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What your mother (or father) didn’t tell you about credit.

Every day I speak with clients that truly don’t understand why they can’t get their credit scores above a certain number.  Yes, that pesky little 3 digit number that has become all important to everyone of late. The truth is, they were never taught how to get above a “poor” or “fair” score.  These are [...]

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Should I use a “Credit Repair” company?

We love to read all of the differing opinions that flood the internet from the so-called professionals in investing, money management, debt management, etc.  We sift through articles and websites trying to find the best, most accurate information for you, our clients. We do however, have one very significant pet peeve and that is all [...]

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Ouch! You just shot yourself in your credit foot.

I can’t tell you how often a client tells me that they can’t “understand” why their scores are so low.  At first I thought it was an excuse.  It took me a while to figure it out (I think I was blond at the time) but the fact is is that most people DON’T understand. [...]

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What NOBODY else will tell you about credit inquiries!!!!

Seriously?  I am going to write a whole article about credit inquiries ?  How boring, right?  Well, come on.  Do I ever write anything boring or irrelevant?

Although many people will tell you that inquiries have little to nothing to do with your credit score they impact your ability to get credit in other, unforseen ways.

Because I work with many people that are looking at acquiring SBA loans and other loans I can tell you unequivocally that those creditors taking a peak at your credit report can come back to bite you in the butt.

So, what exactly are inquiries?  An inquiry is anytime anyone requests access to your credit information for the purposes of making a decision to extend to you credit.  Today however, credit reports are also used for employment purposes, criminal proceedings, etc.  For our little demo we are going to stick with just the credit issue.

Inquiries account for approximately 15% of your total credit score.  Not a huge amount, I know.  But, what if I told you that they can still keep you from getting new credit even with scores as high as 780 or higher.  What!?!   No way!!  Way!!

What a lender sees is not your score, which at 780 if that was the only criteria would qualify you for the best rates and usually a pretty substantial credit line.  What they see is that you are applying for credit all over the country and what happens if you get approved for all of them at once?  Yikes, you are now at a huge debt-to-income ratio.

But….What if you didn’t apply for anything?  How could you have inquiries on your report.  Here comes the “did you know?” part.

You must place an “opt-out” message on your credit report to keep creditors from accessing it.

WHAT!?  You read me right.  Much like a “do not call” list you must “opt-out” of receiving pre-approved offers and allowing others to look at your credit report without your permission.  This goes back to remembering that your “credit report” is actually and “information report”.  The bureaus earn their billions every year buying and selling your personal information, often without your knowledge…that is until you attempt to acquire an SBA loan or other loan that you need.

YOU have the right to access your report anytime you wish and it does not affect your inquiry status.  This is known as a “soft pull”.  A soft pull will show when a current lender has accessed your account for review, however this does not affect your score nor is this shared with other lenders.

A creditor accessing your information for the purpose of extending credit is known as a “hard pull” and that information is included in your FICO score and listed on your report.

This information is shared with anyone else that does a “hard pull” including the people that are going to make the decision on your SBA loan and your current lenders that are deciding if you should or should not have your limit raised or reduced.

Very few people are aware that you actually have to tell the bureaus “No, don’t share my information”.  It seems like common sense, but as we have seen very little having to do with credit and the credit reporting agencies has to do with common sense.

The first step is to go to www.optoutprescreen.com to have electronically remove your report from access.  You can even go one step further, and as I find this a great way to help with identity theft, you can request a code from the bureaus that is required for ANY credit inquiry and must be used before your credit can be accessed.  This makes a bit more work for the lender, but as we have seen the rules have been skewed toward the lender for a very long time.  Now it is about taking control over your credit.

Courtesy of DeAnne West

Things that Impact Credit Scores

Things that Impact Credit Scores

 

Debt

The more debt you have, the higher credit risk lenders you are and the lower your score goes. Simple as that!

 

High credit card balances

One of the most important aspects of your credit score is level of credit card debt, measured by credit utilization. Having high credit card balances (relative to your credit limit) increases your credit utilization and decreases your credit score.

Inquiries

When consumers apply for credit, they authorize those lenders to ask or “inquire” for a copy of their credit report from a credit bureau, and an inquiry appears on their credit report. Inquiries are often placed on credit reports by businesses that the consumer did not apply with. Multiple hard inquiries negatively affect your credit score. Not only will your credit score suffer a few points damage for each inquiry, but you will appear credit-desperate and risky to lenders. The only inquiries that count toward a consumers credit score are the ones that result from applications for new credit. Inquiries impact credit scores for up to two years.

Charge-Offs

A charge-off or charge off is the declaration by a creditor (usually a credit card account) that an amount of debt is unlikely to be collected. This occurs when a consumer becomes severely delinquent on a debt. Traditionally, creditors will make this declaration at the point of six months without payment. In the United States, Federal regulations require creditors to charge-off installment loans after 120 days of delinquency, while revolving credit accounts must be charged-off after 180 days.  The purpose of making such a declaration is to give the bank a tax exemption on the debt. Bad debts and even fraud are simply part of the cost of doing business. The charge-off, though, does not free the debtor of having to pay the debt.  A charge-off is one of the most adverse factors that can be listed on a credit report. It will then be listed as such on the debtor’s credit bureau reports (Equifax, for instance, lists “R9″ in the “status” column to denote a charge-off.) The item will include relevant dates, and the amount of the bad debt.  While a charge-off is considered to be “written off as uncollectable” by the bank, the debt is still legally valid, and remains as such after the fact. The creditor legally has the right to collect the full amount for a time periods permitted the laws of places of the location of the bank and where the consumer resides. Depending on the location, this amount of time may be a certain number of years (e.g. 3 to 7 years), or in some places, indefinitely. Methods of collection that can be used include contacts from internal collections staff, outside collection agencies, or if the amount is large (generally over $1500–$2000) there is the possibility of a lawsuit or arbitration.

Repossessions

Repossession is generally used to refer to a financial institution taking back an object that was either used as collateral or rented or leased in a transaction. Repossession is a “self-help” type of action in which the party having right of ownership of the property in question takes the property back from the party having right of possession without invoking court proceedings. The property is then sold by either the financial institution or 3rd party sellers. The extent to which repossession is authorized, and how it may be executed, greatly varies in different jurisdictions. Repossessions have a dramatic influence on credit scores and are often reported incorrectly. A repossession is usually carried out in accordance with a purchase contract or credit contract, in which the consumer agrees that the seller (the “lienholder”) may repossess the object if the signers are past the grace period (generally for prime lenders the critical number is 30 days late making an installment payment but can vary based on how many payments have already been made, the length of the business relationship, reason why past due, etc.). Contracts that authorize repossession also usually specify additional fines that the consumer must pay to the seller, ostensibly to cover the seller’s costs of the repossession and of depreciated value of the object, as the seller is now in possession of a “used” object. In some places self-help repossession is not permitted; the lien holder is required to go to court to obtain an order of replevin. However, in some states, repossession is mandatory and suits of replevin are not permitted.

Unscrupulous creditors may try to lull a debtor into a false sense of security by the use of a tactic sometimes called the “gab and grab.” The creditor will orally agree to give the debtor extra time to make a payment–this is the “gab.” But the creditor is only doing this to facilitate the repossession–the “grab.” The creditor ignores the oral agreement to extend the time of payment and arranges for an immediate repossession. This tactic has been deemed unlawful by numerous courts. If a lender finds itself in the situation of needing to repossess property while the borrower attempts to avoid this, the dealer may contract the work of repossession out to a repossession agent. Many things can be repossessed, but most repossession agencies focus on auto repossession.

 

The repo agent normally uses a tow truck or pickup truck with a special towing attachment called a boom, but sometimes they pick the lock or obtain the key from the car owner. Usually, the vehicle owner must be notified of repossession. The repossession agent will find the car and check the VIN to make sure they have the right car. They will then hook up the car to the tow truck and tow it away or pick the lock and drive it away. Repossession does not necessarily satisfy the loan. If the repossessor sells the asset for an appropriate amount, and if that amount is less than the amount of the loan, and if the repossessor sues the debtor for the balance (plus reasonable fees if applicable) in a timely manner, the debtor may be liable to pay the balance (sometimes called the “deficiency”). Whether a debtor is actually liable for a balance depends on jurisdiction and on the details of the loan contract. In the case of a nonrecourse debt for example, the debtor is not personally liable for a deficiency. We have found that repossessions are often inflated and inaccurate.

 

Duplicates, Triplicates and Quadruplicates

Duplicate entries, or instances where a particular situation shows up more than one time, on consumers  credit reports can make it look as though they have more debt or credit issues than they really do, which can negatively affect chances of getting a loan or  having credit extended. Some of the most common duplicate, triplicate or even quadruplicate entries are student loans, utility bills that have been sold to multiple collection agencies and/or any other item that gets sold and resold. According to the Fair Credit Reporting Act (FCRA), consumers have the right to dispute negative items on their credit reports in order to ensure that when their credit score is reported to potential lenders and employers, it is an accurate representation of who they are as a consumer. The FCRA allows consumers to dispute any negative item on their credit report that the consumer feels is inaccurate, misleading or unverifiable.

 

Paying Late

Thirty-five percent of credit score is payment history. Being late on payments will hurt your credit score. Consumers often send a payment on time and late payments show up on credit reports because of clerical errors, mail delays or simply due to sheer incompetence. These late payments can cause severe damage to credit reports and cost consumers thousands of dollars in unnecessary interest.

 

Not paying at all

Completely ignoring your credit cards bills is much worse than paying late. Each month you miss a credit card, auto loan, installment account or mortgage payment, consumers are one month closer to having the account charged off. Eventually, the creditor will consider the debt un-collectable and either sell or lease the debt to a 3rd party debt collector. We have seen thousands of instances where the original creditor continues to report the entire balance and an additional collection item appear in the collections section of consumer credit reports. This causes duplicates, triplicates and quadruplicates and excessive and incorrect balance amounts. We can help remove this erroneous information.

 

Having Accounts Sent a Collection Agency

Creditors often use third-party debt collectors to try to collect payment from you. Creditors might send your account to collections before or after charging it off. A collection status shows that the creditor gave up trying to get payment from you and hired someone else to do it.

 

Filing Bankruptcy

Bankruptcy will devastate credit scores. Bankruptcy or insolvency is a legal status of a person or an organization that cannot repay the debts it owes to its creditors. Creditors may file a bankruptcy petition against a business or corporate debtor (“involuntary bankruptcy”) in an effort to recoup a portion of what they are owed or initiate a restructuring. In the majority of cases, however, bankruptcy is initiated by the debtor (a “voluntary bankruptcy” that is filed by the insolvent individual or organization). An involuntary bankruptcy petition may not be filed against an individual consumer debtor who is not engaged in business.

 

There are six types of bankruptcy under the Bankruptcy Code, located at Title 11 of the United States Code:

 

  • Chapter 7: Basic liquidation for individuals and businesses; also known as straight bankruptcy; it is the simplest and quickest form of bankruptcy available

 

  • Chapter 9: Municipal bankruptcy; a federal mechanism for the resolution of municipal debts

 

  • Chapter 11: Rehabilitation or reorganization, used primarily by business debtors, but sometimes by individuals with substantial debts and assets; known as corporate bankruptcy, it is a form of corporate financial reorganization which typically allows companies to continue to function while they follow debt repayment plans

 

  • Chapter 12: Rehabilitation for family farmers and fishermen;

 

  • Chapter 13: Rehabilitation with a payment plan for individuals with a regular source of income; enables individuals with regular income to develop a plan to repay all or part of their debts; also known as Wage Earner Bankruptcy

 

  • Chapter 15: Ancillary and other international cases; provides a mechanism for dealing with bankruptcy debtors and helps foreign debtors to clear debts.

 

The most common types of personal bankruptcy for individuals are Chapter 7 and Chapter 13. As much as 65% of all U.S. consumer bankruptcy filings are Chapter 7 cases. Corporations and other business forms file under Chapters 7 or 11. We have found that most bankruptcies report inaccurate information. Common examples are items included in the bankruptcy that still show balances after being discharged, bankruptcies that were dismissed appearing as if they were still active and multiple entries of the same bankruptcy. Bankruptcies and items included in bankruptcies can be disputed and removed if not verified within 30 days.

 

Having Your Home Foreclosed

Consumers getting behind on mortgage payments will lead the lender to foreclose on the home. In turn, the late payments will hurt credit scores and make it harder to get approved for future mortgage loans.

 

Getting a Judgment

A judgment shows you not only avoided your bills, the court had to get involved to make you pay the debt. While they both hurt your credit score, a paid judgment is better than an unpaid one.

 

Liens

In law, a lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation. The owner of the property, who grants the lien, is referred to as the lienor and the person who has the benefit of the lien is referred to as the lienee. A lien is an extremely negative item on a credit report because it shows you have defaulted on a debt obligation which has progressed through the legal system.

 

 

Closing Credit Cards with Balances

When you close a credit card that still has a balance your credit limit drops to $0 while your balance remains. This makes it look like you’ve maxed out your credit card, causing your score to drop.

 

Closing Old Credit cards

Another component of your credit score, 15%, is the length of your credit history – longer credit histories are better. Closing old credit cards, especially your oldest card, makes your credit history seem shorter than it really is.

 

Closing Cards with Available Credit

If you have several credit cards some with balances and some without, closing those credit cards without balances increase’s your credit utilization. Think about it, if a consumer has 5 credit cards with 30k in available credit, then one of the higher credit limit cards is closed, it will no longer be calculated into the consumer’s available credit, thus reducing their scores. We can help consumers open accounts with high credit limits which will reduce their balance to limit rations and help them increase their scores.

 

Having Only Credit Cards or Only Loans

Mix of credit is 10% of your credit. When you have only one type of credit account, either loans or credit cards, your credit score could be affected. This factor mostly comes into play when you don’t have much other credit information in your credit history.

 

 

Credit History

Credit History

 

Credit history or credit report is a record of an individual or company’s past borrowing and repaying, including information about late payments and bankruptcy. The term “credit reputation” can either be used synonymous to credit history or to credit score.

 

In the U.S., when a customer fills out an application for credit from a bank, store or credit card company; their information is forwarded to a credit bureau. The credit bureau matches the name, address and other identifying information on the credit applicant with information retained by the bureau in its files. That’s why it’s very important for creditors, lenders and others to provide accurate data to credit bureaus.

 

This information is used by lenders such as credit card companies, marketing companies, insurance companies and any other possible lender imaginable to determine an individual’s credit worthiness; that is, determining an individual’s willingness to repay a debt. The willingness to repay a debt is indicated by how timely past payments have been made to other lenders. Lenders like to see consumer debt obligations paid on a monthly basis.

 

There has been much discussion over the accuracy of the data in consumer reports. However, the only scientifically researched studies that include sample sizes large enough to be valid have generally concluded the data in credit reports is not very accurate. Of course the credit bureaus point to their own study of 52 million credit reports to highlight that the data in reports is very accurate. The Consumer Data Industry Association testified before Congress that less than two percent of those reports that resulted in a consumer dispute had data deleted because it was in error which we feel is completely false according to our experience.

 

If a consumer disputes some information in a credit report, the credit bureau has 30 days to verify the data. Over 70 percent of these consumer disputes are resolved within 14 days and then the consumer is notified of the resolution. The Federal Trade Commission states that one large credit bureau notes 95 percent of those who dispute an item seem satisfied with the outcome which we also feel is entirely inaccurate.

 

The other factor in determining whether a lender will provide a consumer credit or a loan is dependent on income. The higher the income, all other things being equal, the more credit the consumer can access. However, lenders make credit granting decisions based on both ability to repay a debt (income) and willingness (the credit report) as indicated in the past payment history.

 

These factors help lenders determine whether to extend credit, and on what terms. With the adoption of risk-based pricing on almost all lending in the financial services industry, this report has become even more important since it is usually the sole element used to choose the annual percentage rate (APR), grace period and other contractual obligations of the credit card or loan.