This is the Perfect Time to Fix Your Credit

We have all read the headlines about the current economic crisis. We have seen the “Stimulus” packages passed. We have all wondered aloud, “What is in it for us?”

Well, on an individual basis, you may have a lot of ways to take advantage of the current economic situation. Opportunities abound if you have a fist full of cash and/or excellent credit. The sad reality is that most of us have neither. While I could write about a number of ways to fill your hands and pockets with cash, this article is about fixing your credit.

You see, if you don’t fix your credit, your ability to put cash together to take advantage of opportunities will be limited. We live in a credit-based society, and many items are overpriced due to the availability of credit. Do you really think that homes and cars would cost so much money if people had to pay cash for them? Of course, they would not cost so much!

The burning question then is “how to fix your credit?” You have two choices: 1) Do it yourself, or 2) Hire a professional. Let’s think this through.

If you opt for the Do-It-Yourself route, you need to do a lot of research. Why? The decks are stacked against you. Every American wants perfect credit. If it was so easy to fix their credit themselves, they would have done it by now. Instead, the average American’s credit score has been dropping each year at a record pace. The average American’s credit score is now 678, when it was over 720 just three years ago.

You could research the credit laws, pore over case histories, and study the various Federal and State Acts and laws that have been enacted to protect your consumer rights. You could write brilliant letters espousing your innocence against the spurious allegations against you that say that you do not honor your commitments and pay your debts. You could keep meticulous records, building evidence for lawsuits that you would later file against your creditors, collection agencies, and credit bureaus.

The sad truth is that you could do all of these things yourself. The sadder truth is that you probably won’t. Most consumers make a brief effort to write a couple of letters and hope their credit reports will magically improve. Unfortunately, these feeble attempts rarely achieve the goals set by these same consumers, and they sadly give up, and face their fate. Even those who get proactive, take all the right steps, keep their documentation in order, and follow-through are in for a battle that could last two years or longer, and still not get the results they desire.

Your creditors, in concert with the credit reporting agencies and others, have spent a lot of money to back those very same Federal Acts and other legislation that supposedly protects your rights. Do you realize that these laws do little to protect you, but do a lot to protect those who disparage your reputation by saying you don’t pay your bills? It’s sad, but true.

In fact, the three major credit bureaus have spent millions of dollars in lobbying for laws that severely restrict the ability of third parties that would help you fix your credit. Nearly every state in the union has laws set-up to make it very difficult for a so-called “credit repair company” to exist and do business. Why would they fight so hard for this? The reason is simple, “The CRAs do not want you to engage professional help, because they know it works!”

Consumer Reporting Agencies exist for one reason only. They exist to protect the creditors and collection agencies who provide data to them and who rely on this data to make credit decisions. It makes sense that the CRAs would rather have inaccurate, negative data against you than to possibly miss something negative. Since your creditors use the data provided by the CRAs to turn down all but the most solid risks, it is in the best interest of the CRAs to ensure that ALL potentially negative information about you is reflected on YOUR credit report. If the CRA told your creditor that you had a very low risk of default, your creditor gave you a loan, and then you defaulted; it makes them look bad!

This is why when you try to get the CRA to remove any adverse information (regardless of merit) they do everything in their power to avoid removing the item. They stall. They force you to jump through hoops. They ask for more information. They simply tell you that the creditor has confirmed the information as accurate. They tell you that your dispute is frivolous.

They do all of these things, because they know that you will probably not follow-up. They count on the fact that you do not know your rights, and that puts you at their mercy.

This is why you need PROFESSIONAL help. A professional has seen all of these tactics. A professional knows the laws that protect consumers. A professional can cut through the stalls, and attack the CRAs and your creditors using the laws in YOUR favor.

Sure, you could do the work yourself. However, I don’t know a single cardiologist who would do her own angioplasty. A professional should be able to get results for you within three to six months, rather than the two years or longer it might take you to do it yourself. Considering the cost of bad credit in higher interest rates and lost opportunities, it is an investment with a very high return.

Where and how do you find a professional? This is the difficult question. You can hire an attorney to do this for you, but that could cost you thousands of dollars. You could find a company that charges a low monthly fee to do the work (and their motivation to work quickly will be?). You could find an organization that charges a fair amount of money, but actually gets the job done.

Whichever route you choose, choose wisely, because credit repair organizations earned the bad rap they received back in the 90s by not performing. Things are much better now, but you need to choose your solution wisely. Do your homework. Ask the right questions. Contact this author for suggestions.

Help is available, if you know where to look, and whom to ask. Fix your credit, and then we can talk about how to use that access to capital to start building your wealth.

Your Way Out - Personal Economic Recovery

Judging from the record number of comments that I received from all of you this week, I realized two things:

1) I have a lot more readers than I suspected.
2) You are an impatient bunch! OK, perhaps it was cruel to make you wait, but the last post was so long that I wanted to ensure that it got enough time to be read, and I didn't want to put so much into one post, that no one would read it all the way through.

The Four "I"s

This topic has nothing to do with wearing glasses. Last week, I asked you to gather all of your financial data from the last year. Since most of you didn't do it, do it now.... I'll wait....   

Welcome back! Now, the Four "I"s consist of Income, Investments, Insurance, and Interest. In order to succeed financially, you must have all four of these items in place in your life. Most likely, you don't, but we can fix that.

Income consists of all inflows to your household, regardless of source. Primarily, this consists of profits from your business or your salary or wages from employment. You may also have income from investments or savings, hobbies, and avocations. You need to maximize this aspect of your life. To the extent that your income derives directly from the "amount of time" you spend on an activity, you need to maximize your return on that time (i.e. Become more efficient).

Investments consist of continuing returns on prior income. In other words, first you worked for your money, and now your money is working for you. To the extent that you are successful with your investing, you are now using time to compound your return on your original labor.

Insurance is the method by which you protect everything that you have accomplished in your life to date. Some methods are obvious, while others are not. I have written a few articles about insurance, which you may peruse. The less obvious insurances may include unemployment insurance and workers' compensation, which protect your income. Life insurance protects your family by replacing your income, while property and casualty insurance protects your accumulated assets. Liability insurance protects everything you own against the claims of others.

Interest will either work for you, or it will work against you. You may derive interest on savings or investments in debt securities (bonds or corporate notes payable) and you may lose interest on borrowing (mortgages, auto loans, credit cards, etc.). Albert Einstein said something along the lines of "Those who understand compound interest will be investors, and those who don't will be borrowers." Which of these describes you?

Using the Current Situation to Your Advantage

At present, financial institutions in the United States are reeling. They cannot possibly keep up with all of the issues that they face. Approximately 16% of mortgages will foreclose this year. This will keep real estate prices low, which contributes to foreclosures. Yes, this is a vicious cycle. As people see their credit ratings destroyed due to non-payment of their mortgage obligations, they will tend to care less about paying for unsecured debt (credit cards), which will take away the banks' most profitable income center. A record number of bankruptcies is expected this year (well over two million cases).

Since I do not wish to create a forty page blog posting, I will lightly cover the areas that you need to address in order to solve your financial issues. This is not a do-it-yourself posting, as I cannot give you all of the information, skills, and tools needed to solve this problem yourself, in the space of a single blog posting. I will ask that you contact this week's sponsor, as they are in a position to help you accomplish all of these tasks, and as an advocacy organization, can do it much more efficiently and more cost-effectively than you can handle them yourself.

National Consumer Rights Alliance, Inc.

The NCRA is an advocacy organization dedicated to the protection of Consumer Rights for all Americans. They provide a number of benefits to their members, including credit repair services, a nationwide legal network, IRS Audit Defense, debt settlement assistance (not bankruptcy), mortgage modifications, and mortgage attainment assistance. They also assist with second chance bank accounts (no ChexSystems verification) and second chance (secured) credit cards. I believe so much in this organization that I have accepted a position as its President, in order to help drive their mission forward. I know of no better organization, public or private, that is in a better position to assist consumers in the ways that I suggest below. Of course, you may take all of these steps on your own, but I think you will find better results by allowing their experts to work on your behalf. Even if you were a skilled surgeon, you still wouldn't perform your own appendectomy, would you? Save time and money by joining the organization today.

Your Personal Recovery Steps

Income - You need to find ways to increase and diversify your income. In the current job environment, changing jobs is probably not the best option. In fact, you may be doing all you can to hold onto the job you have. Perhaps, you have lost your job, and find yourself in a very difficult spot. Try to find ways to supplement your income. Most online methods are scams, so be careful. It is possible to make money on E-Bay or Google and with certain blogging opportunities, but most people fail. NCRA has a referral program that can provide a good second income, so that might be worth investigating. 

Investments - Assuming that you still have some money invested, you need to find a way to build back up. If you are still able to invest each month, I suggest that you continue to invest. In most cases, the companies in which you are invested lost value due to the overall market, and not due to anything directly related to the performance of the company with respect to its peers. If this is the case, continue to invest in the same companies, and allow dollar-cost averaging to work for you. If you need to realign your investments, speak to your investment advisor.

Insurance - Be sure that your insurance policies are up-to-date. Is your life insurance protection adequate to replace your income for at least twenty years? If not, reevaluate. Be sure you are getting the best value for your health insurance as well. Many individual and family policies now provide benefits as good or better than your workplace may provide. Oftentimes, these policies are cheaper if your family is in good health, due to the elimination of "adverse selection" that exists with group policies. 

Interest - Good news! This is the area in which you have the most control at present. These are the areas that we can address here, which will help you to solve the majority of your financial problems. Of course, if you have no income, that is a severe issue, but you can still work on alleviating much of the pressure you face by addressing these issues.

Reducing Interest and Credit Liabilities

Mortgage Modification is a great way to reduce your mortgage liability, payments, interest rate, or a combination of the three. I highly recommend that you NOT DO this yourself. Even if you are not behind on your mortgage, you may be able to renegotiate your mortgage into a better interest rate, longer terms to lower your payments, reduction in pricipal, and other options that can help you save your home and/or lifestyle. I have seen instances where individuals have lowered their monthly obligation by as much as 75%, reduced interest rates to as low as 3%, and had tens of thousands of principal balance forgiven. This is not an area for do-it-yourself. Help will cost you one mortgage payment on average, but you will have one month in which you will not owe a mortgage payment to your lender, so it is a service generally provided at no net cash flow loss to you. NCRA can connect you with a law firm to handle this for you. 

Debt Settlement is another way to greatly improve your cash flow. What would it mean to you if you could slash your total outstanding debt by 50% or more, reduce your interest rates to single digits, be debt free in 36 months, and actually come out of the process with excellent credit? Even if you have good credit and can afford to pay your debts now, this may be a great way to free up money for investment. Again, this is a service provided by attorneys, and you don't want to play this game on your own. 

Credit Repair/Restoration can help you qualify for much better terms on mortgages, auto loans, and credit cards. Do you have old collection accounts, chargeoffs, or even some late payments showing on your credit report? These items can cost you dearly when it is time to obtain financing for any purpose. NCRA provides attorney-assisted credit services at almost no cost to its members, as a benefit of membership. You only pay $5 per deletion obtained. 

Mortgage Refinancing is available if you can prove your income, have a debt-to-income ratio of 45% or less, including your mortgage, and have a credit score higher than 720. If you have these attributes, then you can probably refinance in the low 5% range on a 30-year fixed mortgage. If not, then take some of the steps above before trying to refinance. A mortgage modification may be a better deal anyway, as the cost of modifying a mortgage may be much lower than the cost of obtaining a mortgage. 

Margin Account Borrowing is available to investors who have active trading accounts with the major wirehouses. If you have been purchasing stocks without borrowing against them, you can open an account, which will allow you to borrow up to 80% of the value of the shares at rates as low as 2%-3% per annum. If you take this money, and payoff your high interest credit cards, your savings could be significant. If you will take this tact, I advise that you only borrow 50% of what is available to you, and then repay the monthly payments that you would have made on the credit cards back to your margin account. In the alternative, you can take that monthly payment to reduce the liability on other high interest accounts, but be sure that as you accumulate these payments that you eventually pay off the margin account. 

That's all for now. Once you take these steps, keep me apprised of your results. Of course, I am always here to help, so keep those comments coming. If you need individual help, let me know. If I receive similar questions from a number of readers, I will post my comments, so that we can all benefit. See you soon!

Credit: What is a FICO Score?

I didn't plan on bringing you another credit-related post so soon. In fact, I expected that I would probably be giving you a post on tax issues about now, but maybe I'll do another post on tax day for that one. Anyway, today we will talk about one of the greatest mysteries in the world of credit: The (dreaded) FICO Score!

Today's Issue of "Personal Finance for Real People" Sponsored by:

The reason that the FICO score is such a mystery, is that Fair, Isaac, and Company (the developers of the FICO score) won't release the formula that they use to compute it. Over time, we have figured some things out about what drives the score, and I will share with you some of what we have learned to this point.

I'm sure that by now, everyone has heard of the FICO score, as it has become a topic of major discussion, and is one of the major components in the process of applying for any loan, but especially with regard to mortgage loans. With all of the news about the housing crisis and the tightening of mortgage lending, the FICO score has become a point of contention.

The basic breakdown of your FICO score is as follows:

• Payment History - 35%
• Outstanding Balances - 30%
• Length of Credit History - 15%
• Amount of New Credit - 10%
• Types of Credit Used - 10%

Payment History

If you pay your bills on time, this helps a lot. If you have late payments, collections, back child support, and/or judgments appearing on your credit report, this hurts a lot. The amount past due, length of delinquencies, time since you last paid late, number of past due items, and number of accounts "paid as agreed" all play a role in determining the "Payment History" portion of your score. Obviously, if you pay all of your accounts on time, this is a huge help to your score!

Amounts Owed

Obviously, the amount of money that you owe is a factor here, but what is less obvious is that the amount you owe for certain types of debt can work against you. If you have amounts owing to Finance Companies (i.e. Wells Fargo Finance, Finance & Thrift, etc.), this will lower your score, even if the payments are always on time, because these are considered "lenders of last resort." If you could have been granted credit at better rates, the assumption is that you would have used another credit card or finance method. The unfortunate part of this is that these institutions often finance autos and furniture at stores you frequent, so you might have a balance with them, even if you have stellar credit otherwise.

American Express can also lower your credit score, because they don't show a credit limit. This means that the FICO system assumes that you are using 100% of your available credit on the card. Also, if you have an account where the limit has been lowered, this can hurt you as well. You don't want to be over your credit limit on any account, because you will take a severe hit to your score. The outstanding balance as a proportion of the credit limit is also a factor, with any balance in excess of 20% of the credit limit working against you, albeit on a sliding scale. For best results, stay under 20%. To avoid any dings, stay under 45%.

Length of Credit History

This is how long you have had a credit record, as well as how long your existing accounts have been open. If you have accounts with histories over two years, DO NOT CLOSE THEM! You can stop using them, but it is better in most cases to keep the accounts open with a zero balance.

New Credit

This runs in concert with Length of Credit History, but takes a special look at recently opened accounts and the number of recent credit inquiries. This factor also looks at your attempts to re-establish good payment patterns after a series of past payment problems.

Types of Credit Used

This looks at what proportion of your credit usage is comprised of mortgages, installment (auto or other purchase-money) loans, credit cards, finance company accounts, etc. If you have 100% credit cards, this can count against you, while a mortgage will generally help your score.

Summary

Keep in mind that your FICO score takes into account ALL of the above issues. Yes, some of these issues seem to overlap, but the overall weighting of each issue is as stated above. Your FICO score only takes into account information on your credit report, so your job, income, and education level do not play a part in your score, but they may affect a lender's desire to offer you credit. Also, the Credit Reporting Agency does not determine whether you get credit; only your lender makes that decision, but your credit score will be an important factor in that decision.

Clarification

You may hear some things in the news about FICO '08. This is a change to the scoring system that eliminates the advantage of riding on someone else's credit history by becoming an authorized user on their established cards. At this point, only Experian plans to use it, as both TransUnion and Equifax are in litigation opposing its implementation. If you plan to use this 'credit riding' technique, you can probably continue to do so for the foreseeable future. With most lenders looking at your mid-score, and TU and EQ still using the old formula, your EX score will matter less.

In a later posting, I will provide tips on how to Keep and Maintain a High FICO. Stay tuned!

First-Time Credit

People often ask me, "Randall, I don't know how to get started with credit. I know it causes problems for most people, but in this society, you have to have credit to exist. No one will issue me any kind of credit card. How do I get started?" Many people also ask me about how to re-establish credit, after they have already mucked it up before.

First of all, I caution everyone to be careful with credit. This is one of those, "Do as I say, and not as I do" kind of propositions, because I have had credit issues in my life at various times also. I will tell you how to go about setting-up stellar credit for the first time (or the next time), so that you can establish or re-establish a decent credit rating.

This article will focus on the personal side of credit, which I suggest you fix before you get to the business side of credit, which I will discuss in a future article (or many). Credit issues can get complex, and this blog will deal with a lot of credit issues, including setting up personal or business credit, managing and maximizing your credit score, repairing credit, protecting your identity, and exercising your legal rights as a consumer. This posting focuses on an easy way to establish or re-establish your credit. Ready? Here we go!

Step One: Find $500 to $1,000. I know, you don't have that much money. Everyone tells me that.

Rule #1: If you can't save money, you have no business borrowing money! Remember this, because it is the theme for every credit-related issue I will discuss from now until I stop breathing (or blogging, whichever comes first).

If you don't have the cash, open a savings account, and put 10% of your paycheck (or more) into it every payday. Do this before you pay any other expense, including your rent. If you pay your expenses first, you will never be able to save any money. You might question me on this, but you have always paid your expenses first, and you don't have any money, right? Trust me, I know what I am saying. You will automatically adjust your budget, so that you don't starve. If you lose some weight, you will be healthier anyway.

Once you have accumulated $500 to $1,000 cash in your savings account (I highly recommend $1,000 or more), you will set-up a meeting with the New Accounts Officer at your bank. I always recommend getting to know the manager, so if you can get your appointment with him/her, even better. At this meeting, you will explain to the officer that you have been consistently putting money into your savings account for the past (however many) months. You are happy that you have been able to save this money, but you need to access some of it, but you don't want to take it from savings. Tell them that you would like to borrow against your account on a 12-month basis. You would like to borrow $1,000 of the money you have in the account.

The officer should set you up with a Secured Loan against your Savings Account. You may have to relinquish your passbook, or they may just put a hold on $1,000 in funds. Since this is a Secured Account, your interest rate should be lower than a standard loan. Perhaps in the low double digits (i.e. 11.5%). Yes, you are paying interest to borrow your own money. You could pay a whole lot more for setting up your credit. Compare this to the hundreds of dollars you would spend in fees and interest opening up a new secured charge card or loan online. This is better, trust me!

You will take the $1,000 that you receive from the bank, and you will take it to a second bank. Note: Please deal with major banks, because they all report your loans to the Credit Reporting Agencies. At the second bank, you will deposit this money into a new savings account. About one week later, you will go back to the bank, and tell them the same story you told at the first bank about wanting to borrow against your savings. After they agree, take the $1,000 to a third bank, and repeat the process.

After the third bank gives you the $1,000, go back to the first bank, and open a checking account with the money. This should now be about two weeks since you opened the first credit line. The next week, pay $100 on each of the three loans. Two weeks later, pay another $100 on each of the three loans.

At this point, you have savings accounts (all encumbered) at three banks, which total $3,000. You have three credit lines, which now total $2,400 (plus a little bit of interest). You have $400 in a new checking account. Notice that if you add everything up, your net worth is still about $1,000.

Remember how you were saving money to build-up your initial savings. Now, instead of depositing this money into your savings account every week, you will use this money to pay your loans. Pay the loans down so that they are at $300 each by the end of six months. Pay $50 per month each from that point, until you can pay-off all three loans.

Yes, this process takes six months to one year. At the end of the process, you should now have three savings accounts with at least $1,000 in each. Hopefully, you have increased your income at work during this time through a promotion, raise, or job change as well. Wait 45 days after you pay-off all three accounts. Then, go back to each bank, and borrow the $1,000 again from each. Deposit this money into the first checking account. In two weeks, pay $250 against each loan. Two weeks later, pay another $150 against each loan.

Pay $100 per loan after this, until paid. Be sure that you keep each loan open a minimum of six months before you pay it off, or it won't help you as much.

It is now 18-24 months since you began the process. You have six trade lines of credit history, all for $1,000 or more, and all paid in full. Hopefully, you do not have any other debt. You also should have at least $4,000 to $6,000 in total savings (you didn't stop saving, did you?).

At this point (and you probably could have done it sooner), you should have no problem opening unsecured credit accounts with Visa, Mastercard, American Express, or anyone else you like. If you had bad credit, these new accounts should help make up for some of that.

This whole process probably did not cost you more than about $100 in interest payments, it caused you to save a few thousand dollars, which you had been unable or unwilling to do before, and it has helped you establish or re-establish a good credit rating. Hopefully, you have learned some discipline as well with regard to building savings and managing your expenses along the way.

By the way, be sure that you continue to deposit money into your first savings account during this process. Just because you are only paying $150 - $300 per month on the credit lines does not mean that you should stop putting the excess from your 10% paycheck contribution into savings. Even though the account is encumbered, you can still make deposits to it.

Look for future articles on credit repair, and read them before paying any money to a collection account or other aged balance that is negatively reporting on your credit report. Other credit-related articles on the way will be dealing with debt management, staying out of debt, proper uses of debt, and a whole slew of articles regarding business credit, mortgages, and investment financing. Stay tuned!

Have a great day!