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Credit Repair Kit For Dummies
By Steven Bucci
John Wiley & SonsCopyright © 2014 John Wiley & Sons, Ltd
All rights reserved.
Introducing Credit Repair, Credit Scores, and Your Life on Credit
In This Chapter
* Handling credit problems
* Rebuilding your credit after a crisis such as a foreclosure or bankruptcy
* Safeguarding your credit and your identity
* Discovering how to manage your credit
* Keeping your credit solid in every stage of life
Credit plays a larger role in life than ever, and it looks like its influence will only expand in the years to come. The good life, happiness, and credit are inextricably linked. It's not that more material things make you happier, but bad credit exacts a price from your life and your relationships with others. Think of it as your credit/life connection. You must successfully manage your credit and, by extension, your personal finances if you are to lead a successful and satisfying life in these United States.
Financial products, credit foremost among them, have become much more complex and powerful, while the price for having a bad credit report has never been steeper. Your credit report is a financial snapshot of your life. When you use credit, the information usually gets reported to a data storehouse known as a credit bureau. This information ends up on your credit report for at least the next seven years. The good, the bad, and the ugly are all there for anyone you do business with to see and for FICO and VantageScore to summarize in a three-digit number known as your credit score.
Bad credit can keep you from finding a job, getting the promotions you deserve at work, getting insurance (or paying the lowest price for it), securing an apartment or house, and more.
This chapter is all about getting you started in repairing your credit so you can get that job, promotion, home, and insurance to protect it. I start with the basics. If you don't understand credit, you can't fix it, so I discuss how credit works, how to apply that knowledge to get what you want, how to deal with the effects of life's inevitable setbacks on your credit, and how to recover from those setbacks as quickly as possible. Other chapters build on this information, helping to make your credit the best it can be and keep it that way. Why? Because life isn't always fair, but you still need to repair the damage and carry on without being taken advantage of by unscrupulous financial companies or wasting precious years recovering from credit problems that you can avoid or minimize by using the advice in this book.
Repairing Bad Credit
After you've had a rough patch and fallen behind on your payments, you may think that you can never recover. Between the cost of interest and maybe even collection actions, the situation can be overwhelming. But I assure you that you can reverse the cycle. You can not only reestablish good credit but also keep good credit forever. Forever is a long time, but if you follow my advice, you can banish the credit blues permanently! It's not magic, and it won't cost you another dime. By realistically assessing your situation, using free help if you need it, setting goals, planning your spending and savings, and using credit as part of your overall plan, you can quickly rebuild your credit.
You hear the ads all the time: "Settle your debt for pennies on the dollar!" "You have a right to pay less than you owe!" Debt settlement is an often misunderstood option that may work for you, but only if you handle it properly. Many companies that offer debt settlement services help themselves a lot more than they help you. You can avoid huge fees and potential credit damage if you reach a settlement agreement with your lender on your own or if you use your own attorney.
You are personally responsible for the actions of the debt settlement company you hire, and your credit will be ruined in a protracted and adversarial settlement process. Chapter 6 gives you the information you need to decide whether debt settlement is for you and outlines your best options.
Resetting your goals
Just as you did when you first started establishing credit, I want you to revisit your goals from time to time. When your life changes, your goals should reflect that new reality. Goals that once seemed within easy reach may move from short term to long term. Others may change as you mature. Buying that red sports car may not be as important to you now as it was in your 20s. Take the time to reset your sights, as I explain in Chapter 2.
Begin by envisioning your life as you'd like it to be over the short, medium, and long term. Next, create a spending plan (or update your plan if you already have one) so that you know your current financial resources. Then begin to see how long it will take to fund your goals and determine when using credit may be appropriate. Chapter 18 goes into detail about how to create and maintain a spending plan and how to use credit wisely as a part of that plan.
To ensure that your credit is up to the task of supporting your goals for the future, check your credit reports and dispute any inaccuracies or out-of-date information. To rebuild your credit reports, you need to start with an accurate credit history, not one riddled with errors that may hold you back. After you check your reports, look for opportunities to review them for free as often as you can. Part IV tells you everything you need to know about credit reporting.
Rebuilding your credit by using it
The best way to rebuild your credit is to exercise it! Using your goals and spending plan as a guide, start making those payments as agreed, on time and for the correct amounts. Every month you do so, you build better credit while your older, bad credit either counts for less or drops off your credit reports altogether.
Consider opening a secured credit card (backed by a bank account deposit) or a passbook loan to add a revolving and installment account to fatten your credit history and boost your score. You can find the details in Chapter 9.
Using a cosigner or becoming an authorized user
I normally don't recommend that you cosign for a loan, but in this case, someone else is doing the cosigning! Enlisting a cosigner is a way to get access to credit so that you can begin to rebuild your credit history with the credit bureaus. But you need to keep in mind a few important rules:
[check] You have to make all the payments on time.
[check] If you can't make a payment when it's due, you have to tell the cosigner in advance so that the cosigner can make the payment and protect his or her credit. You can pay your pal back later.
[check] You can't get mad at the cosigner for not being understanding or more helpful while you owe him or her money. Your cosigner is doing you a huge favor at great personal credit risk!
Another way to rebuild your credit is to become an authorized user on someone else's credit card. After you're added to the other person's account, his or her good credit history flows onto your credit record as a positive account and payment stream, beefing up your record and credit score. The person needs to have good credit, though, or his or her bad credit will negatively affect yours. I suggest that you decline getting your own card for the account so that only the other person's charges appear on the account. That way, if he or she has a bad memory (like I do), you're spared monthly calls asking whether this or that charge is yours. Although you won't have access to new credit, your credit score gets a boost.
Finding sources of free help
You can do a lot of things on your own, but sometimes having a pro on your side to give you tips helps. You can find that help in three main places, and it ranges from inexpensive to free. Nonprofit credit counselors, pro bono lawyers, and HUD-approved counseling agencies offer priceless insight, assistance, and advice. The trick is to know to ask for it.
Nonprofit credit counselors work with you to set goals, develop a spending plan, and assess your ability to repay your debts. They can set up a repayment plan in concert with your lenders to lower your payments and interest rates and get positive information back on your credit reports faster than you could on your own. They're funded by creditors but work for you, and I recommend the good ones highly. Discover where to find the good ones in Chapter 4.
Lawyers sometime offer free or pro bono help if you can't afford to pay. Chapter 4 includes a list of resources to help you find one in your area.
A mortgage is a different and sometimes dangerous type of loan. The rules for handling a delinquent mortgage are different from those for regular consumer debts, and the penalty for a mistake can be the loss of your home. So I strongly recommend that if you have a mortgage problem, you get professional, HUD-certified help. You can find an agency at the HUD website (www.hud.gov).
Watch out for bad help. In a nutshell, if someone approaches you and offers to help for a fee, don't do it. The free resources work well. The costly ones too often are just ways to separate you from your money while you're under stress.
Dealing with collectors
Sometimes, you have to take the call. You know it's a debt collector, but you don't know what to say, do, or offer. Chapter 5 spells out how to take control of the collection process. Collectors must follow certain rules, and if you know the rules, you'll feel more confident in dealing with a stressful situation.
The Fair Debt Collection Practices Act (FDCPA) regulates what collectors can and can't do. In general, this law protects you from abuse and threats. For example, a collector can't threaten an action that it can't or doesn't intend to take, can't make harassing calls, and can't use abusive language. When you know your rights and insist on being treated fairly, you can negotiate a payment schedule that fits your budget. If you need help coming up with a workable plan, you can always ask a credit counselor for assistance.
Chapter 5 offers solutions that work. From how to handle calls and threatening letters to how to craft a repayment proposal, I walk you through how to keep a small collection annoyance from becoming a major and upsetting life event.
Weathering a Mortgage Crisis
Some credit problems are worse than others. In my experience, a mortgage crisis is among the most upsetting, expensive, and damaging to your credit and relationships. Your home is your castle. When you are at risk of losing it, you likely feel as though your very existence is under attack. Thinking matters through and coming up with the best solution for you and your family may be difficult. In this section, I preview the major options to help guide you along the best path. Check out Chapter 7 for more mortgage information.
Mortgages are different from other types of debts and credit because of a number of factors, including the size of the debt, the importance the lender attaches to a debt secured by a home, and the fact that the debt is probably packaged in a security that's been resold many times and is subject to inflexible collection rules. Mortgage delinquency can have a significant and long-lasting negative effect on your credit score. For example, being just 30 days late on a mortgage payment can cost you 100+ points on your credit score and take three years to recover from. The upshot is that if you're in danger of falling behind on your mortgage payments or you're already behind, you're better off seeking professional help.
Opting for help
In a mortgage crisis, the sooner you get help, the better. The reason is simple: The stakes are high and the help is free.
Most people who have a mortgage payment due on the first of the month know that they have until the 15th to pay it. Do you? If you miss that payment on the 15th, you're 45 days late. Mortgages are paid in arrears, so the bill is already 30 days old when you get it. Miss the due date and the 15-day grace period goes away until you catch up. By the 15th of the next month, you're 15 days away from a foreclosure action. Fast, isn't it? So I suggest that you don't delay in contacting a HUD-approved counseling agency. These agencies are often housed in credit counseling agencies, so they can address all your debt issues at once.
Doing it on your own
You may insist on working out your mortgage problems on your own. The process is tricky and long, but it can be done. Chapter 7 goes into details on the steps and time frames for action. In addition to acting quickly, you need to keep excellent notes about who you speak with, when you talk, and what is said. You're dealing with a bureaucracy, and bureaucracies love to forget that they ever heard from you and send you all over the place to avoid responsibility for helping. So good notes are essential. Chapter 7 lists key terms and things to ask for so you can sound like you know what you're talking about.
Just because a bank doesn't want to take your home doesn't mean that it won't.
As in any debt resolution process, you need to do your homework before you call your mortgage servicer. Know what you really need in terms of help to take care of your missed payments, and know what you can offer. You may be able to make additional payments over a six-month period to catch up. Or you may need to ask for a reduced payment amount for a certain amount of time. Whatever you need, you have to be specific. Chapter 7 helps you understand the major options, but they change frequently, so you may have to rely on your mortgage servicer (the bureaucrat) to advise you.
If you can't work out a compromise, there are ways to leave your home that result in less credit damage. Among them are
[check] Deed-in-lieu of foreclosure: You give the house back, saving the bank foreclosure expenses.
[check] Short sale: You get the bank to agree to let you try to sell the house for less than the mortgage value.
[check] Friendly foreclosure: You cooperate with the bank and leave the house in good shape on a timely basis.
Chapter 7 goes into more detail about these options.
Strategic mortgage default
Strategic mortgage default isn't an option that anyone likes. However, a number of people consider walking away from their homes as an alternative to trying to work matters out. Based on how much you owe, you may be very, very unlikely to get back the money you're putting into monthly mortgage payments. According to the Federal Reserve, strategic default is a particularly popular remedy for people who have lost 50 percent or more of their property values and owe large mortgages. Say that you owe $200,000 on your mortgage but your home is worth only $100,000. Why waste $100,000 in overpayments? Following that reasoning, some people are mailing the keys to the bank and walking away from their homes.
Credit damage from a strategic default is significant and lasts a long time. You can expect to have really bad credit for seven years and to see a credit score drop of 140 to 160 points. (See Chapter 14 for more on credit scoring.) Plus, Fannie Mae, the government agency that guarantees most mortgages, won't guarantee a new loan for you for the next seven years, which means that to buy another home in the next seven years, you'll pay more for a new mortgage and you'll need expensive mortgage insurance.
There are times in life when you just can't cope. For some people, this is also true in credit matters. If you're unable to come to terms with the aftermath of being overextended, bankruptcy may enable you to hit the reset button and start over again. But there is no free lunch.
While you pay a price in terms of future credit, bankruptcy for the right reasons and in the right circumstances may be your best bet. This section gives you a quick look at an often misunderstood and misused tool so that you can decide whether the cure for your debts is worth the damage to your credit. Chapter 8 has more information on the updated bankruptcy process, what it means to you, and what your alternatives are.
Excerpted from Credit Repair Kit For Dummies by Steven Bucci. Copyright © 2014 John Wiley & Sons, Ltd. Excerpted by permission of John Wiley & Sons.
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