Bankruptcy & Foreclosures

In my last blog post, we took a look at the first five strategies for improving a person’s credit score as excerpted from Jason Rich’s excellent book Dirty Little Secrets: What the Credit Bureaus Won’t Tell You. In continuing with the strategies here are the next five (6-10).

Strategy 6: Correct Inaccuracies in Your Credit Reports, and Make Sure Old Information Is Removed.

One of the fastest and easiest ways to quickly give your credit score a boost is to carefully review all three of your credit reports and correct any erroneous or outdated information that’s listed. If you spot incorrect information, you can initiate a dispute and potentially have it corrected or removed within 10 to 30 days.

Strategy 7: Avoid Excess Inquiries.

Every time you apply for a credit card or any type of loan, a potential creditor will make an inquiry with one or more of the credit reporting agencies (Experian, Equifax or TransUnion). This inquiry information gets added to your credit report and will typically remain listed for two years. For one year, however, the inquiry will slightly reduce your credit score. If you have multiple inquiries in a short period of time, this can dramatically reduce your credit score.

Keep in mind, when shopping for a mortgage or car loan, it’s permissible to have multiple inquiries for the same purpose within a 30- to 45-day period, without those multiple inquiries hurting your credit score. In this situation, the multiple inquiries will be counted as one single inquiry.

Strategy 8: Avoid Bankruptcy, if Possible.

There are a lot of misconceptions about the pros and cons of filing for bankruptcy if you encounter serious financial problems. In terms of your credit report and credit score, filing for bankruptcy is one of the absolute worst things you can do. If your credit score hasn’t already plummeted as a result of late payments, missed payments, and defaults, when the bankruptcy is listed on your credit report, you will notice a large and immediate drop in your credit score. Furthermore, that bankruptcy will continue to plague your credit report for up to ten years.

Strategy 9: Avoid Consolidating Balances onto One Credit Card.

Unless you can save a fortune in interest charges by consolidating balances onto one credit card, this strategy should be avoided. One reason to avoid this is that maxing out your credit card will detract from your credit score, even if you make on-time payments. Assuming the interest rate calculations make sense, you’re better off distributing your debt over several low-interest credit cards. An alternative is to pay off high-interest credit card balances using another type of debt consolidation loan or by refinancing your mortgage with a cash-out option.

Strategy 10: Negotiate with Your Creditors.

Contrary to popular belief, your creditors aren’t your enemies (at least they don’t have to be). Your creditors are in business. The nature of business dictates that they earn a profit. When you don’t pay your bills, that impacts a creditor’s ability to do business and impacts its bottom line. Many creditors are willing to be understanding of difficult financial situations and short-term financial problems, especially if you openly communicate with them in a timely manner.

In other words, instead of skipping a handful of payments or defaulting on a loan, contact the creditor as soon as a problem arises and negotiate some form of resolution that’s acceptable and within your financial means. Forcing a creditor to turn your debt over to a collection agency will simply cause you bigger problems in the future because many collection agencies are relentless when it comes to recovering money. Furthermore, the negative information that’s placed on your credit report will have a long-term negative impact on your credit score.

Sometimes even the best laid plans go awry and we find ourselves in situations of outstanding debt. As expected, with this come the calls from debt collectors reminding you of your outstanding balance. This can be not only inconvenient but downright embarrassing. What it important to remember is that even if you owe money, you do still have rights when it comes to debt collection. Let’s take a look at how the system works.

A collector may contact you in person, by mail, telephone, email, or fax. However, a debt collector may not disturb you at inconvenient times or places (such as before 8 am or after 9 pm), unless you agree to such arrangements. A debt collector also may not contact you at work once you make them aware that your employer disapproves.

You can stop a debt collector from contacting you by writing a letter to the collection agency requesting them to stop. Once the agency receives your letter, they may not contact you again except to confirm that there will be no further contact or to notify you that the debt collector or creditor intends to take some specific action.

It is important to realize that sending such a letter, under the auspices of the Fair Debt Collection Practices Act, to a collector does not make the debt go away. You could still be sued by the debt collector or your original creditor.

If you have an attorney, the debt collector must contact the attorney, rather than you directly.

A collector may not contact you if, within 30 days after you receive the written notice, you send the collection agency a letter stating you do not owe money. However, a collector can renew collection activities, as permitted under Fair Debt Collection, if you are sent proof of the debt.

Remember that even collection agencies have to follow the letter of the law. Any of the following would be considered harassment:

• Threats of violence or harm.
• Publishing a list of consumers who refuse to pay their debts (except to a credit bureau).
• Using obscene or profane language.
• Repeatedly using the telephone (such as calling back continually)

As always, the most effective way to get rid of the collector is make good on your balance.

Let’s face it, most of us realize that our credit score is a unit of measurement that determines where we stand in terms of being able to borrow money but how many of us really know what determines our credit score? Let’s start with the basics and then dig in to the nitty gritty- A credit score is a three-digit number that basically attempts to predict how efficiently you’ll pay your bills. The score ranges from 300-850 and is calculated using your credit history information contained in your credit report.

Past payment history accounts for 35% of the credit score. Lenders are obviously concerned about whether or not you pay your bills. A great indicator of your risk level is to look at how you’ve paid your bills in the past. Late payments, collections, and bankruptcies all affect the payment history of your credit score. More recent delinquencies hurt your credit score more than those in the past.

DTI (or debt to income ratio) accounts for 30% of your score. The amount of debt you have in comparison to your credit limits is known as credit utilization. The higher your credit utilization – the closer you are to your limits – the lower your credit score will be. Keep your credit card balances at about 30% of your limit or less.

Length of credit history is 15% of your score. Having a longer credit history is favorable because it gives more information about your spending habits. It’s good to leave open the accounts that you’ve had for a long time.

Inquiries are 10% of your score. Each time you make an application for credit, it’s added to your credit report. Too many applications for credit can mean that you are taking on a lot of debt or that you are in some kind of financial trouble. While inquiries can remain on your credit report for two years, your FICO score calculation only considers those made within a year.

Mix of credit is 10% of your score. Having different kinds of accounts is favorable because it shows that you have experience managing a mix of credit. This isn’t a significant factor in your credit score unless you don’t have much other information on which to base your score. Open new accounts as you need them, not to simply have what seems like a better mix of credit.

Understanding how your credit score is calculated is the first step in being able to take action to improve it. For more information, I recommend checking out LaToya Irby’s helpful About.com article.