|
IWP!, flagship product is Chicago's premiere real estate Investment
magazine. Entitled Invest With Passion!, it is the tool for investors and professionals in the
Mid-West. The publication seeks to grow it's market share by providing
powerful information designed to build the reader both as an investor and a
person.
Since it's release in January of 2006, the magazine has been well received and
continues to gain momentum and support. The education, information, and
networking opportunities for the real estate investor has been long neglected.
No More!
The time is now and the momentum is building.
It's Happening!
|
|
STEPS TO REPAIRING CREDIT
By Anita Clinton
If you've been reader of IWP! for
any length of time, you will know that we've done several articles on
various facets of credit. That's because, credit is, and will continue to
be, an important element of society - especially for investors. No matter
who you are and what you do, your credit profile can either open or shut
doors for you in multiple instances. How you pay your bills is a
determining factor in the quality of life you can live. Whether you want
to accept it or not, there is a direct correlation between your finances
and credit. The fact is that most people's potential to obtain higher
income levels is leveraged by their credit. Let me give you some
examples. Employers will and can deny employment based on credit.
Insurance companies can deny or charge higher rates depending on credit.
Investors who want and/or need to utilize OPM (Other People's Money) are
judged by their credit. The rates received in purchasing a home or car is
heavily weighed on credit. I could go on and on, but I will stop there.
The point is, unless you win the lottery, receive an enormous
settlement/inheritance, are born with a silver spoon in your mouth, etc.,
the quality of life that you are able to live can be determined by your
credit profile.
As many are aware, your credit
report details all credit card, installment loan and mortgage payments;
collection accounts and judgments; and delinquent utility and cell phone
payments. This information is reported to and organized by the three
major credit repositories or bureaus: Equifax, Experian & Trans Union.
Each of them utilize Fair Isaac Corporation's (FICO) proprietary
mathematical formulas to determine credit scores. It is important to note
that it takes time to build/establish a good credit profile and scores,
however it only takes a very short time to ruin it. The pie chart below
depicts the five factors that are utilized to determine scores:
SCORING MODEL CHANGES: FICO 08
No matter what predicament you
find yourself in with your credit, it is never to late to start repairing
it. However, it is important to not that Fair Isaac has slightly adjusted
their scoring model, so some of the ways that worked previously are no
longer valid. Let's review the new changes first:
No longer include
findings on authorized user tradelines. Due to the misuse of the
effectiveness of "piggybacking" or being added to another's account as an
authorized user, it no longer applies. In the past, you could have
someone with a good credit history add you to their account as an
authorized user and you were able to benefit from their credit history on
the account.
Scoring delinquent
accounts differently. The new rules score occasional (one-time) late
payments less stringently as long as the other accounts are paid as
agreed. However, delinquencies with multiple accounts are weighed more
heavily.
Looking for more
balanced account types. FICO 08 will be more favorable to a healthy mix
of credit account types. It will look for a balanced combination of
credit cards, department store cards, and installment loans. As stated by
creditme.com, "the ideal scenario for credit holders is supposed to be the
borrower who maintains one to two installment loans (mortgage and car
usually), at least three of the major credit cards (usually Visa,
MasterCard and American Express) and just one or two retail cards (grocery
store, Wal-Mart etc.)
REPAIRING CREDIT
So where do you start when looking
to repair your credit? There are a couple simple, but somewhat time
consuming steps you can take. Depending on where you stand and your
aggressiveness, this process can take as little as six months. Below are
the steps to follow:
Step One: Obtain a Copy of Your
Credit Report
According to the Free Credit
Reporting Act, everyone is entitled to receive a FREE credit report each
year from the 3 major bureaus. You can obtain copies at
www.annualcreditreport.com. Initially, you would need to request a copy
from each of the three major bureaus, because the information recorded may
vary amongst the three. Different companies report to different bureaus
and you want to make sure that all the information reported is accurate.
By law, the free report does not have to include your scores. If you wish
to obtain your scores, you may be assessed a fee for them.
Step Two: Analyze Your
Information
Once you have obtained copies from
all three bureaus, you want to first make sure that all the information is
accurate. According to www.privacyrights.com, "the U.S. Public Interest
Research Group (USPIRG) found that one in four credit reports contain
serious errors." Therefore, you should check for the accuracy of the such
things as: Name (Jr., Sr.), Social Security Number, Birth Date, Address,
Employer, Account Types, Account Status, Account Limits, Account Dates,
Payment Histories, Collections, Judgments, and other information under the
Public Records & Inquiries section. If you find that any of the
information is incorrect, you have the right to dispute it and have the
information updated.
Step Three: Dispute Inaccuracies
Disputing inaccuracies vary for
each of the bureaus. You will need to dispute any and all inaccuracies
with the specific bureau that is reporting it. You must go to each of the
bureau's website to dispute inaccuracies. However, you can start at
www.annualcreditreport.com and it will forward you to each bureau’s
website. Each of the reports that you pulled through
www.annualcreditreport.com has a reference / report / confirmation number
on it. You will use this number to dispute inaccuracies for each
respective bureau online. If you choose not to dispute online, each
bureau's website defines instructions for mailing and phoning in
disputes.
According to www.privacyrights.org,
once you have submitted disputes to the bureaus, they have 30 days to
investigate the dispute. "The bureau must consider all the relevant
evidence you give it and the errors must be corrected. If the bureau
cannot verify the information, it must be deleted from your file." In
addition, you can request another free copy of your updated report to
verify with the creditors/agencies that are reporting the information is
accurate. In the event you disagree with the findings of the bureau's
investigation, you are entitled to submit a 100-word explanation to be
included in your file. The negative information will still remain on your
report. However, the explanation will also be included. There are also
occasions when the disputed information that was deleted reappears on your
file. By law, the bureaus are suppose to notify you within five days of
reinserting the information. This usually occurs when the bureau receives
proof at a later date that the negative information on your file was
accurate.
Step Four: Settle Delinquent
Accounts
In this step, you want to start
clearing up the negative accounts. You must be proactive and contact each
of the creditors/agencies with an outstanding balance on your report. The
contact information for each should be listed on the report. In most
instances, you should be able to negotiate a favorable settlement amount.
I suggest you start by offering 25% of the amount due. Please note, it is
crucial that you ask for whatever terms/settlement that is agreed upon to
be sent to you in writing. In addition, once you paid off the account,
you want to get a receipt/letter stating paid in full (paid as agreed) and
showing the account number that matches the one on your report. The point
is to have documentation that the account has been satisfied in the event
you need to prove it later on. Remember, earlier I stated that there are
instances when items reappear on your file. One other note, there is a
misconception that once you have paid off a collection/judgment that it
will be deleted from the report. It will not, the record can remain on
your file for 7-10 years. However, the status should have a $0 balance
and will not effect scoring.
Step Five: Reduce All Current
Credit Card Balances and/or Establish New Accounts
If you look at credit in terms of
negatives and positives, a good credit profile has minimum negatives and
an abundance of positives. So with that being said, if you clear all the
negatives off your file and do nothing to increase the positives, your
scores will not change much if any. You must have positives reporting on
a consistent basis to supersede current and past negatives. This is
accomplished through the maintenance of current accounts and/or the
establishment of new accounts.
Some people think credit cards are
evil and everyone should stay away from them. However, the truth of the
matter is, credit cards are a convenience and if used properly can also be
beneficial. The proper use of credit cards is to 1) understand the
terms/rules, interest rate and calculation process, and associated fees;
2) pay the entire balance in full at the end of each month on or before
the due date. This way, you eliminate excessive fees and charges. Now
for those that carry over balances, a general rule as far as credit
scoring is concerned, is to keep all balances under 30% of the credit card
limits. For example, if you have a Visa credit card with a $1000 limit,
you should keep the balance at $300 or less ($1000 x .30). So, on all
current accounts, you need to reduce your balances to 30% of your credit
card limit.
As mentioned earlier, one of the
new changes for FICO 08 is that the scores take into account the
equilibrium of account types. Meaning, you may be penalized for having
multiple credit card accounts and no other account types. They are
looking for a healthy mix of account types, ie. installment loans, credit
cards and department cards. Now you may be thinking, how do I get new
accounts if my scores have not increased? Well I propose a couple of
options:
Secured Credit Card
Accounts. A secured credit card is an account that is secured by a type
of collateral. In most instances, the collateral is a savings account.
So you would open a savings account with the institution and they in turn
issue you a credit card with a limit equal to the balance of the savings
account. Once the card is issued, the savings account is locked down. It
is the institution's security, in the event you default on your payments.
However, as long as you make your payments as agreed, the savings account
will remain intact collecting interest. Now you must, I repeat, you must
use the card. Even if it is just $5 -$10 per month. The creditor will
report your payment history each month to the credit bureaus and once you
have fulfilled the requirements, or at the institution's discretion, the
secured account can be transferred to an unsecured account and the monies
in the savings account is released. There are several institutions that
offer secured credit card accounts, ie. Bank of America, Wells Fargo, and
Charter One.
Secured Installment
Loans. The secured installment loan is very similar to the secured credit
card. You will open a savings account with the institution that offers
the program. Then you take out an installment loan against the balance of
the savings account. Once again, the savings account is locked down as
security for the loan in the event you default on payments. The
institution will report your payment history on a monthly basis to the
credit bureaus. As long as the payments are made as agreed, the savings
account (with interest) is released at the end of the term. I suggest
that you open a checking account and deposit the loan check in it. Set up
the monthly payments to be automatically deducted from this account. Now
keep in mind that the financial institution will access interest to the
loan, so the balance owed will be slightly higher than the amount
borrowed. Therefore, you will have to add additional monies to the
checking account to cover the increase due to the interest. There are
several institutions that offer the secured installment loan program.
Unsecured
Credit Cards and Department Store Cards. Now there are companies that
will offer unsecured credit cards to people with challenging credit.
However, I must caution against these companies because the terms are
usually stringent. They usually charge an annual fee anywhere from $35 -
$250, have extremely high interest rates, and use unorthodox calculation
methods. If you choose to go this route, be sure to pay the entire
balance each month by the due date.
Another option is to
apply for one or two department store credit cards. I suggest trying
Target, Macys, JC Penny and/or Home Depot. Be aware, the interest rate
will be rather high and you will have a lower credit limit. However, if
you are responsible with use and payment, you can negotiate both the
interest rate and credit limit.
Step Six: Pay All Open Accounts
as Agreed
You also want to make sure that
each account is paid as agreed. Even if you are only paying the minimum
balance, make sure it is paid on time. Also, "on-time" as far as the
credit bureaus are concerned is 29 days, after the due date. Your
creditors only report status, based on 30 day increments. Therefore, they
will only report lates if the account has not be paid by the 30th day
after the due date. Now, you may still incur a late fee from the creditor
for payments made within the 29 day window, but after the due date.
The major factor with credit is in
alignment with the general financial factor of living within your means.
Most people ruin their credit because they overspend, exceeding what they
are able to afford. As credit becomes more and more important in our
society, it is crucial to start repairing damaged credit and/or
maintaining a positive credit profile.
Anita Clinton is a licensed Loan
Origination and the founder and creator of OwnSomethingToday.com, which
encourages people to invest in real estate, stocks, and/or business to
create wealth. For more information, she can reached at 708-491-7394. |
|
|
