UNDERSTAND YOUR CREDIT
Understand Your Credit
By John Adams
Thinking about buying a house? Then think about your credit history … the folks who lend money do!
How well you have handled your credit obligations in the past is of utmost importance to lenders today. The good news is that this information, for the most part, is available to you.
Your credit history is maintained by three different private companies called credit-reporting agencies: Equifax, Trans Union and Experian. You can order your report by phone and charge it to your major credit card if you like. It usually takes about a week to arrive. Or you can order your report online and view it within seconds.
It's a good idea to get a copy of all three reports, because if an error exists on even one of the reports, it may negatively affect your chances of getting the loan you want. Your credit report lists all the consumer credit that has been extended to you over the past seven years. It will show what your highest balance has been and what your current balance was on the date last reported by the creditor. It will also show how many payments you made on time and how many late payments were late. Late payments are grouped into categories showing how late you were. For example, if your credit card payment was over 30 days late one time, it might not be considered too serious. But if payments were over 60 days late four times, over 120 days late two times and over 180 days late one time, you have had a serious problem. That problem is going to impact your ability to borrow money.
It just makes sense to find out about your credit and correct any errors now. Regardless of how many credit problems you have had in the past, there are two good points to remember.
First, negative credit information can be reported in your credit file for only seven years. After that, it drops out and cannot even be considered. The one exception is bankruptcy, which can be reported for 10 years. But after that you start with essentially a clean slate.
Second, lenders are much more concerned about how you have handled your credit recently than with what happened several years ago. Even if you have had a bankruptcy, if you have kept your nose clean and paid your bills on time since then, it is possible you could qualify for a loan after as little as two or three years.
One of the best developments in the world of lending has been risk-based pricing. That's a five dollar term for the ability of lenders to offer higher priced loans to borrowers based on their demonstrated ability to repay. In other words, even if you have slightly fractured credit, you can still likely get a loan. It just may cost you a little more.
Guarding Your Credit History
You are the first and best line of defense in maintaining an error-free credit report
By Warren Lutz
It's one thing to have late payments or delinquencies on your credit report. Everybody has forgotten a payment or two. But it's quite different when somebody else's mistakes cause "dings" on your report.
Fixing such errors is important because unfavorable information on your credit report—accurate or not—affects your ability to borrow money.
The three major credit bureaus—Equifax, Experian, and Trans Union—compile information about you into a report that businesses use to evaluate whether you'd make a good borrower or, in some cases, a good employee. Credit reports tell people where you live, how you pay your bills, whether you've filed for bankruptcy and if you've been arrested.
Let's say you made your monthly payment on your department store credit card on time, but for some reason it is reported as a late payment on your credit report. According to the Fair Credit Reporting Act, both the credit bureau and the department store are responsible for correcting mistakes or incomplete information on your report. But you have to let them know. Credit Report Facts
What you need to know about your report:
Types of errors:
Late payments, delinquent payments, accounts you don't own, duplicate account information, unpaid judgments against you and bankruptcies.
How long does a bad history live?
Delinquencies are reported for 7 years. Bankruptcies are reported for 10 years. Criminal convictions and credit applications of more than $150,000 are reported indefinitely.
Does somebody in your household have the same name as you, such as a Jr. or III? Check your report carefully to make sure their accounts don't wind up on your file, or vice versa. It happens!
Step By Step
To correct an error, write a letter to the credit bureau that produced the erroneous report. Be sure to:
Provide your complete name and address, stating each item in your credit report that you believe is a mistake and why. Stick to the facts and request that errors be corrected or deleted.
Include copies not the originals of documents that back your claim such as a canceled check or a receipt of payment. Enclose a copy of the credit report and circle items in question.
Next, write a letter to the company or lender where the mistake came from; informing them of your dispute. Remember; include copies of documents that back your claim.
Send both letters by certified mail, return receipt requested, and keep copies for your records. This way you have proof both parties received notice of your dispute.
Credit Bureau Response
The credit bureau must investigate items in question within 30 days (unless they find your dispute is frivolous). They will also forward your dispute to the department store, which must investigate your claim and report back to the credit provider.
If the department store or any other creditor agree there is a mistake, they must notify the other credit bureaus so they can correct the information in their files. If the disputed item cannot be verified, it must be deleted from your files.
When the investigation is done, the credit bureau must give you its results in writing as well as a free copy of your credit report. You can also request that correction notices be sent to anyone having received your report in the prior six months.
Statement of Dispute
If the credit bureau does not resolve your dispute, you can ask them to include a statement (up to 100 words) in your file that says you disputed information in your report. The statement will show up in future credit reports.
If you're not satisfied with how the credit bureau handled your dispute, you can file a complaint with the Federal Trade Commission's Consumer Response Center by phone (877-FTC-HELP) or on the Web.
Rooting out mistakes in your credit report takes time and diligence. But your efforts could make the difference when it's time for you to get the loan terms you want.
Repairing Poor Credit
It takes discipline to clean up your credit and earn the trust of lenders
By Gwendolyn Glenn
Cleaning up your bad credit report—whether it's the result of unpaid credit card balances, a home foreclosure or a bankruptcy filing—is not an easy task, but it is not impossible. First, call your creditors, explain your situation and play "Let's make A Deal."
"Tell creditors that you are trying to clean up your credit and offer them a 30-percent settlement payment," said Debbi Chapman, a senior loan officer for FD Bankers in Hunt Valley, Md. "Try this first because most of them will take payments of 30 percent to 40 percent" of outstanding balances.
Partial Settlement Payment
If your creditors accept your offer to pay a portion of your debt, make sure you get the terms of the settlement in writing. And if the creditor refuses your offer, get that in writing as well. Once the settlement has been paid in full, your next step is to send the signed settlement letter(s) to the credit bureaus: Equifax, Trans Union and Experian/TRW. Each bureau should update your credit report to show that your settlement is paid.
One thing that Chapman advises consumers not to do is to use the services of consumer counseling finance companies.
"That's like going [in]to bankruptcy. They'll get your payments lowered from each creditor, but when you go for a loan later, a lender will see that as very negative," Chapman says.
Lenders do not have a negative view of partial payment settlements, however, because that shows that a debtor took responsibility for resolving debt problems, she said. Once your bills have been straightened out, close all unused credit accounts and keep only a couple of cards to re-establish yourself in lenders' eyes as a responsible credit user.
Chapman advises against filing for bankruptcy. The process does relieve you of crushing debts, but the fact that you sought bankruptcy protection remains on your credit report for 10 years. Prospective lenders will definitely hold that against you, said Roger Whelan, a bankruptcy attorney in Baltimore.
"Assuming a mortgage is a possibility, but getting a new mortgage is hard due to the stigma attached to bankruptcy filings," he says. "You can rebuild your credit as many people do—by getting secured credit cards."
Secured credit cards work like pre-paid long-distance cards. You'll pay the credit card company up front. Each time you use the card, you'll tap into the available funds.
Road to Recovery
Ironically, the only people who come out of bankruptcy relatively unscathed are those who have significant assets.
"Seven-figure folks with lots of exempt properties can regroup easier," Whelan says. Chapman adds: "If you have equity in your property, you can do something about your credit days after the bankruptcy. After four years, if you have perfect credit, you can get a loan from Fannie Mae. The FHA will approve you three years after a bankruptcy."
But if you've declared bankruptcy, don't expect mainstream lenders to be clamoring to give you a loan. You'll have better luck with mortgage brokers who have more loan products to offer. Keep an eye on rates but don't assume you'll be stuck with a higher rate because of your credit history.
An important thing to remember when you're trying to rebuild your credit following a bankruptcy or other credit problem is never to be late on payments. Your credit history puts you under greater scrutiny, and lenders will not be lenient about payment schedules. You have to be dedicated and really want to work on your credit. It can be done," Chapman says. "You will have to suffer a bit, but it's up to you to prove to lenders that you are someone who will pay on time."
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Get Out of Debt Free
Look to credit counseling for the discipline you need to get out of debt
By Gene Gorman
Jennifer Phyfe and her husband went to a credit counselor eight years ago and they will never forget the office decor. "He had a big jar and it was filled with credit cards," says Jennifer. "You had to cut them up right there—it was painful."
The Phyfes were not—and are not—alone. In 1999, the average American household carried a balance of $7,564, up from $2,985 in 1990, according to CardWeb.com, a credit card research company. To save yourself from the statistics, read on for good advice.
"I think part of the problem is that we're an instant gratification nation," says Kathleen McNally, who oversees debt education programs as a vice president for the National Foundation for Credit Counseling. "We're very impatient about wanting to acquire material things. Shopping is entertainment."
"I always say paying off debt is not like going to a salad bar and picking and choosing," continues McNally, who has dealt with clients who owe up to $160,000. "You've got to pay off all that debt." Credit counseling in a Nutshell
Credit counseling takes three forms: nonprofit counseling, for-profit counseling and online credit counseling.
Credit counselors help clients understand how their debts became overwhelming, and teach them how to both dig out and prevent personal history from repeating itself. Whether a client needs simple financial advice, a personal plan for paying off creditors or referral to a bankruptcy lawyer the assistance is usually free.
How Counseling Works
The Phyfes were about $4,000 in debt before they moved from Arizona to Connecticut. They knew they wanted to buy a house someday and thus needed to improve their credit and reduce their monthly payments to make room for a mortgage. They went through debt proration—a kind of financial workout—and their counselor designed a plan specifically for them.
With debt proration, the counselor negotiates new terms with the debtor's creditors and then takes the debtor's paychecks, pays the creditors each month, giving the client what amounts to an allowance.
"It's all set out up front how much you're going to get back, and it's tight," said Nice Reichbach. NICE, which is affiliated with Eastern Michigan University, runs credit counseling seminars and other classes related to personal finance.
While the counseling service can help resolve debts, it cannot solve all of your credit problems. And in some cases, it can even create new ones. Creditors have been known to reject an application from people who have been through credit counseling.
"I thought counseling was going to be a positive reflection, but we actually got turned down for a loan because of it being on there," Jennifer Phyfe says.
McNally and Gwen Reichbach, who directs the National Institute for Consumer Education, say there is no way to predict how a given creditor—such as a mortgage lender—or loan officer will feel about credit counseling. But they suggest that the alternatives (loan default, over extension and bankruptcy) look far worse on someone's record. "If the debts get paid off, that's got to look good," says Reichbach.
Credit Repair and Debt Consolidation
Credit counseling differs from credit repair and debt consolidation, which are other approaches debtors can take. Debt consolidation involves a loan and usually requires some type of collateral, such as home equity. Repairing credit is really about challenging any errors, and even some items that are perfectly valid, in one's credit history.
One technique used in credit repair is challenging every negative piece of information on a credit report, even the ones that are undeniable. Creditors have a limit on the amount of time they have to respond to challenges. If they can't get to a challenge in a timely manner, the bad report is erased.
Reichbach warns against agencies that claim that they can "wipe your credit clean," or "eliminate your debts." If these pitches sound too good to be true, they are. "They aren't going to know any more than you can learn yourself, in most cases," says Reichbach. "In credit counseling, you may be taught how you can repair credit: You have to build a new, positive record."
The Power of Bankruptcy's Automatic Stay
After you file, the law offers potent legal protection against bill collectors
When you file for bankruptcy, something called the automatic stay immediately stops any lawsuit filed against you and virtually all actions against your property by a creditor, collection agency or government entity. Especially if you are at risk of being evicted or foreclosed on, being found in contempt for failure to pay child support or losing such basic resources as utility services, welfare or unemployment benefits, your driver's license or your job (because of a raft of wage garnishments), the automatic stay may provide a powerful reason for filing for bankruptcy.
Here is how the automatic stay affects some common emergencies:
Utility disconnections. If you're behind on a utility bill and the company is threatening to disconnect your water, electric, gas or telephone service, the automatic stay will prevent the disconnection for at least 20 days. Bankruptcy will probably discharge the past due debts for utility service. Although the amount of a utility bill itself rarely justifies a bankruptcy filing, preventing electrical service cutoff in January in New England might be justification enough.
Foreclosure. If your home mortgage is being foreclosed on, the automatic stay temporarily stops the proceedings, but the creditor will often be able to proceed with the foreclosure sooner or later. If you are facing foreclosure, Chapter 13 bankruptcy is always a better remedy than Chapter 7 bankruptcy, if you want to keep your house.
Eviction. If you are being evicted from your home, the automatic stay can usually buy you a few days or a few weeks. But if the landlord asks the court to lift the stay and let the eviction proceed -- which landlords usually do -- the court will probably agree, reasoning that eviction won't affect the bankruptcy. Despite the attractiveness of even a temporary delay, it is seldom a good idea to file for bankruptcy solely because you're being evicted. You'll probably be better off looking for a new place to live or fighting the eviction in state court, if you have a defense.
Public benefit overpayments. If you receive public benefits and were overpaid, normally the agency is entitled to collect the overpayment out of your future checks. The automatic stay prevents this collection; furthermore, the debt (the overpayment you owe) is dischargeable unless the agency convinces the court it resulted from fraud on your part. Whether or not the threatened collection of an overpayment justifies bankruptcy depends on how severely you'll be affected by the proposed reduction in benefits.
Loss of driver's license because of liability for damages. In some states, your driver's license may be suspended until you pay a court judgment for damages resulting from an automobile accident. The automatic stay can prevent this suspension if it hasn't already occurred. If you are absolutely dependent on your ability to drive for your livelihood and family support, keeping your driver's license can be a powerful reason to file for bankruptcy.
Multiple wage garnishments. Although no more than 25 percent of your wages may be taken to satisfy a court judgment (up to 50 percent for child support and alimony), many people file for bankruptcy if more than one wage garnishment is threatened. For some people, any loss of income is devastating; also, some employers get angry at the expense and hassle of facilitating a succession of garnishments and take it out on their employees. Although federal law prohibits you from being fired for one garnishment, an employer can fire you for multiple garnishments. Filing for bankruptcy stops garnishments dead in their tracks. Not only will you take home a full salary, but also you may be able to discharge the debt in bankruptcy.
If the primary reason you file is to get the benefit of the automatic stay, you don't need to file all of your papers at once; you can file just the two-page petition and a mailing list of your creditors. If you don't file the rest of your papers within 15 days, however, the case will be dismissed.
Usually, the only way for a creditor to get around the automatic stay is to ask the bankruptcy court to remove ("lift") it if it is not serving its intended purpose. For example, say you file for bankruptcy the day before your house is to be sold in foreclosure. You have no equity in the house, can't pay your mortgage arrears and have no way of keeping the property. The foreclosing creditor is apt to run to court soon after you file to ask for permission to proceed with the foreclosure -- and that permission is likely to be granted.
In a few instances, the automatic stay won't help you.
Certain tax proceedings. The automatic stay stops the IRS from issuing a tax lien or seizing property. However, the IRS can audit you, issue a tax deficiency notice, demand a tax return (which often leads to an audit), issue a tax assessment or demand payment of such an assessment.
Support actions. A lawsuit against you seeking to establish paternity or to establish, modify or collect child support or alimony isn't stopped by your filing for bankruptcy.
Administrative freezes. If you file for bankruptcy owing money on a bank loan, and you also have a checking account with that bank, the automatic stay prohibits the bank from removing money from your checking account to cover what's owed. The bank can, however, freeze money in the checking account to cover the amount of your default -- at least until the bankruptcy court determines what will happen to the debt. Freezing money means that you have no access to it.
Criminal proceedings. A criminal proceeding that can be broken down into criminal and debt components will be divided, and the criminal component is not affected by the automatic stay. For example, if you were convicted of writing a bad check, sentenced to community service and ordered to pay a fine, your obligation to do community service won't be stopped by your filing for bankruptcy.
The 12 Credit Myths
By Kimberly Lankford; www.kiplinger.com
These 12 guidelines are often touted as financial words to live by. Should you accept them as gospel truth?
Close credit accounts you no longer use.
Verdict: Thumbs down. Cut up the cards, but don't close the accounts because you could end up hurting your credit score. Assuming your history with those accounts is good, you'll want to keep them on your record.
Closing old accounts also lowers the amount of credit you have available, and that can actually be a black mark on your record. When lenders decide whether to extend credit, they look at how much of your available credit you're already using, poetically called your utilization ratio. Let's say you have five credit cards, each with a $10,000 limit, and your total balance is $6,000. That gives you a utilization ratio of 12%, not bad, in the eyes of lenders. But, if you close four of those accounts, your ratio suddenly jumps to 60% not good.
You haven't borrowed an additional nickel, but on paper it looks as if you're closer to being overextended, says Craig Watts of Fair Isaac, the company that calculates the credit scores most lenders use. Ideally, you should keep your utilization ratio below 50%, says Maxine Sweet of the credit bureau Experian.
Set up an emergency fund to cover three to six months worth of your expenses.
Verdict: Thumbs up. You can get by with a smaller stash, say, enough to pay two or three months worth of expenses, as long as you have a low-interest home equity line of credit.
When calculating your expenses, don't forget to include the deductible on your auto- or homeowners-insurance policy, whichever amount is higher.
The idea is to keep enough cash on hand so that you don't have to sell stocks or rack up expensive credit-card debt if you have an emergency, but not so much that you lose out on the higher returns you can earn on longer-term investments. Emergency money needs to be safe and accessible, which means keeping it in a bank money-market account or a money-market fund with check writing privileges.
The percentage of stock in your portfolio should equal 100 minus your age.
Verdict: Thumbs down. It's not a bad guideline, it's just too conservative. Think of it as a baseline figure rather than a hard-and-fast rule.
Consider a couple who retire at age 65. With only 35% of their portfolio in stocks, says Evelyn D'Amico, a financial planner, their assets will have a tough time growing enough to keep up with inflation. D'Amico recommends that her clients have at least 50% of their retirement assets in stocks at age 65.
For a more aggressive guideline, modify the rule to subtract your age from 110, and then multiply that figure by 1.25, recommends Stuart Ritter, a financial planner. Using that formula, our 65-year-old couple would keep 56% of their portfolio in stocks. For a 50-year-old, the stock portion would be 75%. If you can count on a traditional pension to provide a guaranteed annual income, you can afford to be even more aggressive.
Bear in mind that this rule applies to the long-term portion of your portfolio. Money you're saving for shorter-term goals that are fewer than five years away should be invested more conservatively.
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All information on this site is believed to be true. However do not take it as truth without first personally reviewing the information prior to making any offers to list or purchase