Credit Management ServicesPosted by Badger Coach on May 30th, 2014
Everyone needs credit. You cannot do anything without credit. You cannot open a bank account, lease an apartment, buy a car, secure a mortgage or get the job you want unless you have good credit. In fact, in today’s society, a good credit score is essential to your financial success. And if you are unfortunate enough to have bad credit, life will always be more expensive and more difficult for you.
So, if you have suffered a financial setback due to divorce, a job loss, or some other unfortunate event, what can you do to improve your credit score? The first thing you want to do is learn the difference between a credit report and a credit score.
Federal law allows you to receive a free credit report from each of the three credit reporting agencies annually. These credit reports provide information about how you manage credit. These reports also contain all your personal information, such as social security number, available credit lines, and current balances on any credit cards or other debt you carry. And they also contain your public financial records such as bankruptcies, court judgements, and liens. In short, a credit report is divided into four sections: personal identification, public records, inquiries, and trade lines.
When obtaining information about your credit report or credit score, be sure to contact each credit bureau because each credit reporting agency maintains different information about your credit history. In other words, information concerning one of your trade lines may be on file at only one or two of the three credit reporting agencies. Any yes, the information in your credit report determines your credit score.
A credit score is a three digit number that is commonly referred to as a FICO® Score. This number is based on a proprietary mathematical formula known as an algorithm. The algorithm tries to predict the likelihood that you will be a good debtor or a risky debtor to lenders, and it is based on your previous credit history. Please note that FICO® is not a credit bureau and is not affiliated with the credit reporting agencies; rather, it is a publicly-traded analytics software company.
If you are like most individuals, you have no idea what a credit score says about your ability to repay debt. A good way to understand what your credit score means is to simply remember that a FICO® Score of 700 or higher tells lenders that you are likely to repay your debts on time. Use the following chart (table 1) to see how lenders view your ability to repay your debts.
|723||MEDIAN FICO SCORE|
|687||AVERAGE FICO SCORE|
Now that you know how to check your credit report and credit score, let’s talk about how you may go about rebuilding or improving your credit score.
What is a Credit Bureau?
Now that you know what a credit report and credit score are, you should pull these reports right away. Federal law allows you to obtain these reports, free of charge, once a year from each of the three credit reporting agencies known as Equifax, Experian and Transunion. These credit bureau have no government affiliation whatsoever. Two of these credit reporting bureaus (Equifax and Experian) are publicly traded on the New York Stock Exchange and London Stock Exchange. Transunion however, is a privately held corporation.
How Are Credit Scores Calculated?
As mentioned earlier, you credit score is based on a number of variables. Table 2 breaks down what those variables are. The two primary drivers in obtaining and maintaining a healthy credit score are your payment history (i.e., making sure your bills are paid on time) and the amount of debt you owe (i.e., reducing your debt-to-income ratio). For more information about credit, visit myFico.
Table 2 Credit Factors
Other factors that impact your credit score are credit inquiries. Be very selective in who you allow to check your credit, as a single inquiry can drop your credit score by 15 points. This can remain in your credit report for up to ninety-days or more, and can cause you to pay a higher interest rate on new loan or line of credit. So don’t open any new lines of credit or allow anyone to check your credit six months before take out a loan. If you are applying for a mortgage, let the bank check your credit and not the mortgage lender. Inquiries from a bank during a short period of time are counted as one inquiry, whereas inquiries from a mortgage lender are counted as they occur.
When you open a new credit card, you are given line of credit. This line of credit has a maximum amount of money you can borrow. The key to maintaining an excellent credit score, is to keep your “credit utilization ratio” — what you use versus how much you have to use – between 10 to 15 percent, says Anthony Sprauve of myFICO.com. However, a FICO credit scoring survey found that high achievers, those with credit scores of 750 or higher, only used 7 percent of their available credit. So, if you want to achieve and maintain a high credit score, you pretty much have to use cash to make your purchases, and reserve the credit cards for big ticket items.
If you are starting over and need to establish credit, you can do so by opening a pre-paid credit card. Put $500 hundred dollars on it, and use it to buy something, and then be sure to replace the cash that you spent within 30 days. Do this every month for six months. In the seventh month, apply for an in-store credit card at one of your favorite discount department stores. Once you receive the card, call the credit card company to ask them what your credit limit is. The interest rate will be high, but that is ok because you will make a purchase every month and pay it off before the next billing cycle. You will repeat this cycle for six months. At the end of this period, you will want to check to see what your credit score looks like. If it is not where you want it to be, call the credit card company and ask them to tell you if any of your payments were received late or if you are using more than 7 percent of your available line of credit. At the conclusion of this 12 month period, you should have established credit and have a pretty good credit score.
Is your pocketbook stuffed so tight and weigh so much that it feels like you are carrying around 10-lbs gym weight? There is a way to lighten your load. You can start by cutting up all of your plastic cards, except for your Costco American Express Card, one other credit card, and a debit card. These cards are all you really need, as the Costco American Express card forces you to pay-off your charges at the end of each month. Meanwhile, you could use the other credit card for emergencies, and use the debit card for everything else.
You may have heard that it is a good idea to close-out credit card accounts that you have not used in a long time. This is a bad idea. The reason this is a bad idea is because part of your credit score is based on the length of time you have had an open line of credit with a particular company. If you close an old account and keep the newer accounts open, your credit report will show that you have a limited history in using credit. So leave the old credit lines open and continue to not use them.
Credit Management Services
There are a number of credit management companies that claim, they can improve your credit for a fee. The first two things you need to remember is that no organization can remove valid blemishes from your credit report. End of story. You also need to remember that valid blemishes can remain in your file for up to 7 years for charge-offs and 10 years for bankruptcies. The good news is that nearly 80% of all consumer credit reports contain errors. This is due to inaccurate, obsolete, or unverifiable (I.O.U.) information contained in these reports. Because of the high level of inaccuracies, the federal government, through the Fair Credit Reporting Act, places the burden of proof on the lender to prove that you owe the debt listed in your credit report.
While it is true that the Fair Credit Reporting Act allows you to dispute these errors on your own for free, your initial request is most likely to be denied due to your submitting incomplete paperwork, the lenders proving that you owe the debt, or because of clerical or computer errors at the credit bureaus. As a result, you may erroneously conclude that you are stuck with bad credit. So, it may be a good idea for you to hire a professional to help improve your odds of successfully removing a large number of disputed errors. Doing so, could save you a lot of time and energy.
As you know, there have been a number of highly publicized credit repair shops that have turned out to be nothing more than scams. So, in order to protect yourself, use a credit management company that is approved by credit unions, use a law firm, or use a reputable non-profit credit counseling organization.
Credit Repair Fees
If you need to improve your credit score do not pay make the mistake in assuming that you have to pay big bucks to do it. While there are companies charging thousands of dollars to repair credit, there are other companies that can do it for less than $500, and will even offer a money-back guarantee. So, before you give your hard-earned money to a company to improve your credit, make sure they offer a money-back guarantee, visit their web site and read the fine-print called terms and conditions. And if you do not understand the fine-print, do not give them your money.
Additionally, if a credit repair company claims that it can remove “any” negative information on your report or that it can guarantee you a perfect credit score using their “special” technology, this is your first clue that you are dealing with a scam artist—hold on to your pocketbook and run!
Lenders vs Credit Management Companies
Lenders do not like credit management companies. The reason they do not like credit management companies has to do with transparency. Lenders want to know if you had a charge-off, repossession, bankruptcy, etc., but if you are able to legally remove this information from your credit report, the lender will never know and assume you are a creditworthy customer.
Benefits of Good Credit
Job Security: Nowadays, a low credit score can impact your ability to get or even keep employment. It can also cause you to lose your security clearance because many employers view credit impairments as a high security risk. So, if you are required to have security clearance to do your job, you may want to hire a financial professional to help you monitor your credit, develop a plan to reduce your debt-to-income ratio and to remove any incomplete, outdated or unverifiable information in your credit report. You will also want to subscribe to a highly-rated identity theft monitoring service. After all, identity thieves want to steal the identity of individuals with “Good” or better-than-“Good” credit scores.
Homeownership: If you can afford to do so, now (May 2014) is the perfect time to buy or refinance a house. Interest rates are very low compared to the 8.32% APR mortgage loan rates offered 18 years ago in June of 1996. However, if your credit is “jacked-up” and you are unable to refinance and take advantage of today’s extremely low interest rates, then you could be paying 1996 interest rates instead of the 4.0% APR rates that are currently offered. The difference in monthly payments is staggering. A homeowner with a 30-year, $250K mortgage loan interest rate of 8.32% APR will pay $1,890 per month, whereas a homeowner with a $250K-mortgage loan interest rate of 4.00% APR will pay $1,193 per month. The difference in monthly payments is $697. If you were to earn a 3% fixed rate of return on the difference in mortgage payments, your money would grow to $121,000 over the remaining 12 years. In other words, having bad credit can keep you from adding $121,000 to your retirement account.
In your quest to improve or maintain your credit score, remember to use only 7 percent of your available credit line, maintain a low debt-to-income ratio, and pay-off your credit card balances each month. If you follow these steps, you will be inundated with companies offering you large sums of money on credit. They literally will be begging you to take the money.
And finally, if you are working with a financial professional, make sure to ask him or her to help you improve your credit score as part of their financial planning services. Do not worry if your credit score is not where you want it to be. Try not to focus on where you have been or where you are with your current debt situation. Instead, focus on where you want to be in the future and develop a plan on how to get there.
The opinions expressed are those of the author and is for educational purposes only, and not an offer to buy or sell securities. As always, please consult with a qualified legal, tax, investment or insurance professional before making any financial decision. Investing involves significant risk, even the loss of capital. Invest only what you can afford to lose. Guarantees provided by an insurance company are based on its claims paying ability.