It is important to take steps to clean up your credit if you have had credit problems in the past. You’ll need to set up a plan for spending and saving, get copies of your credit reports, and know your FICO score.
Plan Your Spending
When putting together your spending plan, first tally up all of your household income – that is, every bit of money coming into the home. Now, you need to take into account your living expenses.
Include everything from groceries to mortgage, and don’t forget to include nonessentials that you purchase – like your daily coffee fix, or shopping trips.
Also, include money you put aside for your savings. Savings should be established for whatever your financial goals are – like sending children to college, or even your dream house or car.
Be sure to also include an emergency fund for unexpected expenses, which are bound to pop up. A proper emergency fund should include three to six months of living expenses. This will help you to avoid financial potholes. (Read Budgeting and Setting Goals)
Obtain Your Credit Report
When obtaining your credit report, make sure you get a copy from each of the major credit bureaus, as they may contain differing information.
Remember, you are entitled to a free copy of your credit report each year from each credit bureau. (To order your free credit report visit www.annualcreditreport.com or call 1-877-FACT-ACT.)
When you do receive your reports, take time to go over them, check to make sure all the information is accurate, and make sure that it is free of expired items.
Most items expire after 7 years with a few exceptions. The following items have different time frames:
- Student loans remain on your report until they are paid.
- Overdue tax debts remain until they are paid.
- Child support defaults remain until they are brought up to date.
- Bankruptcy remains for 10 years.
- Positive information can remain from 10 to up to 30 years.
Credit scores are broken down into 5 groups, with 20 percent of the population falling evenly into each of the 5 groups. The group breakdown is as follows, with 690-700 being average:
- 780 or above
- 745-780
- 690-744
- 620-689
- 620 or below
Paying Off Your Debt
When making the decision of which bill to pay first, do what works for you. Some say to pay off loans with higher interest rates first, to save the most money.
Others advocate paying off smaller bills first, as doing this will give you a sense of accomplishment, and motivate you to stick to your plan. Either way is fine, just make your decision and stick with it. Keep in mind that ideally, your open accounts should be paid down to 50% or less than the credit limit.
This helps you maximize your credit score. If you make all your payments on time for a year, you will most likely be able to obtain an unsecured credit card.
Purchase to Your Advantage
Use your purchases to your advantage. When you purchase big-ticket items, such as a home, automobile, or furniture, they sometimes help your credit score.
This is because in these cases, lenders usually extend credit in secured installment loans. This means that if you don’t pay for the item, they take the item back. Your credit score improves when you have secured credit.
When you are paying for a big-ticket item, you must adhere to a set payment each month, as opposed to varying payment amounts as with credit cards. Set payment amounts that are being paid look good to creditors.
Consider a Cosigner
Another way to help your credit is to involve other people. In some cases, a lender will not extend credit to you alone, but they will if you have a cosigner – that is, someone who guarantees a loan if you don’t pay.
The advantage to you is that you receive credit. If you pay on time, this is a great way to get positive information on your credit report. Using a cosigner should be carefully considered, as the person who cosigns for you is fully responsible for your debt if you default.
Not only that, but your default negatively affects your cosigner’s credit. Because of this, using a cosigner is risky, as it can threaten relationships.
Being Married Helps
If you’re married, you can benefit from your spouse’s good credit. If you are an authorized user on your spouse’s credit card and your spouse pays the bills on time, the positive information gets reported on both of your credit reports.
Avoiding Bad Credit
Once you have improved your credit how do you avoid bad credit again and make the most of the credit you have? Here are some bits of knowledge you can take advantage of.
- 1. Pay down your debt. The lower your credit availability to credit used ratio, the better.
- 2. Use secured credit cards. These cards require you to make deposits before you use the card, in order to guarantee payment to the lender. They are easier to obtain, for those with new or poor credit. This is a great way to add positive information to your credit report.
- 3. If possible, take out a passbook loan. This type of loan uses your savings as collateral. Paying on time adds positive information to your credit report.
- 4. Use retail store cards. They have lower credit limits and are easier to obtain than major credit cards. Pay off the balances each month.
- 5. Do not close old accounts just because you are no longer using them – this actually lowers your credit score.
- 6. You have the right to place a 100-word statement on your credit file. Exercise that right.
- 7. Check your credit report periodically.
- 8. Do your best to prevent identity theft.
- 9. Keep good records – this will enable you to pay your bills on time.
- 10. Do not hesitate to get professional help if needed.
Frequent Credit Repair Questions
Is it difficult to repair my own credit?
Repairing your own credit is possible; however, credit bureaus make it very difficult. It seems credit bureaus want to discourage consumers from repairing their own credit; however, consumers have been successful in repairing their credit.
Disputing items on your credit report is easy. However, getting them permanently deleted can be frustrating and time-consuming. Dealing with credit bureaus can be frustrating.
The Federal Trade Commission (FTC) receives more complaints against credit bureaus than any other type of business.
If you want to repair your credit, you really have two options; you can do it yourself or seek professional assistance. If you do it yourself, you must first educate yourself as to the process and be patient.
The process can take 12 to 18 months. If you seek professional assistance, make sure to choose a legitimate company like Lexington Law.
Can a negative item on my credit report be returned after I get it deleted?
Negative items on your credit report are normally deleted for 30 days to give your creditor time to respond. If your creditor responds, the negative item could get relisted.
However, many times the creditor will fail to respond causing the negative item to be permanently deleted.
If I pay off my debt listed on my credit report will my credit score improve?
If you pay off outstanding debt on your credit report it will change the status from “paid was late”, “paid collection”, or “charged off” and will not improve your credit score much, if at all.
Negative listings stay on your credit report for up to 7.5 years. If you want a negative listing deleted, it is best to negotiate with your creditor to have the item deleted after it is paid.
Will creditors read my statements (up to 100 words) on credit reports explaining my debt?
Unfortunately, most creditors will not read your statements. They are more interested in your FICO score and other quantitative numbers to determine the risk of lending money to you.
Can I get a new credit report by changing my social security number or using an EIN (Employer Identification Number) tax number?
This practice is known as “File Segregation” and is a federal crime. Additionally, lying on a credit application is also a federal crime. Some credit repair companies have been known to promote
“File Segregation” as a strategy to credit repair. This scheme is extremely complicated because you have to change all your identification information and you must be careful to never use the old information again.
Can I improve my credit score with enough good credit?
Any amount of negative listings on your credit report can cause a loan denial or increase dramatically the interest rate on a loan (home, car, personal, etc).
Most creditors use computers to analyze your credit report to determine your FICO score, your credit standing, income indebtedness, etc., to determine loan approval or denial.
Can CCCS (Consumer Credit Counseling Service) help to repair my credit?
CCCS is a nonprofit debt counseling service controlled and funded by credit bureaus and credit grantors. CCCS’s main goal is to help people who are in deep debt.
CCCS does provide several beneficial services to consumers; however, there is a conflict of interest since they are aligned with the credit bureaus. CCCS cannot be expected to do anything that the credit bureaus would not do to help you repair your credit.
If you leave the CCCS program before it’s completed, they can list your failure to complete as a negative listing on your credit report, however, rare, but possible. If you participate in a CCCS program your creditors may note it on your credit report.
Can bankruptcies and foreclosures be deleted from my credit report?
No type of negative listing is impossible to remove from your credit report. However, bankruptcies, foreclosures, unpaid debt are extremely difficult to remove.
Will negative items be removed from my credit report after I file bankruptcy?
Bankruptcy should be avoided at all costs because it will stay on your credit report from 7.5 to 10 years.
Bankruptcy on your credit report will totally destroy your credit because every credit account included in the bankruptcy will be listed as “Included in Bankruptcy”.
Additionally, bankruptcy discharge listings will appear in the court records section of your credit report.
Knowing When to Get Help
Now that you are more familiar with the importance of good credit, and the pitfalls of bad credit, you should know when to seek help in fixing it. You need to be proactive if:
- 1. You avoid phone calls because they may be a creditor.
- 2. You have three or more creditors who are constantly trying to reach you.
- 3. You are considering getting a loan to pay off your debt.
- You are considering filing for bankruptcy.
- 4. You are paying more than 20% of your monthly income toward debt (this does not include mortgage or rent).
- 5. You have missed more than one mortgage or rent payment.
- 6. You are having trouble making the minimum payments on your credit cards.
- 7. You are receiving warnings from your utilities, or they have been shut off.
- 8. You and your partner argue about money.
- 9. You have been turned down for credit.
- 10. You have written bad checks unintentionally. If you have done this intentionally, you’ve committed a crime.
- 11. You are receiving calls from more than one creditor.
- 12. You have been summoned to appear in court.
- 13. Your car has been repossessed.
There are some problems you can probably handle yourself. If you decide to do this, make sure you know how much money you’re working with, and act fast. For problems with credit cards, you can call the customer service number and make an offer to resolve the problem.
Most often, if you contact them before they contact you, you will still be considered a good customer going through hard times, as opposed to a customer who is a collection risk. Managing problems with student loans is relatively easy, provided you contact them before you go into default.
Give them a call and explain your situation, and more often than not, they will work with you. For problems with mortgages, try to make up any shortfalls within the grace period. If you can’t, you should seek outside help.
If your problems get away from you, that is, if you have more than a few bill collectors after you, or if you have problems with debts that are backed by assets, you should seek professional help from a legitimate credit counseling agency.
A good counselor will take into account your current and future needs (buying a home, or sending a child to college) in recommending debt management plans.
To help ensure that you use a legitimate agency, look for accreditation with the COA (Council on Accreditation) or the ISO (International Standards Organization), and make sure the accreditation is current. You can also check agencies out with your state’s consumer protection office.
An above-board counseling agency will charge you less than $100 for counseling and setup fees combined.
Dealing with Financial Emergencies
In life, things come up and throw us for a loop. It has been said that prevention is the best medicine. To avoid emergencies in the first place,
- 1. Plan ahead – save up “just in case.”
- 2. Put your savings away first, not last. Don’t wait until there’s not enough to put in the savings account.
Should life catch you unprepared, here are some ways you might go about getting out of trouble:
- 1. If necessary, sell some of your unused big-ticket assets.
- 2. Increase your income with overtime, a raise, or a second job if possible.
- 3. Borrow against your home. This is fine to do when necessary, just try to stay within 75% of the value of your home.
- 4. Put off your retirement contributions if you must.
- 5. Seek help from family, friends, or a professional.
- 6. Declare bankruptcy. If all else fails, this is a good option, as this is what bankruptcy is for.
The FACT Act
The Fair and Accurate Credit Transaction Act was established in 2003 and is intended to be an updated version of the Fair Credit Reporting Act. The FACT Act or FACTA helps consumers fight identity theft by setting credit-reporting standards for accuracy, privacy, information sharing, and consumer rights. Those rights include, but are not limited to the following:
- You are entitled to a free copy of your credit report each year.
- You are entitled to a free report if you feel your identity has been stolen.
- Once suspected identity theft is reported to a credit bureau, the bureau has a responsibility to ensure that future credit transactions are actually from you.
- Active duty military personnel can place an alert on their files to protect their credit.
- You have the right to be informed if your report has been used against you.
- You have the right to dispute inaccurate information and have it corrected or deleted within 30 days.
You have the right to have outdated information removed. Most information more than 7 years old, and 10 years for bankruptcies should be dropped. If it still appears, you may demand that it be removed.
The FACTA is beneficial, as it helps to protect you from identity theft by attempting to stop it before it starts. This is done by taking note of certain changes, like changes of address, or requests for replacement credit cards.
The FACTA also requires creditors to give you early warning notices when there is negative information in your account history that may be reported to a credit bureau.
In addition, you may receive a notice after negative information has been reported. To further protect consumers, the FACTA demands that receipts for credit and debit card transactions only include the last 5 digits of the credit card number and that the expiration date is excluded.
Those in the Military
If you are in the military, rest assured that FACTA is here to help protect you as well. Military personnel should be aware of the “active-duty alert.” This is a notation that can be placed on their file when they are outside of the country. This applies to their families as well.
This active-duty alert stays on your credit report for a year, and all potential lenders must contact you before extending credit. This is done to ensure that these actions are legitimate. The FACTA rules are in addition to the SSCRA (Soldiers and Sailors Civil Relief Act), established in 2003. Under the SSCRA, military personnel is entitled to the following:
- Court hearings can be held off by a 90-day stay if you are unable to attend due to your military service. You must request this, and the judge can grant additional delays if needed.
- Interest rates on pre-service loans, IF REQUESTED, can be reduced to 6 percent. Interest in excess of 6 percent per year must be forgiven. To take advantage of this, make sure you make your request in writing and include copies of your military orders.
- Proper court action must be taken before you are evicted from a rental property for not paying the rent.
- If you are under orders for permanent change of station, or if you are deployed for at least 90 days, you may terminate housing leases entered into before you started active duty – without a military termination clause in your lease.
- Automobile leases can be canceled if your orders are for 180 days or more. This applies to family members as well.
- If the military moves you to another state, you can keep your state of residence.
Budgeting and Setting Goals
Though a dreaded word, creating a budget is a necessary task to achieving financial stability. It’s often avoided because people are either afraid to know how out of control they are, or because they feel that having a budget means you can’t spend anything.
In reality, a budget lets you know where you stand and enables you to spend comfortably when you have the available money. When you have a budget, you can make sure you live within your means and make better purchasing decisions.
If you have a proper budget, you are also prepared in case of emergencies, since you would have an emergency savings account. Overall, a budget helps you to stay out of debt and gives you peace of mind.
Setting Goals
Setting goals is a sure way to help your credit, as you will now have reasons to spend wisely and keep up with your bills. There are 4 categories of goals:
- Short-term goals – those things you wish to do in one year, like a vacation or reducing debt, for example.
- Intermediate-term goals – those things you wish to do in one to five years, like starting a family or paying off all debts.
- Long-term goals – those things that are at least five years in the future, like starting your own business, or buying a home.
- Life goals – those things which don’t have a timeframe because they will never be fully achieved. These goals need not be attainable through money.
Once you establish your goals, prioritize them. This will enable you to build your spending plan.
Making a Budget
A budget is just a written plan of how you plan to spend your money every month, which will allow you to contribute money to savings and retirement. A good budget will help you live within your means, or even below your means. A budget is a long-term, even permanent activity. You can’t dig yourself out of debt then go back to the old habits that got you in debt.
When you are in debt, a budget is a great plan to help you get out of it. It isn’t rocket science but most people fail at this task because they simply don’t stick to it. Building and sticking to a budget is like sticking to a diet and exercise plan. Most people have good intentions by starting but then they eventually go back to their old habits and stop together.
If you are in debt $10,000 and you create a budget that allows you to save $250 per month then in 40 months (or 3.33) years, you will pay off the $10,000 debt.
If you think 40 months is too long, then you can look at your budget to determine if there are any additional costs you can cut or reduce. You may realize that if you cut your cable TV off, it will save you $100 per month. Adding the $100 to the $250, you will be able to save $350 per month and now it will take 28.6 months (or 2.4 years) to pay off the $10,000 debt.
If you are still not happy, you can cut other expenses or try to increase your income by finding another job, getting a part-time job, or starting a side business.
The hardest part of a successful budget is “SUSTAINING” it. You have to stick to it month after month and eventually, you will hit your goals.
- Living on a budget will allow you to:
- Save money, especially for setbacks, such as losing your job.
- Live at or below your means so you can save money.
- Allow you to eventually buy big-ticket items without using credit or taking out loans.
- Measure your performance. If you are not meeting your goals, your budget will make it evident.
Below is an interesting video from Financial Advisor Dave Ramsey about creating a budget.
Legally Repairing Your Credit
Many people are confused as to the legality of repairing their credit. First, it is helpful to understand what is illegal to repair your credit.
- 1. It’s illegal to change your Social Security number to get clean credit. If any company offers you this as a type of credit repair, you should immediately report them to the proper authorities.
- 2. Disputing every item on your credit report, regardless of whether you know it to be true or not is illegal. Per the Fair Credit Reporting Act, only items that are unverifiable, misleading, or inaccurate should be disputed. Items that you know to be true and reflect your credit history should not be disputed.
- 3. It’s illegal for any credit report service to charge you for services not completed. This will protect you the consumer from any fraudulent companies that charge for services they never complete.
So, what exactly is considered legal credit repair?
Legal Credit Repair involves removing negative items from a credit report. There are several different methods of going about this; however, the most common and effective are as follows:
“Goodwill” Negotiation – Negotiating with creditors to remove negative items from your credit reports for mild late-pay accounts.
No law exists that requires negative items to stay on your credit reports for any amount of time. As a result, creditors have the ability to remove these items if it works to their benefit, even if it simply pleases a customer.
Credit Disputation – The Fair Credit Reporting Act gives consumers the right to contact credit bureaus directly and dispute items on their credit reports.
Consumers have the right to plead “not guilty” to negative information on their credit reports and the burden of proof is on the credit bureaus, just like in a court of law.
Consumers can dispute any and all items on their credit reports that they believe are inaccurate, unverifiable, or misleading. If the credit bureaus can not verify that the information on a credit report is correct, then those items must be deleted.