Credit
How to Improve Your Credit
If you have had credit problems, be prepared to discuss them honestly with a mortgage professional.
Your Credit Report
Understand how a mortgage company views your credit information.
Credit Scoring and How It Works
Credit scoring, also known as FICO scoring, is a statistical method of assessing the credit risk of a loan applicant.
Credit Profile
A credit profile details your credit history as it has been reported to the credit reporting agencies by lenders who have extended credit to you.
Credit Reporting Agencies
This article includes address, phone and web site information for each credit repository.
Credit Grade
Mortgage companies often grade your loan based on certain credit related items such as payment history, amount of debt payments, bankruptcies, equity position and your credit score.
Other Credit Factors
Mortgage companies look at other information besides your credit score and credit profile before deciding whether to approve your mortgage.
Know the Score About Your Credit Rating
Learn about the importance of keeping tabs on your credit rating.
Credit Inquiries
The Fair Credit Reporting Act (FCRA) outlines specifically who can see your credit profile.
How to Fix Credit Report Errors
You have the right, under the Fair Credit Reporting Act, to dispute the completeness and accuracy of information in your credit file.
Steps to Take After Being Denied a Loan
It's never fun to be turned down for a loan, but before you think you won't be able to get credit anywhere, there are some steps you can take.
Establish a Credit History
What to do to increase your chances of being approved for a mortgage.
How to Prevent Identity Theft
According to one non-profit debt counseling agency, some 40,000 consumers each year are victims of this crime, which is a serious type of fraud.
Improve Your Bad Credit
If you had a problem that's been corrected, and your payments have been on time for a year or more, your credit may be considered satisfactory.
Bankruptcy
Read articles about the different types of bankruptcy and how to avoid it.
How to Improve Your Credit
If you have had credit problems, be prepared to discuss them honestly with a mortgage professional. Responsible mortgage professionals know there can be legitimate reasons for credit problems, such as unemployment, illness, or other financial difficulties. If you had a problem that's been corrected and your payments have been on time for a year or more, your credit may be considered satisfactory.
If you are currently in excess debt, there are four ways to control it:
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If your credit is not in terrible shape, you can reduce your other expenses, even if it means making hard choices or changing your lifestyle to fit your income. Consider selling a second car, taking equity out of your home, applying for a non secured signature loan, obtaining a loan from a relative, selling your home and paying off your debts with the proceeds and then renting, cashing out your 401K/retirement benefits, or selling family heirlooms, jewelry, etc.
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If your credit is already damaged or one of the above isn't an option, go through Consumer Credit Counseling Services (CCCS). Check your yellow pages for the local number. CCCS may be able to help you pay off your debts as if you were in a Chapter 13 bankruptcy, but you don't actually file for bankruptcy.
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If CCCS won't take you, you may want to consider bankruptcy. Claiming Chapter 13 bankruptcy takes longer than a Chapter 7, but your credit will end up in a little better standing. Chapter 13 bankruptcy gives you up to 5 years to pay off your debts. The disadvantage is that you're in bankruptcy for up to 5 years plus your credit report shows your bankruptcy for 7 more years after you have finished paying off your debts.
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If you are so far in debt that you can never repay it, then the best solution may be a Chapter 7 bankruptcy. A Chapter 7 bankruptcy is the least desirable from a credit standpoint, but you are typically out of bankruptcy in 6 months and you don't have to repay any debt. The disadvantage is that this shows on your credit report for 10 years from the date of filing your bankruptcy. Creditors are starting to tighten their credit requirements, and you may have a tough time getting future financing.
If your debts are under control now, but want to improve your bad credit history, the most important factor is to make your monthly payments on time. Use pre-addressed envelopes enclosed with your statements to mail your payments and call the company if you don't receive your usual statement. Also, send your payment as early as possible if you carry a balance. Most companies calculate interest on a daily basis, so the sooner they receive your payment, the less interest you'll pay.
Don't procrastinate. It's the day your payment is received that counts, not the postmark date. Give the post office sufficient time (five business days is a good guideline) to deliver your mail. Late payments may mean late fees, higher interest, and/or a negative mark on your credit report.
Never send cash. Open a checking account if you don't have one, or spring for a money order and keep your receipt. Finally do not forget to tell your creditors your new address when you move.
If you are worried about making payments, make a list of your debts and when the payments are due. Contact your lenders immediately if you think you will have trouble meeting the monthly payments to arrange a payment schedule.
Taking money from your retirement account or tapping the cash value of your life insurance policy to pay bills or living expenses may have serious implications you haven't considered, so try to get advice from an expert before you take any major financial actions.
Credit cards can be invaluable in a crisis, since they allow you to charge items and pay them off over time. But they can also be dangerous if you aren't careful and charge more than you can afford. If you do use credit cards, choose those with the lowest interest rates and pay them back as soon as you can to cut your costs.
Your Credit Report
Your credit report provides information to current and prospective creditors to help you make purchases, secure loans, pay for college educations, and manage your personal finances. Credit reporting makes it possible for stores to accept your checks, banks to offer credit and debit cards, businesses to market products, and corporations to better manage their operations to benefit the world's economy.
Your credit report is only compiled when you or a lender makes an inquiry. Information supplied by lenders, you, and court records is gathered from the credit reporting agency's file and presented in report format for the requester.
Credit grantors send updates to each of the credit reporting agencies, usually once a month. These updates include information about how their customers use and pay their accounts.
Under the Fair Credit Reporting Act, you may be entitled to receive a free copy of your personal credit report if you have been declined credit, housing, or employment in the last 60 days. To request your free copy, ask your mortgage company or contact one of the credit reporting agencies directly.
Credit Scoring - How it Works
Credit scoring is a statistical method that lenders use to quickly and objectively assess the credit risk of a loan applicant. The score is a number that rates the likelihood you will pay back a loan. Scores range from 350 (high risk) to 850 (low risk). There are a few types of credit scores; the most widely used are FICO scores, which were developed by Fair Isaac & Company, Inc. for each of the credit reporting agencies.
Credit scores only consider the information contained in your credit profile. They do not consider your income, savings, down payment amount, or demographic factors like gender, race, nationality, or marital status. Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit, and number of inquiries are all considered in credit scores. Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or reestablishing a good track record of making payments on time will raise your score. Different portions of your credit file are given different weights.
They are:
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35% - Previous credit performance (specific to your payment history)
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30% - Current level of indebtedness (current balance compared to high credit)
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15% - Time credit has been in use (opening date)
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15% - Types of credit available (installment loans, revolving and debit accounts)
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5% - Pursuit of new credit (number of inquiries)
The most important factor for a good credit score is paying your bills on time. Even if the debt you owe is a small amount, it is crucial that you make payments on time. In addition, you may want to keep balances low on credit cards and other "revolving credit;" apply for and open new credit accounts only as needed; and pay off debt rather than moving it around. Also don't close unused cards as a short term strategy to raise your score. Owing the same amount but having fewer open accounts may lower your score.
Recent changes minimize the negative effects that rate shopping can have on a mortgage applicant. If there is a consumer originated inquiry within the past 365 days from mortgage or auto related industries, these inquiries are ignored for scoring purposes for the first 30 calendar days; then, multiple inquiries within the next 14 days are counted as one. Each inquiry will still appear on the credit report.
Every score is accompanied by a maximum of four reason codes. Reason codes identify the most significant reason that you did not score higher. The reason codes can help a lender describe the reasons for higher than expected rates or loan denial. Scores are not part of the credit profile and are not covered by the Fair Credit Reporting Act.
Your credit report must contain at least one account which has been open for six months or greater, and at least one account that has been updated in the past six months for you to get a credit score. This ensures that there is enough information in your report to generate an accurate score. If you do not meet the minimum criteria for getting a score, you may need to establish a credit history prior to applying for a mortgage.
Credit Profile
Your credit profile details your credit history as it has been reported to the credit reporting agencies by lenders who have extended credit to you. Your credit profile lists what types of credit you use, the length of time your accounts have been open, and whether you've paid your bills on time. It tells lenders how much credit you've used and whether you're seeking new sources of credit.
Basically, it is a picture of how you paid back the companies you have borrowed money from and how you have met other financial obligations.
There are usually five categories of information on a credit profile:
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Identifying Information
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Employment Information
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Credit Information
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Public Record Information
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Inquiries
There are many items that are NOT included on your credit profile, including:
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Your Race
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Your Religion
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Your Health
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Your Driving Record
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Your Criminal Record
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Your Political Preference
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Your Income
Credit Reporting Agencies
Credit Reporting Agencies collect information about you and your credit history from public records, your creditors, and other reliable sources. These agencies make your credit history available to your current and prospective creditors and employers as allowed by law. Credit agencies do not grant or deny credit.
The credit reporting agencies are:
Equifax
PO Box 105873
Atlanta, GA 30348
800-685-1111
Experian
PO Box 2002
Allen, TX 75013
888-EXPERIAN (888-397-3742)
TransUnion
PO Box 2000
Chester, PA 19022
(800) 888-4213
Credit Grades
Mortgage companies often grade your loan based on certain credit related items such as payment history, amount of debt payments, bankruptcies, equity position, and your credit score. Below is a guide to help you estimate your credit grade. This is only a guide as many companies have exceptions that may result in more strict or more lenient guidelines.
The figures shown here are estimates. When trying to figure your credit grade, keep in mind the following principles:
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Other Things Being Equal
When your have bad credit, all of the other aspects of the loan need to be in order. Equity, stability, income, documentation, and assets play a larger role in the approval decision. -
Worst Case Scenario
When determining your grade, various combinations are allowed, but the worst case will push your grade to a lower credit guide. Late mortgage payments and bankruptcies are the most important. -
Going Once, Going Twice
Credit patterns are very important. A high number of recent inquiries and more than a few outstanding loans may signal a problem. A "willingness to pay" is important, thus late payments in the same time period is better than random late payments as they signal an effort to pay even after falling behind.
Other Credit Factors
Mortgage companies look at other information besides your credit score and credit profile before deciding whether to approve your mortgage. They also consider:
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Income stability
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Employment history
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Monthly debts in relation to your income
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Savings amount and methods
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Mortgage type
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Property type and value
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Down payment amount
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Timeliness of rent and utilities payments
Know the Score About Your Credit Rating
Consumers have been hearing a lot about the importance of keeping tabs on their credit ratings. After all, a good score can make a difference of around, say, $500 in monthly payments on a $250,000 mortgage, and also can mean much lower credit-card rates. But what's considered a good credit score, anyway? And, who's actually evaluating you? Here are the answers to these and other common questions about your credit rating.
How is a credit score calculated?
A credit score is a value assigned to several criteria used in making lending decisions. Criteria include the amount you owe on non-mortgage-related accounts such as credit cards, your payment history, and credit history. Scorers take this information from your credit report and plug it into formulas that calculate a value representing the amount of risk you pose to a lender. That value takes into account the track record of other consumers with similar credit profiles. By looking at this value, or score, lenders are able to roughly gauge whether it's a good idea to extend you credit. Fair Isaac calculates the widely used FICO credit score on a scale ranging from 300 to 850 and the higher, the better. It is used nationwide by lenders to judge credit worthiness. The score calculated generally used information from one of the three main credit bureaus: TransUnion, Experian, and Equifax. It's possible there are discrepancies among information held at each of the bureaus that could affect your score and the interest rate you receive.
What else affects my chances for qualifying for a loan?
A credit score is just one component of the credit evaluation. This is especially so in the case of mortgages and car loans. In examining these types of applications, a lender will look beyond your raw credit score to scrutinize your payment history, among other things. For instance, the fact that the late payments on your credit report were on a small credit card (as opposed to a mortgage) could work in your favor. Lenders also take into account such factors as your income and earning potential, both indicators of your ability to repay a loan. Two borrowers with above-average FICO scores of 660 can get different interest rates, based on their existing debt burden and ability to meet required payments based on their income.
Is the score treated the same for all kinds of loans?
Generally, no. A mortgage loan, by virtue of its size and long repayment terms, will usually require you to have a higher score to qualify for a favorable rate than, for example, a credit card. But the nature of the loan may also play a role. For instance, a borrower with a low credit score applying for a 15 year mortgage with a 25% down payment may qualify for a better rate than someone applying for a one year adjustable rate mortgage. Mortgage lenders will typically look at all the risks involved before deciding on a rate. A lender whose loan portfolio has a high concentration of risky clients may require you to have a higher score to qualify for a prime interest rate than a lender with relatively lower risk in its portfolio. So, it's possible that given a particular score, you might get a prime rate with one lender, and get a less favorable rate with another.
What can I do to improve my score?
It's a good idea to make sure that the data each bureau has on you are consistent and up to date by ordering a copy of your credit report about once a year and disputing any inaccuracies. You also should be aware of what affects your score to help minimize the damage you can potentially do to it. People tend to get nervous when they receive credit card solicitations in the mail. However, scorers treat these solicitations as "spot" inquiries, which do not affect your score. Whenever you apply for credit, on the other hand, it's treated as a "hard inquiry" that's factored into your score. Too many inquires over too short a time can have a negative impact. But scorers make special provisions for mortgage and car loans inquiries because people tend to shop around more for these products. Overall though, credit inquiries account for only about 10% of the total score. Also, keep in mind that the main components of the score are your payment history and the amounts you owe. A bankruptcy filing can remain on your credit report for as long as 10 years and foreclosures can "significantly lower" your score. You should avoid taking on more credit than you can handle. Late payments will also work against you, so it is important to make all loan payments on time even if it means paying the minimum balance. Ideally, you should avoid "maxing out" your credit lines and strive instead to maintain low balances. This will improve your score over time, because people owing smaller amounts on their credit accounts are viewed as having a lower repayment risk than those who owe more. By carefully managing your credit, it's possible to add as much as 50 points in a year to your score. There is nothing that you can do to your credit from which you can't recover.
How much should I worry about my score?
Not all that much, unless you have an especially troubled financial history. Much of the current anxiety over credit scores stems from the public's misunderstanding of the way in which these numbers are used and factors that affect them. People spend a lot of time and money trying to modify their scores when it wasn't necessary for them to get preferential interest rates.
Credit Inquiries
The Fair Credit Reporting Act (FCRA) outlines specifically who can see your credit profile. Businesses must have a "legitimate business need," and a "permissible purpose," as stated in the federal law to obtain your credit file. Otherwise, only you, and only those who you give written permission, can access your credit files. Your neighbors, friends, co-workers, and even your family members cannot have access to your credit profile unless you authorize it. Some examples of those who can access your credit files are:
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Credit Grantors
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Collection Agencies
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Insurance Companies
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Employers
Any company that receives a copy of your credit profile will be listed under the "Inquiry" section of your report. An "inquiry" is a listing of the name of a credit grantor or authorized user who has accessed your credit file. Credit grantors post an inquiry before offering you a pre-approved credit card application. These are listed as "promotional" inquiries on your credit file because only your name and address were accessed, not your credit history information. They are NOT sent to credit grantors or businesses for reasons of credit reporting. They are listed for your informational purposes only. The Fair Credit Reporting Act (FCRA) is the federal law regulating credit reporting companies like Equifax, Experian, and TransUnion. It has been in effect since 1971 and undergoes periodic revisions by the Federal Trade Commission. This law protects consumers rights such as the right to review and contest information in their credit profiles. It also specifically defines who can access the information in a credit profile and how you are notified of this activity.
Fixing Credit Report Errors
You have the right, under the Fair Credit Reporting Act, to dispute the completeness and accuracy of information in your credit file.
When a credit reporting agency receives a dispute, it must reinvestigate and record the current status of the disputed items within a "reasonable period of time," unless it believes the dispute is "frivolous or irrelevant." If the credit reporting agency cannot verify a disputed item, it must delete it. If your report contains erroneous information, the credit reporting agency must correct it. If an item is incomplete, the credit reporting agency must complete it.
For example, if your file shows that you were late in making payments on accounts, but fails to show that you are no longer delinquent, the credit reporting agency must show that your payments are now current. If your file shows an account that belongs to another person, the credit reporting agency would have to delete it. Also, at your request, the credit reporting agency must send a notice of correction to any report recipient who has checked your file in the past six months.
For items in your credit profile which you feel deserve further explanation (such as an account that was paid late due to the loss of job, military call up, or unexpected medical bills), you can send a brief statement to the appropriate credit reporting agency. The information will be placed in your credit profile and will be disclosed each time it is accessed.
Steps to Take After Being Denied a Mortgage Loan
It's never fun to be turned down for a loan, but before you think you won't be able to get credit anywhere, there are some steps you can take.
Lenders are required by a federal law, The Equal Credit Opportunity Act, to tell you in writing when you've been turned down for credit. Two important pieces of information must be included in the letter you receive when you are denied credit:
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The specific reasons why you were denied credit (or information on how to obtain those reasons); and
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If a credit report was used in making that decision, the name and address of the credit reporting agency that supplied it.
If you don't understand the reasons given for turning down your application, ask for more information. Sometimes it can be hard to determine exactly why your application was not approved, because these decisions involve a lot of different factors. Don't be shy about asking, though, since the information you receive may help you improve your credit so you can qualify in the future.
You may be denied credit for various reasons, including not meeting the creditor's minimum income requirement or not being at your address or job for the required amount of time.
If your loan application was rejected because of insufficient income to afford the house you want or you have insufficient funds for closing costs and a down payment, you could consider loan programs for low to moderate income borrowers with lower down payment requirements, such as an FHA loan or VA loan.
If you requested the loan amount which is larger than 95 percent of the appraised property value, the chances are that loan will be denied. In this situation:
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You can try to renegotiate with the seller for the purchase price to lower the loan amount
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Make an additional down payment to cover the difference between the appraised value and purchase price
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If you think the appraiser undervalued the property suggest that the lender reexamine the appraisal
If your loan is turned down because of a poor credit report, you are entitled to a free copy of that report. You must request it within 60 days, so don't wait to order it. Read your report carefully to make sure it is accurate and complete.
Once you have a copy of your credit report, you should check for errors and fix any errors by disputing them with the credit report agency. If you believe that mistakes on your report led to the rejection of your application, you can ask the credit bureau to send a corrected copy to the lender. Follow up with the lender to find out if your application can be reevaluated.
Finally, you can try again. All lenders have different approval standards. Just because you did not get a loan from one financial institution doesn't mean you can't get one somewhere else. Try again with another company. Just don't apply for more than four or five loans in a six month period.
Establish a Credit History
In order to establish good credit, you need a good credit history. If you have no credit history at all, it is easy to start creating one.
Opening a bank account is the simplest and safest way to manage your finances. By opening a savings account or a checking account, you can build good credit by saving money and earning interest, easily paying bills and tracking expenses. Responsible use of a checking account or an Automatic Teller Machine (ATM) card will reflect favorably in your credit report.
If you have services in your name (telephone, gas, and electric), make sure you pay them in full and on time. Pay any loans and credit accounts on time each month. At least pay the minimum, if there is one.
Applying for a credit card and using it responsibly can help you build a good credit history. If you have been denied a credit card in the past, you may want to investigate a secured credit card, where you put a pre-determined amount of money in an account as a deposit in the bank. The secured card can be used in the same way as a credit card with the same convenience and payment flexibility. Gasoline companies and retail stores also offer their own credit cards.
Preventing Identity Theft
Many of us know the fear and frustration of having our wallet or credit cards stolen, but even worse is having your identity stolen. According to one non-profit debt counseling agency, some 40,000 consumers each year are victims of this crime, which is a serious type of fraud.
With identity theft, someone will use personal information about you such as your name, address, social security number, or driver's license to apply for credit, utilities, bank accounts, mortgages, and even jobs in your name. Some people don't find out that their identity has been stolen until months after it has happened.
Here are some tips to help you avoid becoming a victim of identify theft:
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Check your credit report at least once a year. Investigate if you find accounts that are not yours.
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Rip-up, or better yet, shred, any credit card applications, bank or billing statements, and any other sensitive documents.
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If you don't get a bill for one of your credit cards in any given month, call the issuer immediately.
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Use a locked mailbox for incoming and outgoing mail. Avoid giving out your social security number unless it's necessary. Save your ATM and credit card receipts, check them against your statements and then shred them.
If you are a victim of identity theft, act quickly:
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If your wallet or purse with your identification is stolen, notify the credit reporting agencies. They can issue a fraud alert for your file, which can help prevent additional credit accounts from being opened without your permission.
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Initiate a police report. Be persistent, even if the police don't seem interested in your situation.
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Keep careful written records of everyone you speak with, and use registered mail when sending important correspondence.
How to Improve Your Credit
If you have had credit problems, be prepared to discuss them honestly with a mortgage professional. Responsible mortgage professionals know there can be legitimate reasons for credit problems, such as unemployment, illness, or other financial difficulties. If you had a problem that's been corrected and your payments have been on time for a year or more, your credit may be considered satisfactory.
If you are currently in excess debt, there are four ways to control it:
-
If your credit is not in terrible shape, you can reduce your other expenses, even if it means making hard choices or changing your lifestyle to fit your income. Consider selling a second car, taking equity out of your home, applying for a non secured signature loan, obtaining a loan from a relative, selling your home and paying off your debts with the proceeds and then renting, cashing out your 401K/retirement benefits, or selling family heirlooms, jewelry, etc.
-
If your credit is already damaged or one of the above isn't an option, go through Consumer Credit Counseling Services (CCCS). Check your yellow pages for the local number. CCCS may be able to help you pay off your debts as if you were in a Chapter 13 bankruptcy, but you don't actually file for bankruptcy.
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If CCCS won't take you, you may want to consider bankruptcy. Claiming Chapter 13 bankruptcy takes longer than a Chapter 7, but your credit will end up in a little better standing. Chapter 13 bankruptcy gives you up to 5 years to pay off your debts. The disadvantage is that you're in bankruptcy for up to 5 years plus your credit report shows your bankruptcy for 7 more years after you have finished paying off your debts.
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If you are so far in debt that you can never repay it, then the best solution may be a Chapter 7 bankruptcy. A Chapter 7 bankruptcy is the least desirable from a credit standpoint, but you are typically out of bankruptcy in 6 months and you don't have to repay any debt. The disadvantage is that this shows on your credit report for 10 years from the date of filing your bankruptcy. Creditors are starting to tighten their credit requirements, and you may have a tough time getting future financing.
If your debts are under control now, but want to improve your bad credit history, the most important factor is to make your monthly payments on time. Use pre-addressed envelopes enclosed with your statements to mail your payments and call the company if you don't receive your usual statement. Also, send your payment as early as possible if you carry a balance. Most companies calculate interest on a daily basis, so the sooner they receive your payment, the less interest you'll pay.
Don't procrastinate. It's the day your payment is received that counts, not the postmark date. Give the post office sufficient time (five business days is a good guideline) to deliver your mail. Late payments may mean late fees, higher interest, and/or a negative mark on your credit report.
Never send cash. Open a checking account if you don't have one, or spring for a money order and keep your receipt. Finally do not forget to tell your creditors your new address when you move.
If you are worried about making payments, make a list of your debts and when the payments are due. Contact your lenders immediately if you think you will have trouble meeting the monthly payments to arrange a payment schedule.
Taking money from your retirement account or tapping the cash value of your life insurance policy to pay bills or living expenses may have serious implications you haven't considered, so try to get advice from an expert before you take any major financial actions.
Credit cards can be invaluable in a crisis, since they allow you to charge items and pay them off over time. But they can also be dangerous if you aren't careful and charge more than you can afford. If you do use credit cards, choose those with the lowest interest rates and pay them back as soon as you can to cut your costs.
