ReESTABLISHING YOUR CREDIT

Bad stuff happens—to everyone at one time or another. Sometimes, it’s a single event, such as losing your job, going through a divorce, or having to move to a new home or apartment that can throw you for a loop. Other times, a series of life events can come at you, one after another, making it difficult for you to recover financially.

Perhaps your spouse has surgery and you have a car accident soon after, or you become ill and miss several weeks of work just when your car’s transmission needs to be replaced. You’ve done your best to keep afloat, but what happens when you lose financial ground and are unable to make your payments as agreed?

If you’ve had accounts go into collection, your home has been foreclosed upon, or if you have filed for bankruptcy, you may be feeling as though all hope is lost. Your credit and finances are in bad shape, and you aren’t sure how you can get back on track. Do you have to live your life for the next 7 to 10 years with bad credit? Thankfully, the answer is no. With some time and effort, you can rebuild your credit.

Maybe you have no interest in re-establishing credit right now—perhaps you have even sworn off credit cards and other loans entirely, believing that they only spell trouble. But credit is neither good nor bad, only a financial tool. While it can be difficult to do right now, you should consider what your future credit needs might be and think about how credit will continue to affect your life. You may want to purchase a home or refinance your home in the future. You may need insurance, or you may apply for a job where an employer reviews your credit report. You may need a credit card to rent a car or reserve a hotel room if you need to travel. Whether or not you choose to use a credit card, there are a number of reasons why you should re-establish credit. Let’s assume that you have dreams and goals that will in the future require the use of credit. Here’s what you need to know about the process of rebuilding your credit.

If you have damaged credit, you may think that rebuilding it will take eons, but you might be surprised to learn that you can rebuild your credit in as little as three years. If three years seems too long, you might consider that most cell phone contracts are typically two years and that the average car loan is more than five years. When you think of it this way, three years really isn’t all that long. Of course, much will depend on your situation and what choices you make. You may even be able to rebuild your credit in less time, but it could take longer, especially if you don’t manage your credit or budget. If you ignore the situation and don’t make an effort to improve your credit, you could end up living with poor credit for a very long time.

The key to rebuilding your credit is view it is a process. Just as in any process there are steps you will need to take, but you will also need to avoid common pitfalls along the way. Let’s start with the most common mistakes that people make when trying to rebuild credit and ways to avoid these pitfalls. The most common mistakes include:

1. Trying to borrow too much too soon
2. Assuming the information contained in your credit report is correct
3. Using the services of a credit repair company
4. Failing to give sufficient thought to where you borrow money

Let’s start at the top with Mistake #1: Trying to borrow too much too soon. If your credit has taken a hit, and you’re looking to rebuild it, borrowing a large amount of money right away to buy something such as a new car or a house full of furniture is never a good idea. This is because any loan that you take out when you are in the process of rebuilding your credit will come with a high rate of interest. Potential lenders, while perhaps willing to give you a loan, will view you as a credit risk and will set rates accordingly. Second, a large loan, particularly with a high interest rate, can be difficult to repay. Attempting to make a large loan payment can sabotage your attempts to rebuild your credit.

Mistake #2 is assuming that everything on your credit report is accurate. You need to be sure that your credit report reflects your borrowing history, not someone else’s. Mistakes happen, and you want to be sure that they aren’t showing up on your report. You also want to be certain that the information on your report is current. Again, rebuilding your credit is a process, and like all processes, credit repair takes time. Nevertheless, there are many companies out there who would have you believe otherwise. Mistake #3 is using the services of a credit repair clinic to help you rebuild your credit. Credit repair clinics are ready and willing to take hundreds of dollars of your hard-earned money to do what you can do for yourself at no cost.

You may also see advertisements that promise to eliminate bad credit by helping you to obtain a new Social Security number. You absolutely do not want to do this. Every loan application you sign is a contract – a contract where you state that the information you are providing is true and accurate. If you knowingly provide a fraudulent Social Security number, you are committing a crime. If a lender finds out that you have committed fraud, they will pursue action. (Your credit report will show your old Social Security number as well as your employer – so it can be traced.) The company that sold you the new Social Security number will be long gone, so you will face all legal consequences on your own.

Not only should you avoid credit repair clinics, but you should also avoid borrowing money from non-traditional lenders when you want to rebuild your credit. Mistake #4 in the process of rebuilding your credit is: Not giving sufficient thought to where you borrow from. Borrowing from a payday lender is not going to build your credit. In fact, borrowing from a payday lender will probably put you in a situation that will cause additional problems that can hurt your credit. You will be charged high fees and interest on your loan, interest so high that it can become difficult to repay what you borrow. This can put you back in a cycle of debt.

Now that you know what pitfalls to avoid, what steps should you take to rebuild your credit? The first step in this process takes you back to Chapters 1 and 2 of this book. Take a few minutes and review your current goals and think about what you might like to do in the near future. Have you modified your goal card to include the goal of re-establishing your credit? If this is one of your goals, you should add it to your goal card. If your goals are up-to-date, then it’s time to review your budget. This will allow you to take a look at what money you have coming in and what money you have going out. More than this, though, you need to reenergize your savings plan so that you can anticipate unexpected expenses and reach your goals. Dust off that budget form and put it to work. Remember, your budget is designed to help you get what you want, and in this case, the goal is to rebuild your credit.

If you are rebuilding your credit, and you don’t want to find yourself in a difficult financial situation again, you can’t spend more than you earn. This is a simple money rule that applies in good times and in bad. Setting a goal to create an emergency fund is smart money management. Even just $500 in a savings account can help you weather tough times. And once you make saving a habit, you may just find that it can be fun to watch your money grow as you work toward reaching your financial goals.

But what if money is already tight? What if you are on a fixed income? You may be thinking, “How can I save anything when I’m barely scraping by?” Do you get a tax refund? If so, you could save that. Do you ever receive gifts of money? You could save that money too.

There are many other creative ways of saving money, as Latisha learned following the discharge of her debts in bankruptcy.

Latisha still had a number of debts to repay following her bankruptcy, which meant her budget was still very tight. But Latisha didn’t let this stop her from beginning a savings plan. To find money for savings, Latisha became a dedicated coupon clipper.

Any money she saved by using coupons went directly into a savings account. Latisha admits that the first few months of doing this were very hard; in fact, she wasn’t sure it would work or make much of a difference. But then, she said something changed. Whether because she formed a savings habit or because her attitude changed, Latisha grew more determined to save money. Along the way, she modified her shopping habits and became increasingly careful to make sure she received the best price.

Her coupon savvy moved to becoming an even better shopper by using double coupons and knowing which stores honored their competitor’s coupons. Before she knew it, Latisha had $200 in savings. Two years after filing for bankruptcy, Latisha still uses coupons and squirrels away the money she saves. She has now set a goal to take a trip to see her daughter, and as she has watched her travel fund grow, she firmly believes that saving any amount of money can make a difference.

If you’re having trouble getting started with your budget, consider contacting your nearest credit counseling agency and ask if they can provide budgeting advice to help you with your goal of re-establishing credit. Credit counselors may have other suggestions to help you reduce your expenses, and they may know of assistance programs you may be eligible for that can help.

Once you take the first step to rebuilding your credit—using a budget—then you’re ready for the second step, which is to make sure all your debts are current. If you are past due on any of your payments, you need to work to bring them current. This is a very important step in rebuilding your credit. Your credit won’t improve if you continue to make late or partial payments on any of your debts. This may mean you need to make extra payments on accounts to bring them current.

Where can you find the money to make extra payments? Can you make cuts in any areas? Are you being charged various kinds of late fees on your accounts? If so, you may want to call your creditors and negotiate with them. What will they do for you so that you can bring your account current? You may request that a creditor “re-age” your account, which can bring it current and stop past due fees. If a creditor has cancelled your credit line, and you are over the limit, ask them to do a line increase to stop the over limit fees. It never hurts to ask; the worst they can say is no, and even so, you aren’t out anything if a creditor won’t negotiate with you. On the other hand, a creditor may be willing to bring your account current and stop fees for an additional payment, but you won’t know unless you ask.

Another option is to get a part-time job. Use the money you earn from the job to bring your accounts current. When you know how much money you need to bring your accounts current, it is easier to work a part-time job, particularly if you know it is temporary.

Part-time work doesn’t have to be inconvenient. Perhaps you need more exercise in your life, so you decide to do yard work for hire. If you live in a metropolitan area, you could walk dogs. You could pick up groceries for elderly neighbors. Perhaps you could provide babysitting services in the evening or on weekends for families in your neighborhood. You could sell your baked goods or help your neighbor with minor household repairs. Use your imagination–there are hundreds of odd jobs that you might consider to earn extra income. It may not take much to get your payments caught up so you aren’t charged late or other fees.

Now that you’ve addressed your budget and your current debt, the third step to rebuilding your credit is knowing what is on your credit report and ensuring it is correct. Go to www.annualcreditreport.com and pull your credit report or call 1-877-322-8228 . As discussed in Chapter 5, you have the ability to pull a free report every 12 months from each of the three credit reporting agencies. Be sure to sit down with someone who knows how to read a credit report. If you don’t know how to read the report, how can you check it for errors? If you have just filed for bankruptcy, you will want to wait 90 to 120 days after your bankruptcy is discharged to pull your credit report.

This will allow time for the updates to be recorded on your credit report. While bankruptcy will not wipe your credit report clean, the accounts listed in your bankruptcy will no longer be collectable, and this should be reflected in your credit report.

Let’s assume that you have pulled your free annual credit report from one of the three national credit reporting agencies: Equifax, Experian, or TransUnion. Remember that while credit reports carry the same information, they don’t all look the same. That’s why it’s important that you examine the information contained in your credit report carefully. For a quick review on what’s included in a credit report, revisit Chapter 5.

If you find data on your credit report that is incorrect, you will need to dispute it. In Chapter 5, you will find addresses for each of the three credit bureaus, along with a sample dispute letter. When you report an error, the credit bureaus have 30 days to verify the information, or they have to remove it from your report. However, if they later verify that the information was correct, they can put it back onto your credit report.

Of all the items that are included in your free credit report, your credit score is not one of them. You will need to pay for your credit report if you want it to include your credit score. Before you do that, though, you need to correct any errors on your credit report. This can involve multiple communications with the credit bureaus and individual creditors, so keep this in mind as you make contact with them.

When it comes to knowing whether an account should remain on your credit report or not, you need to understand a legal term known as the statute of limitations. It can be confusing to understand how the statute of limitations works, but it is essential nevertheless. First, you need to know that there are two statutes of limitations that apply to debt. One statute of limitations regulates the time that a debt is legally collectible, and the second governs the time that a debt can remain on your credit report. Understanding this difference is important to helping you review your credit report for accuracy because you need to know how long an account can legally remain on your credit report.

Every state has a time frame that governs how long a bill is legally collectible. This may range from three to six years, depending on the state, but not all debts have a statue of limitations. Federal Student loans, fines, past due child support, and some taxes do not have a statute of limitations.

The statute of limitations on debt depends on the state and type of debt. For example, let’s say you have debt that is 7 years old, and in the state you reside, the statute of limitations is 6 years. Can a collector contact you in this instance? Yes, because the debt remains unpaid. However, here’s the tricky part: the collector cannot legally enforce the collection of the debt, which means you do not legally have to repay it.

Here’s where you need to decide if this is a bill you want to pay, even though it’s beyond the statute of limitations. If you do, you should pay it in full. If you need to make payments, you may want to hold off paying the bill until you can pay it in full. Don’t start making payments or promise to make payments on an old debt unless you know you can pay the debt in full. In some cases, making a payment or a promise to pay can reset the statute of limitations, depending on the state law. This can make a previously uncollectible debt collectible once again. If you question whether an account is legally collectible, you should visit with an attorney or a credit counselor. Credit counselors cannot give you legal advice, but they should be able to tell you the statute of limitations for a debt in your state.

The statute of limitations for your credit report is different than the statute of limitations for the collection of a debt.

The Fair Credit Reporting Act requires credit bureaus to drop negative information from your credit report after 7 years, with some exceptions. This 7 years is from the date of last activity. Understanding the date of last activity for your credit report is essential, as it determines how long negative account information can remain on your credit report.

The date of last activity is the month in which the late payment was due. If an account is charged off, the time runs from the date of delinquency, plus 180 days. For instance, if an account becomes delinquent on February 1, and is never brought up-to-date, the charge off date would be August 1. If an account is in collections, it is handled like a charged off account. Collection agencies cannot legally change or re-set the date of last activity just because the account was sent to collections. These accounts can stay on your credit report for 7 years from this date of last activity.

Judgments will stay on your credit report based on your state’s statute of limitations. This may be 10 years and renewable for another 10 years if unpaid.

A chapter 7 bankruptcy will remain on your credit report 10 years from the date of adjudication. A chapter 13 bankruptcy will remain on your credit report for 7 years.

Tax liens will stay on your credit report for 7 years from the date of payment. Unpaid tax liens and federal student loans can remain on your credit report forever.

There are still some instances when a credit bureau can disclose information beyond the timeframes already noted. If you are applying for a loan over $150,000, if you are applying for a life insurance policy with coverage over $150,000, or if you are applying for a job that pays $75,000 or more a year, then the credit bureaus can legally disclose older information.

If an account is old, past its time of reporting, you need to request that the credit bureau take this off of your credit report. You can do this by following the process outlined in Chapter 5.

The fourth step in rebuilding your credit is to try to borrow a small amount of money from a traditional lender. This means that you need to build or rebuild a relationship with a bank or credit union. This will help you to gain access to the kind of loans that can help to improve your credit.

Start by obtaining a loan application from a local bank or credit union and filling it out as completely as possible.

Then call to make an appointment with a loan officer. When you arrive, be ready to explain what caused your problems in the past. If you are turned down, be polite and ask for the loan officer’s advice on what else you could do to improve your credit; then make it a point to follow the advice.

When you are re-establishing credit following a bankruptcy or other causes for bad credit, you will not be offered great terms or rates on loans and credit cards. In some cases, you won’t qualify for the loan or card at all, but when you do, the rates will typically be very high. You may also be charged additional fees to open or maintain a new account.

This is why your first loan in the credit rebuilding process should be relatively small, say, $500 or so. And as you rebuild your credit by making payments on this small loan, you will become eligible for more credit at better rates. As you are offered better rates, this is when you should look at larger loans. No matter what, you should look carefully at all offers you receive to determine whether you are willing to live with the terms being offered.

Following some financial missteps that had damaged his credit, Carlo received a credit card offer with a credit limit of $500. He was anxious for the opportunity to open a new account and completed the application and awaited his new card. When it arrived, Carlo was surprised to receive a bill along with his new card. He wondered how he could already have a balance when he had never even used the card. Upon reading the fine print, he saw that he was being billed for an administrative fee and a monthly fee, leaving him with a $250 balance. This left Carlo with two choices: 1) He could keep the card and pay the fees; or 2) He could cancel the card and ask that the account be closed. Before Carlo decided whether or not to keep the card, he called the credit card company to ask if they were willing to waive all or part of the fees. The credit card company was not willing to do so, so Carlo canceled the card.

After this experience, Carlo decided to look for another card that didn’t charge such large fees. He applied for a credit card that didn’t charge an administrative fee, though he found that he would still need to pay a monthly fee. Carlo soon received the card and was careful to charge only a small amount and to pay the full balance each month. A year later, Carlo started looking for a new card that didn’t charge a monthly fee. He read the credit card applications he picked up or received in the mail with a careful eye and found one that offered him the terms he was looking for. When he received his newest card, Carlo closed his original account, so he would not have to continue paying the monthly fee.

The key for Carlo was knowing that his good repayment record would make it more likely that others would be willing to extend him credit. Don’t expect the credit card company to tell you that you now qualify for better terms and that you should seek a better card. Just as the grocery store manager isn’t going to tell you that the store down the road has what you want for a better price, neither will a credit card company tell you to seek a different card.

A traditional credit card is just one way to begin rebuilding your credit. Some banks and credit unions offer secured credit cards. With a secured card, you are required to deposit funds to be used as collateral for the card. The terms on a secured card will vary. For example, you may be required to deposit $500 to receive a credit limit of $500, or you may be required to deposit $500 and will be offered a credit limit that is higher or lower than your deposit. A secured card will still have fees and interest but will typically be less expensive than some other credit card offers that you may receive.

You could also consider opening a small retail credit card. If you open such an account, keep your charges low and pay off whatever you charge as quickly as you can. You will never be able to take advantage of better offers as you receive them if you are stuck paying a large amount on an account with poor terms.

As time passes and your situation improves, you will be offered better and better terms. Keep your charges to a minimum and never charge more than you can repay in one year – six months is even better. Remember that you need to be able to make your payments, regardless of what is happening in your life. It takes work to improve your credit, and once you do, you will want to make sure you keep your good credit.