: Excellent credit. May enable you to get even lower prime x% interest rates depending on the credit type you’re utilizing.
UNDERSTAND WHAT AFFECTS YOUR CREDIT
The exact calculation of the FICO score is kept secret as proprietary information, but there are some general guidelines we can apply.
Approximately 35% of a credit score may be based upon payment history. A credit score is negatively impacted if bills are paid late or if there is a history of delinquent payments listed on the credit report, including matters of public record such as bankruptcy, collection accounts, etc.
Approximately 30% of a credit score may be based upon amounts owed or other outstanding debt. A credit score can be negatively impacted if the amount owed is close to the credit limit. A low balance on two credit cards may be better than a high balance on one credit card.
LENGTH OF CREDIT HISTORY:
Approximately 15% of a credit score may be based upon length of credit history. A credit score can be positively impacted the longer that accounts have been open, especially if they are with one financial institution.
TAKING ON MORE DEBT:
Approximately 10% of a credit score may be based upon how much new debt a consumer is incurring. A credit score may be negatively impacted if someone has recently applied for several new credit accounts.
Promotional inquiries usually do not negatively impact a credit score.
TYPES OF CREDIT IN USE:
Approximately 10% of a credit score may be based upon the types of credit currently in use by a consumer. A credit score is usually negatively impacted by loans from finance companies.
Your overall FICO score is the culmination of years of credit experience, but even in the short run there are things you can do to raise it slightly. Always make your payments on time.
Do not carry high balances on credit cards. Ideally you would never go over half the available amount on your credit card for any extended period.
Serious credit problems could range from a 30-day late payment to a judgment or Despite what you may have read on some internet sites, there is no quick fix to repair bad credit. There are, however, ways to remove inaccurate information and improve your credit over the long run.
If there is inaccurate negative information on your credit report, get it removed. Dispute the charge with the agencies by writing to them or going online to their websites. They have 30 days to respond to your dispute. If they cannot verify the negative information, they must remove it.
If you have a 30-day late blemish on your credit you can dispute the negative information as above. If the credit bureaus cannot verify the 30-day late payment with your creditor, the information must be removed.
If you have more serious credit problems such as a judgment, bankruptcy, or foreclosure, it may be in your interest to seek a non-profit credit counselor or an attorney specializing in credit repair. The latter can sometimes settle your debts for less than 35 cents on the dollar and may be able to get some of the information removed. If you simply pay off the judgment for example, it is still going to stain your credit for a minimum of 10 years. For a foreclosure, the term is 7 years, for a bankruptcy, 10 years; and for tax liens, 5-7. Even after that amount of time goes by you will need to aggressively go after the agencies to get the information off your credit.
SHOULD I DECLARE BANKRUPTCY?
There is no “quick and easy” answer to this question. You should discuss your situation with a credit counselor or a bankruptcy attorney, to evaluate the costs and benefits of bankruptcy given your personal financial situation.
Not every debtor qualifies to file for Chapter 7 bankruptcy. A means test is applied to determine if you will be able to repay a substantial percentage of your debt, and if you are determined able to do so you will be ineligible for a liquidation of your debts and will likely have to engage in a repayment plan as part of a Chapter 13 bankruptcy.
The type of debt you owe can be a significant factor in whether you file for bankruptcy, as well as the form of bankruptcy you pursue. Factors which may affect your decision to file for bankruptcy protection are detailed in this associated article: Filing for Personal Bankruptcy Protection in a U.S. Court.
REESTABLISH CREDIT AFTER A BANKRUPTCY
Your ability to rebuild credit after filing bankruptcy is better than it has ever been. After you get your discharge, you will receive many solicitations from lenders offering to finance homes, vehicles, and credit cards.
HERE ARE SOME TIPS TO REBUILD CREDIT RESPONSIBLY AND SUCCESSFULLY:
Open a checking or savings account. Lenders may look at this to determine if you can responsibly handle money.
Apply for store and gas credit cards that you would normally pay cash.
Apply for a secured card where you deposit cash and charge against it. Pay advances back over two months so that they will be reflected as positive marks on your credit report.
Pay your utility bills and rent on time for at least a year.
Find a friend or relative to cosign for you on a loan and pay it on time.
Look for car dealers and mortgage brokers that attest to be “bankruptcy friendly”. Buy a used car so you do not get hit with the depreciation that occurs during the first two years of a new car purchase.
Stay away from payday loans that are at high interest rates and are a “bad credit” trap.
Write a letter to each credit reporting agency explaining the circumstances that lead to you filing.
Live within your means. Do not unnecessarily increase your debt-to-income ratio by taking on credit to purchase luxury items that you DO NOT NEED. Your payments on consumer debt should equal no more than 20% of your expendable income after costs for housing and a vehicle.
Pay your reaffirmed, pre-bankruptcy debts on time.
CREDIT SCORE FACTS AND FALLACIES
FALLACY: MY SCORE DETERMINES WHETHER OR NOT I GET CREDIT
Fact: Lenders use several facts to make credit decisions, including your FICO? ® score. Lenders look at information such as the amount of debt you can reasonably handle given your income, your employment history, and your credit history. Based on their perception of this information, as well as their specific underwriting policies, lenders may extend credit to you although your score is low or decline your request for credit although your score is high.
FALLACY: A POOR SCORE WILL HAUNT ME FOREVER
Fact: Just the opposite is true. A score is a “snapshot” of your risk at a particular point in time. It changes as new information is added to your bank and credit bureau files. Scores change gradually as you change the way you handle credit. For example, past credit problems impact your score less as time passes. Lenders request a current score when you submit a credit application, so they have the most recent information available. Therefore, by taking the time to improve your score, you can qualify for more favorable interest rates.
FALLACY: CREDIT SCORING IS UNFAIR TO MINORITIES
Fact: Scoring considers only credit-related information. Factors like gender, race, nationality and marital status are not included. In fact, the Equal Credit Opportunity Act (ECOA) prohibits lenders from considering this type of information when issuing credit. Independent research has been done to make sure that credit scoring is not unfair to minorities or people with little credit history. Scoring has proven to be an accurate and consistent measure of repayment for all people who have some credit history. In other words, at a given score, non-minority and minority applicants are equally likely to pay as agreed.
FALLACY: CREDIT SCORING INFRINGES ON MY PRIVACY
Fact: Credit scoring evaluates the same information lenders already look at – the credit bureau report, credit application and/or your bank file. A score is simply a numeric summary of that information. Lenders using scoring sometimes ask for less information – fewer questions on the application form, for example.
FALLACY: MY SCORE WILL DROP IF I APPLY FOR NEW CREDIT
Fact: If it does, it probably won’t drop much. If you apply for several credit cards within a short period of time, multiple requests for your credit report information (called “inquiries”) will appear on your report. Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.
MORTGAGE OPTIONS FOR DISTRESSED SELLERS
If you are behind on payments and wanted to know what options are available, many time professionals forget the simple options to homeowners. For professionals in the foreclosure business, we use terms such as deed-in-lieu, forbearance, loan mod, and other terms that homeowners may not. I have come up with a few terms and options that homeowners should have available as options for available alternatives to foreclosure.
A company will attempt to stall or reduce your payment by submitting a hardship package on your behalf. Many times, the lender will work with a “foreclosure assistance” company before working with an individual attempting to submit a foreclosure package.
With this option, you can sell your house and continue living in. Some investors offer a buyback program where they will step-in quickly, purchase your house, and allow you to rent it while you catch up on your bills and even allow you to purchase it back from them once you are “back on your feet”. (Be very careful, some companies are better than others, and of course, you have those predators out there)
RESTRUCTURE (MOST POPULAR ALTERNATIVE)
Some foreclosure companies will negotiate with your lender to get your loan in good standing again. There are many options available to get a restructure approved like a separate payment plan for your delinquency or even adding the delinquency to the end of your loan. No one can guarantee to restructure your payments, so be careful.
Pay your lender(s) your entire past due payments to bring your mortgage current. This option is rarely feasible. (However, I know some private money lenders that will provide homeowners up to 90% for the reinstatement amount.)
Hardly available, through traditional lenders, however some foreclosure companies have established relationships with in-house lenders who can give loans on mortgages that are in foreclosure if there is enough equity in your property available.
You may simply sell your home before the Foreclosure Sale Date. Sometimes the homeowner is unable to sell the home outright at the desired sale price and this is not an option.
In this instance the lender may take less than what you owe on the loan to avoid a lengthy and costly foreclosure process.
You or a foreclosure company can arrange for you to simply give the home back to the lender and walk away with a clean slate.
This is a last resort. This will only save your home temporarily. If you miss one payment during this process the lender will put you right back into foreclosure.