September 15, 2014

Rebuilding Your Credit Part 2





Thanks for coming back for part two of the rebuilding your credit discussion. Part one was an introduction to rebuilding your credit. Part two will help you center your attention on what is important to maximize your credit results. Now that you have dispute any inaccuracies, it is time to focus on what is correct in your credit report. I know you were probably hoping that old cell phone bill wouldn't show up but it did and it is yours so now is the time that you deal with it. From a mortgage lender standpoint, you will need to handle any judgments that you may have. Judgments can be found in the "public record" section of the credit report. You may also find child support payments here as well if you are ordered by a court to pay child support. If that is the case, don't worry but this section. Judgments range from any creditor that sued you (and won) for an unpaid debt. For some people they didn't know they were sued or that the creditor won because they probably never opened their mail. You see why that is important? You could have settled, negotiated, or set up payment plans before things went this way but at this point that is neither here or there. Your judgment will need to be paid before moving on to any other step in this course. At this point, if you are saving money that is your negotiating point for that creditor. All creditors' contact information are listed on the credit report. Contact the creditor who won the judgment and negotiate. In the terms of negotiation, money today is better than money tomorrow. Always have a stopping point. If the creditor isn't willing to work with  your stopping point, hang up and move on to the next creditor. {NOTE: Don't negotiate if you don't have any funds}. Just because the creditor didn't budge that day, call the next day. You will probably get a new person the next day who is ready to talk business? You have to have a game plan. How much you plan to pay or all of it (of course all of it makes it easier right? Start negotiating before you agree to pay all though)? This will determine your stopping point. Once this is paid, request a receipt and then send the receipt to the credit bureaus to have the judgment either removed or updated. Please do not rely on the creditor to do this for you. Remember the inaccuracies? 

Now the same scenario that you used in the judgment will be applied for any other debt. You can ask and please do ask for a deletion for payment but if they refuse, don't worry because negative debt has a time period on your credit report. Here is an excerpt from Equifax about negative information: 

Credit Accounts
  • Accounts paid as agreed generally remain on your credit file for up to ten years from the date of last activity (DLA).
  • Accounts not paid as agreed generally remain on your credit file for seven years from the date the account first became past due, leading to the current not-paid status.
  • Late-payment history generally remains on your credit file for seven years. It’s important to note that accounts with current statuses, such as R1 (revolving debt) and I1 (installment debt), that reflect previously late payment history will remain on the credit file for up to ten years from the date of the last activity-only the late payment history is removed after seven years.
Collection Accounts
  • Collection accounts generally remain on your credit file for seven years from the date the account first became past due, leading to the account’s placement with a collection agency.
Public Records
  • Judgments generally remain on your credit file for seven years from the date filed, whether satisfied (paid) or not.
  • Paid tax liens generally remain on your credit file for seven years from the date released (paid).
  • Unpaid tax liens generally remain on your credit file indefinitely.
Bankruptcy
  • A bankruptcy under chapter 7 or 11 or a non-discharged or dismissed chapter 13 bankruptcy generally remains on your credit file for ten years from the date filed.
  • A discharged chapter 13 bankruptcy generally remains on your credit file for seven years from the date filed.
Inquiries
  • Inquiries are a record of companies and others who obtained a copy of your Equifax credit file. The Fair Credit Reporting Act (FCRA) requires that Equifax disclose to you who requested copies of your credit file. Depending on the reason your credit file was accessed, credit reporting agencies generally retain these for one to two years.
  • Some types of inquiries you might see on your credit report are not reported to others or used in credit score calculations. Promotional inquiries, in which your name and address were provided to a person who made you a firm offer of credit or insurance, such as a pre-approved credit card offer, generally remains on your credit file for twelve months and does not affect your credit score. An account monitoring or account review inquiries happen when one of your creditors performs a periodic review of your credit file in connection with reviewing your account. These inquiries generally remain on your credit file for twelve months and do not affect your credit score. 
Which creditor do you focus on? I say start with the creditors that were placed in collection within the previous two years. That is two years from today. So September 2012 to today. Any debt from the previous 24 months is what is affecting your score the most at this point. Yes any debt before this timeframe is affecting your score but not as much as the previous 24 months. From there, you can focus on the Dave Ramsey but on old debt instead of current debt (I will get to current debt but let's focus on rebuilding credit). List the debts that are in collection within the previous 24 months in order from least to greatest. From here, you will follow the same steps you did in the negotiation with the judgment. This is not to say you won't have to pay any of those other collections but the focus is to help rebuild your credit and develop savings. The tools here is to create a habit so that you are prepared for these times if it happens again. 

On to the Tips

Next, look at your positive credit. If you have negative debt but no positive, you need some positive debt to offset the negative. If you have no credit at all, you can have nontraditional credit applied to your report like rent payments, cell phone payments, utility payments. You will need to ask those providers if they will report your payments to the credit bureaus. Back to the positive credit, if you don't have any and need some to offset the negatives here are some suggestions:

1. Credit Cards - yes we are rebuilding your credit so why get in more debt? Blame it on America. In other to have a credit score, you will need some form of credit. Sorry I didn't make the rules. I hate this too. You will need either an unsecured credit card (typical credit card) or a secured credit card (you front the money on this card). Credit card are equivalent to easy courses in college. Just how those easy courses are GPA boosters. Credit cards are credit score boosters. Now here is the tip to improving your score and beating the game. Find a bill that you pay ON TIME ALL THE TIME. Use your credit card to pay that debt and set it up as an automatic payment through that creditor. Then when it is time to pay your credit card bill you will pay the majority of the bill with the exception of $5-10. The key here is to show that you know how to manage debt and that you leave low balances on your credit cards. Remember in part one I told you that payment history and balances owed were key factors in determining your score. Look at my example below:

Cell Phone Bill: $90
Credit Card Limit: $500
Setup automatic payments through your cell phone carrier to make the payment on your credit card. The credit card pays the cell phone bill. You turn around and pay $80-$85 on the credit card. In this situation you need to know the three following dates: date the creditor sends the information to the bureaus, date payment is due, and date that interest is charged. You would want the information reported to the bureau to show some type of balance. Usually after interest has been charged, that is what will be reported to the credit bureaus. After that date, go ahead and pay the whole thing off. Then start the process over the next month. 

It is important to keep credit cards available balance to credit card limit between 30 to 50 percent. So in this example, a credit card that has a $500 limit, you shouldn't spend no more than $150-$250. For safe practices, let's stick to 30%. Now if your cell phone bill puts you above the 30% threshold, then select a smaller bill or get gas with the card once a month. If you get into a bind, please take this card off automatic payments. The purpose of credit cards is to boost your credit and show that you can be responsible. 

2. Secured loans 

The next tip is to do a secured loan program through a bank or credit union. You won't find many banks or credit unions that do this. This type of loan is called a credit builder loan. In Dallas/Fort Worth, there are two credit unions that do this and they are ResourceOne Credit Union and Neighborhood Credit Union. The only initial cost to you is to become a member of the credit union which could be as low as $25. This program IS a forced savings. If you don't live in the Dallas/Fort Worth area, contact your local credit union or bank to see if they have a similar program. For this situation, the minimum loan would be $500. The thing for this loan is that it reports to all three credit bureaus as a normal loan. The difference is that $500 isn't given to you. You have to work for the $500 by *coughs* saving it. Each month the credit union will require that you make a certain payment to the loan each month. The $500 will be placed as a hold in your savings account. Once you have satisfied ("saved") the amount of the loan, the $500 will then be released in your savings account. This is a easier way to pay yourself first because now you are contractually obligated to do so. 

As you work on rebuilding your credit, you will pay off negative debts and increase your score. From pulling yourself out of credit challenges, you can work on paying down any debt. You should develop a habit of savings and paying down debt. Once you have the collection issues resolved, you can fully complete the Dave Ramsey structure through the debt snowball method. With the credit cards that you obtained from building your credit, you won't have much to pay off. The key here is to rebuild your credit to obtain your financial goals whether they are short term or long term. 

If you live in the Dallas/Fort Worth area, here are some counseling agencies that can help you in your particular situation for FREE:




These are excellent resources to get you on the track to financial freedom whether that freedom will help you become debt free, a homeowner, or spare you the freedom to travel. 
Andrea Fowler Web Developer