Bankruptcy & Foreclosures

High foreclosure rates, talk of recession, it seems like there is nothing but doom and gloom in the news today concerning the economy. But alas there is hope coming in the form of our government and as fate would have it, this happens to be election time.

Majority Democrats want the government to get involved by backing up to $400 billion in troubled loans. The goal is twofold: First to help strapped borrowers and also to thaw a credit market plagued by uncertainty about the value of subprime mortgages that were issued to individuals with spotty credit or low income.

Interestingly, the republicans don’t share the democratic view of economic resolve. In his speech delivered on the 25th of March, Senator John McCain argued against a more expansive role for the government in dealing with the economic crisis. While the candidates themselves argue about the best means for recovery, the current body of leadership has issued its own proposal.

Issuing the most radical proposed overhaul of financial oversight since the Great Depression, the Bush administration has fired up a fierce debate by pitting those eager to revamp an antiquated system (such as plans proposed by the democratic candidates) against an industry that has been typically opposed to excessive regulation.

The plan, set to be released tomorrow is quite well aware of the current situation which has meant billions of dollars of losses for banks and investment firms, the near-collapse of the country’s fifth largest investment bank, made it harder for individuals and businesses to secure loans and has pushed the country to the brink of economic recession.

In addressing these issues, the plan is calling for the greatest alteration in financial regulation since many of the current oversight institutions were created in the 1930s. So what then is the debate about? Many experts in the financial industry are concerned that Congress could use the situation to rush in to legislate & regulate. Opponents to the proposal fear the government may use the current unstable economic conditions to grant themselves regulatory power that may remain long after the economy recovers. Whether or not these accusations prove true will remain a mystery until after the plan is released.

Here’s the scenario: After years of paying your bills on time, you overlook a bill that ends up going into collection. By the time you realize the error, a negative entry has been logged onto your credit report. It happens even to the most organized of us.

The question I often encounter after these situations is: “How long will this blemish stay on my credit report?”

Here’s the bad news: A 30-day late payment will likely stain your credit for seven long years. As will defaulted student loan payments, foreclosures, or law suit filings.

Bankruptcy stays on for ten years and unpaid taxation leans stick with you for fifteen years!

What’s worse is that if these negative entries aren’t erroneous, there is very little a consumer can do to get them to go away. The best advice I can offer if this happens to you is to pay everything else on time so that the negative entry stands out as a single-mistake rather than a pattern of your payment practices.

In case you haven’t read Jason Rich’s excellent book Dirty Little Secrets: What the Credit Bureaus Won’t Tell You, the following excerpt is very useful information and an effective summary of the type of material presented. The actual book contains 10 strategies to improve your credit score. For the sake of space restraints, I’ll break down the strategies presented into two parts (1-5 below and 6-10 in my next blog post).

Strategy 1: Pay Your Bills on Time.

Although this strategy may seem extremely obvious, late payments are the most common piece of negative information that appears on peoples’ credit reports and are often responsible for significant drops in credit scores. When it comes to loans and credit cards, it’s vital that you always make at least the minimum payments in a timely manner each and every month, with no exceptions.

The impact on your credit report and credit score will be considerable if you’re late or skip one or more mortgage payments, however, making late payments on other types of loans or defaulting on any loans will also have a disastrous impact on your credit score that will have an impact for up to seven years.

Strategy 2: Keep Your Credit Card Balances Low.

The fact that you have credit cards impacts your credit score. Likewise, your payment history on those credit card accounts also impacts your score. Another factor that’s considered in the calculation of your credit score is your credit card balances. Having a balance that represents 35 percent or more of your overall available credit limit on each card will actually hurt you, even if you make all of your payments on-time and consistently pay more than the minimum due.

If you have a $1,000 credit limit on a credit card, ideally, you want to maintain a balance of less than $350, and make timely monthly payments on the balance that are above the required monthly minimums.

Strategy 3: Having a Good History Counts, So Don’t Close Unused Accounts.

One of the factors considered when calculating your credit score is the length of time you’ve had the credit established with each creditor. You’re rewarded for having a positive, long-term history with each creditor, even if the account is inactive or not used. The longer your positive credit history is with each creditor, the better.

Strategy 4: Only Apply for Credit When It’s Needed, Then Shop for the Best Rates on Loans and Credit Cards.

If you’re in the market for a bunch of new appliances or other big-ticket items, it’s common for consumers to walk into a retailer and be offered a discount and a good financing deal on a large purchase, if they open a charge or credit card account with that retailer. Before applying for that store’s credit card, read the fine print. Determine what your interest rate will be and what fees are associated with the card.

Strategy 5: Separate Your Accounts after a Divorce.

During a marriage, it’s common for a couple to obtain joint credit card accounts and co-sign for various types of loans. Coming into the marriage, the information on each person’s credit report and their credit score will eventually impact their spouse, especially when new joint accounts are opened or a spouse’s name is added to existing accounts. Consolidating all your accounts once married makes record-keeping easier. If a couple gets divorced, however, this can create a whole new set of credit-related challenges.

First, understand that just because you obtain a legal divorce, it does not release one or both people from their financial obligations when it comes to paying off a joint account. As long as both names appear on the account, both parties are responsible for it.

As your divorce proceedings move forward, be sure to pay off and close all joint accounts, or have one person’s name removed from each account, meaning only one person will remain responsible for it.