How to Improve Your Credit
If you have had credit problems, be prepared to discuss them honestly with a mortgage professional. Responsible mortgage professionals know there can be legitimate reasons for credit problems, such as unemployment, illness or other financial difficulties. If you had a problem that's been corrected and your payments have been on time for a year or more, your credit may be considered satisfactory.
If you are currently in excess debt, there are four ways to control it:
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If your credit is not in terrible shape, you can reduce your other expenses, even if it means making hard choices or changing your lifestyle to fit your income. Consider selling a second car, taking equity out of your home, applying for a non secured signature loan, obtaining a loan from a relative, selling your home and paying off your debts with the proceeds and then renting, cashing out your 401K/retirement benefits or selling family heirlooms, jewelry, etc.
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If your credit is already damaged or one of the above isn't an option, go through Consumer Credit Counseling Services (CCCS). Check your yellow pages for the local number. CCCS may be able to help you pay off your debts as if you were in a Chapter 13 bankruptcy, but you don't actually file for bankruptcy.
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If CCCS won't take you, you may want to consider bankruptcy. Claiming Chapter 13 bankruptcy takes longer than a Chapter 7, but your credit will end up in a little better standing. Chapter 13 bankruptcy gives you up to 5 years to pay off your debts. The disadvantage is that you're in bankruptcy for up to 5 years plus your credit report shows your bankruptcy for 7 more years after you have finished paying off your debts.
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If you are so far in debt that you can never repay it, then the best solution may be a Chapter 7 bankruptcy. A Chapter 7 bankruptcy is the least desirable from a credit standpoint, but you are typically out of bankruptcy in 6 months and you don't have to repay any debt. The disadvantage is that this shows on your credit report for 10 years from the date of filing your bankruptcy. Creditors are starting to tighten their credit requirements, and you may have a tough time getting future financing.
If your debts are under control now, but want to improve your bad credit history, the most important factor is to make your monthly payments on time. Use pre-addressed envelopes enclosed with your statements to mail your payments and call the company if you don't receive your usual statement. Also send your payment as early as possible if you carry a balance. Most companies calculate interest on a daily basis, so the sooner they receive your payment, the less interest you'll pay.
Don't procrastinate. It's the day your payment is received that counts, not the postmark date. Give the post office sufficient time (five business days is a good guideline) to deliver your mail. Late payments may mean late fees, higher interest, and/or a negative mark on your credit report.
Never send cash. Open a checking account if you don't have one, or spring for a money order and keep your receipt. Finally do not forget to tell your creditors your new address when you move.
If you are worried about making payments, make a list of your debts and when the payments are due. Contact your lenders immediately if you think you will have trouble meeting the monthly payments to arrange a payment schedule.
Taking money from your retirement account or tapping the cash value of your life insurance policy to pay bills or living expenses may have serious implications you haven't considered, so try to get advice from an expert before you take any major financial actions.
Credit cards can be invaluable in a crisis, since they allow you to charge items and pay them off over time. But they can also be dangerous if you aren't careful and charge more than you can afford. If you do use credit cards, choose those with the lowest interest rates and pay them back as soon as you can to cut your costs.
Your Credit Report
Your credit report provides information to current and prospective creditors to help you make purchases, secure loans, pay for college educations and manage your personal finances. Credit reporting makes it possible for stores to accept your checks, banks to offer credit and debit cards, businesses to market products, and corporations to better manage their operations to benefit the world's economy.
Your credit report is only compiled when you or a lender makes an inquiry. Information supplied by lenders, you and court records is gathered from the credit reporting agency's file and presented in report format for the requester.
Credit grantors send updates to each of the credit reporting agencies, usually once a month. These updates include information about how their customers use and pay their accounts.
Under the Fair Credit Reporting Act, you may be entitled to receive a free copy of your personal credit report if you have been declined credit, housing or employment in the last 60 days. To request your free copy, ask your mortgage company or contact one of the credit reporting agencies directly.
Establish a Credit History
In order to establish good credit, you need a good credit history. If you have no credit history at all, it is easy to start creating one.
Opening a bank account is the simplest and safest way to manage your finances. By opening a savings account or a checking account, you can build good credit by saving money and earning interest, easily paying bills and tracking expenses. Responsible use of a checking account or an Automatic Teller Machine (ATM) card will reflect favorably in your credit report.
If you have services in your name (telephone, gas, and electric), make sure you pay them in full and on time. Pay any loans and credit accounts on time each month. At least pay the minimum, if there is one.
Applying for a credit card and using it responsibly can help you build a good credit history. If you have been denied a credit card in the past, you may want to investigate a secured credit card, where you put a pre-determined amount of money in an account as a deposit in the bank. The secured card can be used in the same way as a credit card with the same convenience and payment flexibility. Gasoline companies and retail stores also offer their own credit cards.
Credit Scoring - How it Works
Credit scoring is a statistical method that lenders use to quickly and objectively assess the credit risk of a loan applicant. The score is a number that rates the likelihood you will pay back a loan. Scores range from 350 (high risk) to 950 (low risk). There are a few types of credit scores; the most widely used are FICO scores, which were developed by Fair Isaac & Company, Inc. for each of the credit reporting agencies.
Credit scores only consider the information contained in your credit profile. They do not consider your income, savings, down payment amount or demographic factors like gender, race, nationality or marital status. Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or reestablishing a good track record of making payments on time will raise your score. Different portions of your credit file are given different weights. They are:
- 35% - Previous credit performance (specific to your payment history)
- 30% - Current level of indebtedness (current balance compared to high credit)
- 15% - Time credit has been in use (opening date)
- 15% - Types of credit available (installment loans, revolving and debit accounts)
- 5% - Pursuit of new credit (number of inquiries)
The most important factor for a good credit score is paying your bills on time. Even if the debt you owe is a small amount, it is crucial that you make payments on time. In addition, you may want to keep balances low on credit cards and other "revolving credit;" apply for and open new credit accounts only as needed; and pay off debt rather than moving it around. Also don't close unused cards as a short-term strategy to raise your score. Owing the same amount but having fewer open accounts may lower your score.
Recent changes minimize the negative effects that rate shopping can have on a mortgage applicant. If there is a consumer originated inquiry within the past 365 days from mortgage or auto related industries, these inquiries are ignored for scoring purposes for the first 30 calendar days; then, multiple inquiries within the next 14 days are counted as one. Each inquiry will still appear on the credit report.
Every score is accompanied by a maximum of four reason codes. Reason codes identify the most significant reason that you did not score higher. The reason codes can help a lender describe the reasons for higher than expected rates or loan denial. Scores are not part of the credit profile and are not covered by the Fair Credit Reporting Act.
Your credit report must contain at least one account, which has been open for six months or greater, and at least one account that has been updated in the past six months for you to get a credit score. This ensures that there is enough information in your report to generate an accurate score. If you do not meet the minimum criteria for getting a score, you may need to establish a credit history prior to applying for a mortgage.
Credit Profile
Your credit profile details your credit history as it has been reported to the credit reporting agencies by lenders who have extended credit to you. Your credit profile lists what types of credit you use, the length of time your accounts have been open, and whether you've paid your bills on time. It tells lenders how much credit you've used and whether you're seeking new sources of credit.
Basically, it is a picture of how you paid back the companies you have borrowed money from and how you have met other financial obligations.
There are usually five categories of information on a credit profile:
- Identifying Information
- Employment Information
- Credit Information
- Public Record Information
- Inquiries
There are many items that are NOT included on your credit profile, including:
- Your Race
- Your Religion
- Your Health
- Your Driving Record
- Your Criminal Record
- Your Political Preference
- Your Income
Credit Reporting Agencies
Credit Reporting Agencies collect information about you and your credit history from public records, your creditors and other reliable sources. These agencies make your credit history available to your current and prospective creditors and employers as allowed by law. Credit agencies do not grant or deny credit.
The credit reporting agencies are:
Equifax
PO Box 105873
Atlanta, GA 30348
800-685-1111
Experian
PO Box 2002
Allen, TX 75013
Consumer Credit Questions
888-EXPERIAN (888-397-3742)
TransUnion
Post Office Box 2000
Chester, PA 19022
(800) 888-4213
Other Credit Factors
Mortgage companies look at other information besides your credit score and credit profile before deciding whether to approve your mortgage. They also consider:
- Income stability
- Employment history
- Monthly debts in relation to your income
- Savings amount and methods
- Mortgage type
- Property type and value
- Down payment amount
- Timeliness of rent and utilities payments
Preventing Identity Theft
Many of us know the fear and frustration of having our wallet or credit cards stolen, but even worse is having your identity stolen. According to one non-profit debt counseling agency, some 40,000 consumers each year are victims of this crime, which is a serious type of fraud.
With identity theft, someone will use personal information about you; such as your name, address, social security number or driver's license to apply for credit, utilities, bank accounts, mortgages, even jobs in your name. Some people don't find out that their identity has been stolen until months after it has happened.
Here are some tips to help you avoid becoming a victim of identify theft:
- Check your credit report at least once a year. Investigate if you find accounts that are not yours.
- Rip-up, or better yet, shred, any credit card applications, bank or billing statements, and any other sensitive documents.
- If you don't get a bill for one of your credit cards in any given month, call the issuer immediately.
- Use a locked mailbox for incoming and outgoing mail.
- Avoid giving out your social security number unless it's necessary.
- Save your ATM and credit card receipts, check them against your statements and then shred them.
If you are a victim of identity theft, act quickly:
- If your wallet or purse with your identification is stolen, notify the credit reporting agencies. They can issue a fraud alert for your file, which can help prevent additional credit accounts from being opened without your permission.
- Initiate a police report. Be persistent, even if the police don't seem interested in your situation.
- Keep careful written records of everyone you speak with, and use registered mail when sending important correspondence.
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