Debt and Credit Tips

          Why should you pay off your debt? *

          Check Your Credit Report *

Correct Your Credit Report *

Repair your Credit Report *

Build or Rebuild Your Credit *

Tips and Warnings *

Co-signing a Loan *

Avoid the Credit Traps *

The first step to financial stability is to fix your credit and get rid of the debt you already have. According to the US Department of labor, the average American wage earner owes more than $15,000 in debt, and that is not including mortgage payments or automobile payments. Credit cards are a major contributor to this debt.

Here are two good reasons:

• Consumer debt is not tax deductible.

You can't deduct a dime of interest on consumer loans.

• Lost opportunity.

Switch you current credit card balances to a card that charges a lower interest rate. Here are three things to look for in a credit card before you switch:

• Low interest rate.
• No annual fee.
• Grace period.

Once you get your debt transferred to a lower interest rate card, it's time to start thinking about paying off your debt entirely.

Method 1: Use Savings to Get Out of Debt...and Stay Out of Debt

• If you don't have at least three months worth of expenses saved, don't use your savings to pay off your debt. You will need that money to protect yourself against emergencies.

• Limit yourself to one or two credit cards with high credit limits.

Method 2: Increase the Payment

Method 3: Pay off Your Debt in One Year

Method 4: Consolidate Your Debt with A New Loan

This next step to financial stability is to get a copy of your credit report.

Lenders, credit card issuers and other credit providers send regular reports about their accounts to the major credit bureaus. This is where the information on your credit report comes from. There are three major credit bureaus; you should contact each one because not all credit providers report to each bureau. Also, if you have joint credit (for example, if you are married and have joint accounts with your spouse), it is a good idea to get the credit report for each of you because there may be information on one report that does not appear on the other.

There has been a study done which showed that 50 % of consumer credit reports had errors in them, and 20 % had errors that would cause the consumer to be denied credit. Some problems stem from having a common name and finding other persons’ information on your report. Other problems arise from incorrectly reported information or credit fraud. There is no watchdog group to protect your interest in good credit reporting. It is up to you.

Credit reports are available through the major Consumer

Reporting Bureaus in the U.S. and numerous smaller, locally based agencies.

They can even be ordered over the Internet. These reports are available to the consumer but do not include the credit score that lenders use.

• Most telephone directories have listings of credit bureaus even if they are out of the area.

• Address your letter to the Customer Relations Department of the credit bureau.

• Your credit report request must include the following information:

1. Full Name
2. Social Security Number
3. Complete Address

You may either contact these agencies through the mail, asking for a credit report request, or via phone. If you are working under time constraints, we suggest you call each company so they can mail you the request form immediately.

The Internet is a great source for getting a credit report. Sites like www.freecreditreport.com are available.

Never request a free credit report if you have been denied credit. If you send a copy of a credit denial letter to the credit agency and request a free copy of your credit report, the bureau will change the "inquiry" to read "credit denied." Then future lenders and retailers will see "credit denied" when they pull your credit report. This remark can result in even more denials in the future. If you are denied credit, go ahead and pay the small fee to get your credit report. This way you won't have the "denial" on your record.

Every agency has a different form for reporting their credit information. When you receive your credit report, take time to read the instructions that accompany the report. It will explain fully how to read and interpret the information in your report.

Our country has thousands of credit reporting subscribers reporting and requesting information on a daily basis. It's obvious that with that kind of volume, a lot of mistakes are made. If you know how these mistakes occur and understand your rights, you can use this knowledge to your advantage. Let's look at the kind of information that can really make your credit look bad. Then we'll show you how to fix it.

Slow payments, bad debts and legal judgments all go against your credit record and make you look risky to a lender.

Inquiries are made by anyone who checks your credit, with your permission. As few as four inquiries in a six-month period may be considered excessive by some creditors because they assume that you have been denied credit by previous inquirers. But don’t let the fear of inquiries stop you from shopping for the best deal when you need auto or home financing. Recently, the credit bureaus have recognized that borrowers may apply for credit at more than one place for the same transaction. Generally, the credit scoring companies will consider all auto or mortgage loan inquires received within a 14 day period as 1 inquiry so the additional inquires will not affect your credit score.

Typing mistakes, name confusion, and erroneous information are typical mistakes seen in credit files. The only way mistakes can be found and corrected is by periodically reviewing your file for accuracy and then taking steps to correct it.

Lenders are apprehensive about giving money to people with no credit history. You will need to develop your credit history more fully in order to qualify for higher credit levels.

• Bankruptcy Up to 10 years
• Paid Tax Liens 7 years
• Charge-Offs 7 years
• Collection Accounts 7 years
• Arrests, indictments

and convictions 7 years from date of release or parole

When lenders evaluate your loan application, they use a process called underwriting—they try to evaluate your ability and willingness to repay your loan. They judge your ability to repay by looking at the amount of your income and how stable your past earnings have been. This helps them determine if you can afford the loan payments. They judge your willingness to repay by looking at your past credit history. Generally speaking, someone who has made payments on time will probably do so in the future.

Lenders want their evaluation to be as accurate, objective and as consistent as possible. In an effort to achieve these goals, mortgage lenders recently began using credit scores to help in the underwriting process. Credit scores are numerical values that rank individuals according to their credit history at a given point in time. Your score is based on your past payment history, the amount of credit you have outstanding, the amount of credit you have available, and other factors. According to Fannie Mae and Freddie Mac, two of the largest purchasers of home loans from lenders, credit scores have proven to be very good predictors of whether a borrower will repay his or her loan.

Many lenders use credit scores to help evaluate loan applications. However, a credit score is just one of the many factors considered in the underwriting process. Lenders look at the entire picture. Even when a credit score is low, lenders try to find other factors that could overcome the negative credit issues and satisfy their underwriting criteria. The decision to approve or deny a loan will be made based on sound, flexible underwriting guidelines.

"FICO" scores are a type of credit score developed by Fair Isaac & Company. FICO scores use credit bureau information to obtain a score which indicates how likely someone is to make their loan payments on time. Millions of consumers’ credit bureau records were used to develop the scorecards, and all of the consumer data—not just negative information—was included to develop the system. FICO scores range from approximately 350 to 900. The higher the score the more likely someone is to make their payment. Similarly, the lower the score the more likely someone is to not make their payment.

Just as credit scores are one factor in determining if you qualify for a loan, they may also be a factor in determining the price of your loan. The price of a loan means the interest rate and the points charged by the lender and/or the mortgage broker. The price charged for a loan will be higher or lower depending on various factors.

Credit scores are used in determining the price of a loan because they are believed to be good predictors of a borrower’s ability and willingness to repay the loan. Many mortgage loans are sold to investors, and investors will pay a more favorable price for loans they feel have a low risk of default. Fannie Mae and Freddie Mac use credit scores as part of their analysis when pricing loans they buy from lenders because of this very reason. Thus, applicants with lower credit scores may pay higher prices for their loans because of the higher risk of default and loss.

There are many other factors relating to an individual borrower’s situation that may also affect the price of a loan, often even more so than credit scores. These include the type of property securing the loan (detached single family residence, duplex, etc.), the amount of the borrower’s equity in the property, the lender’s costs to make the loan and type of loan selected.

Fortunately anyone, by law, can dispute the information in his or her credit file and/or request a re-investigation of the items contained in the file.

Before you dispute anything in your credit report, you may want to get a copy of Fair Credit Reporting Act (available at most libraries).

We suggest that you never dispute over 1/4 of the report. What are some good reasons to dispute an item or request verification?

Here are a few ideas:

• Improper spelling of a name
• Wrong account number
• Wrong address
• Inaccurate information
• Incorrect balances
• Wrong social security number
• Closed accounts which should have been removed
• Accounts that are not yours

The Fair Credit Reporting Act requires that credit bureaus reinvestigate any entry you disagree with and remove any item that is no longer verifiable. Here's what you need to do:

1. Write to the credit bureaus from which you have received a report and ask for an investigation into the entries you disagree with.

   Major Credit Reporting Agencies

   Experian National Consumer Assistance Center (TRW)

   P.O. Box 949

   Allen, TX 75013-0949

   Telephone: (800) 682-7654

   Website: www.experian.com

   Trans Union Corporation

   760 West Sproul Road

   P.O. Box 390

   Springfield, PA 19064-0390

   Telephone: (800) 916-8800

   Website: www.tuc.com

   Equifax Information Service Center

   P.O. Box 740241

   Atlanta, GA 30374-0241

   Telephone: (800) 685-1111

   Website: www.equifax.com

2. Let them know that the entries on your report are detrimental to your credit record and you wish to have them investigated in accordance with the Fair Credit Reporting Act.
3. Mention that you would like to have the matter handled within 15-30 days and that you expect to receive a corrected copy of your report at that time.

Send copies of cancelled checks, payment receipts, letters of agreement and/or other information. You should also request the names of persons contacted by the bureau for future reference. You are entitled to this information under the Fair Credit Reporting Act.

Send the letter to the credit bureau via certified mail, return receipt requested. Before mailing be sure to make a copy of everything for your file.

There are three possible responses you can get from the credit bureau.

If the creditor reviews its files and verifies that the derogatory information is correct, you will need to submit a consumer statement to counteract or explain the information.

A sample letter is provided on the following page. Make a copy of the letter and send the original certified, return receipt requested.

Hopefully the creditor will change a derogatory item (i.e. a "charge-off') to one that is non-derogatory (i.e. "account closed paid in full").

If this happens, it's good news. If the creditor does not respond, the credit bureau must promptly remove the information from your credit history.

Date:

Credit Bureau Name

Address

City, State, Zip

RE: XYZ Finance Co., Subscriber # Acct #

Dear Sir:

According to the my rights under the Fair Credit Reporting Act Section 611(b), I hereby request that you enter the following "consumer statement" into my credit report:

On ,19 I moved from Colorado to New Jersey. I notified XYZ Finance in Boulder, Colorado of my change of address. Unfortunately, XYZ continued to mail my statement to my old address in Colorado for several months. I notified XYZ to tell them that only one statement had been forwarded by the Post Office. It was over four months before I received that statement.

To my surprise, I discovered that XYZ was reporting my account as late to the credit bureau. I offered to pay the account in full if XYZ would remove the derogatory information from my credit report, since it should have never been there in the first place.

I have always maintained contact with XYZ and informed them of my address change. I feel that I am a victim of a computer error by XYZ and the credit bureau. I am willing to pay the bill in full as soon as the misleading, erroneous information is removed.

Sincerely,

Betsy Borrower

SS#: 000-00-0000

Now, let's see how to correct prior credit problems.

What should you do if you read over your credit report and see an account that:

1. is delinquent,
2. has been turned over to a collection agency, or
3. has been charged-off with a balance remaining due?

The best way to get something like this off your record is to work out a deal with the creditor. It's as easy as ABC:

1. Call the person or company you owe money to. Ask to speak to the credit department manager.
2. Offer to pay them in full. If it is not possible for you to pay in full, renegotiate the loan. Many creditors are willing to make a settlement for less.
3. Once the company has received your payment, they will contact the credit bureau and request removal.

Your Name
Address
City, State, Zip

Date

Contact Person
Creditor
Address
City, State, Zip

Dear

This letter is a request to remove the derogatory information currently in my credit report.

For years I have been a good customer and look forward to an active business relationship in the future. However, from to a medical condition caused me to be late on my payments on several occasions. This was an unusual situation, which I don't expect to repeat. At this time, I am happy to say that I am able to pay my credit balance IN FULL. In exchange for this payment in full I would appreciate it if you would delete the damaging entry from my credit record. It is very harmful to my credit status.

If this is acceptable to you please sign below and return to the above

address. Thank you for your time and consideration.

Bob Borrower

Social Security #:

Date of Birth

Approved : . Date: .

Step Two: Get a Secured Credit Card

Step Three: Use your Credit Card

Step Four: Build A Strong Credit Rating

Step Five: Apply for Instant Credit

Step Six: Apply for a MasterCard or Visa

Step Seven: Apply for In-Store Credit

Because each borrower’s credit score is a reflection of his or her unique credit profile, it is not possible to quantify in advance exactly how each item in your credit history numerically impacts upon your ultimate credit score. No one can tell you, for example, how much your credit score will be affected if you pay off a delinquent account or cancel a credit card. We do know, however, that there are things you can do to improve your credit profile. Some of the factors which may impact your credit score include:

• Making Timely Payments. Making your payments on time is the best way to increase your score. Delinquencies, foreclosures, bankruptcies and judgments will decrease your score.

• The Number of Trade Lines. The number of credit cards, lines of credit and other types of credit ("trade lines") you have available will affect your score. If you have a lot of trade lines, this may decrease your score because of the risk that you might not be able to pay off all of your accounts, and this may affect your ability to pay off your mortgage loan. You may want to consider canceling credit cards you do not use regularly or choosing 2-4 cards to use and canceling the rest. If you close or cancel an account voluntarily, it will not have a negative effect on your credit score. You may wish to reconsider accepting "pre-approved" offers for credit cards, or if you accept an offer, perhaps you should cancel another credit card. On the other hand, if you have no trade lines, this will likely decrease your score. Lenders generally want to see that you have some available credit and that you can handle your credit wisely.

• Avoid Unnecessarily High Credit Limits. Lenders also consider the amount of credit available to you compared to your income when making underwriting decisions. Having credit limits that are too high relative to your income can affect your score just like having too many trade lines.

• How You Use Credit. The amount outstanding on each of your credit cards will also affect your score. In general, the lower the amount outstanding, the more likely it is that your score will be higher.

• Do not Apply For Credit You Do Not Need. Whenever you apply for credit, the creditor will obtain a credit report from one or more of the three credit bureaus. Each such credit inquiry will stay on your record and will affect your credit score. Even if you are turned down for the credit or change your mind and withdraw your application, your credit score will be affected. This is because each inquiry suggests that you are increasing the amount of credit available to you. Before you give your social security number to someone, make certain you know how they are going to use it; a social security number is required to run a credit report.

Everyday, companies nationwide appeal to consumers with poor credit histories. They promise, for a fee, to clean up your credit report so you can get a car loan, a home mortgage, insurance or a even a job. After you pay them hundreds or thousands of dollars in up-front processing fees, these companies do nothing to improve your credit report; many simply vanish with your money. The truth is, no one can legally remove accurate and timely negative information from a credit report. But the law does allow you to request an investigation of information in your file that you dispute as inaccurate or incomplete. There is no charge for this. Everything a credit repair clinic can do for you legally, you can do for yourself at little or no cost.

Beware of companies that:

• Want you to pay for credit repair services before any services are provided. Under the Credit repair Organizations Act, credit repair companies cannot require you to pay until they have completed the promised services.
• Don’t tell you what you can do for yourself for free.
• Recommend that you not contact a credit bureau directly.
• Suggest that you try to invent a "new’ credit report by applying for an Employer Identification Number instead of using your Social Security Number
• Advise you to dispute all information in your credit report or take any action that seems illegal.

If you feel that you have been victimized by a credit repair agency, report them. Contact your local consumer affairs office or your state attorney general (AG). Many AG’s have toll-free consumer hotlines. Check with your local directory assistance.

You may also wish to contact the FTC. Although the Commission cannot resolve individual credit problems for consumers, it can act against a company if it sees a pattern of possible law violations. If you believe a company has engaged in credit fraud, send your complaints to: Consumer Response Center, Federal Trade Commission, Washington D.C. 20580, (202) 326-2222. TDD: (202) 326-2502.

A co-signer is someone with good credit who promises to make loan payments if the borrower does not. If you co-sign a loan you are being asked to guarantee this debt. If the debt is ever in default, that fact may become part of your credit record.

Despite the risks, there may be times when you want to co-sign. Your child may need a first loan, or a close friend may need help. Before you co-sign, consider the following:

• Be sure you can afford to pay the loan. If you can you could be sued or your credit rating damaged.
• Even if you are not asked to repay the debt, your liability for the loan could keep you from getting other credit because lenders will consider it as one of your obligations. (Make sure to have the borrower pay with a check or payment directly from his/her account. Make the payment to the lender. If you follow these steps, most lenders will accept 6-12 months cancelled checks to prove that someone else makes the payment. DO NOT have your child pay you in cash and then make the payment yourself.)
• Before you pledge property to secure the loan, realize you could lose these items.
• Ask the lender to calculate the amount of money you might owe. Ask the lender to include a statement similar to "The co-signer will be responsible only for the principal balance on the loan at time of default."
• Ask the lender to notify you in writing if the borrower misses a payment.
• Make sure to get copies of all important papers and documents. You may have to get copies from the borrower.

After you reestablish your credit, it is important not to fall back into the credit trap once again. One example is the person who takes out a second mortgage on a home in order to pay off credit card debt. This is great to lower interest, however if this person goes back and charges again on credit cards, they find that they have created a new debt problem. They now have a burden of high interest credit card debt and also have a second mortgage as well.

Another example of credit card debt is the person who charges their Christmas presents on their charge cards because they don’t have the cash to but all the presents they want. The bad part of this story is that the next year they do it again. They buy their presents on their credit cards, but fail to realize they sill owe the balance from last year’s Christmas presents. Because they are paying only the minimum balance on the cards, their principal is not going down by any significant amount. So their debt load increases every year until it reaches critical mass!

Remember, the main purpose of your new credit limit or loan, is to build good credit. It's important to limit your purchases to items you would buy normally. Stay within your means and always pay your bills on time. In no time at all derogatory credit will heal.

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