"Picking Up The Pieces: Rebuilding Your Credit After Financial Disaster"
PICKING UP THE PIECES Rebuilding Your Credit After Financial Disaster PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER TABLE OF CONTENTS How Your Credit Score is Calculated ...........................................................3 Start Your Emergency Fund .......................................................................5 Limit Your Spending ...................................................................................6 The Importance of an Effective Budget .......................................................9 Increase Your Income................................................................................10 Eliminate Your Debt .................................................................................10 Rebuild Your Credit ..................................................................................12 Minimizing the Effect of Older, Negative Information ...........................12 Having Negative Information Removed ................................................13 What About Credit Repair Companies? ...........................................21 Suing the Credit Bureaus .................................................................22 Debt Settlement ...............................................................................22 Creating New, Positive Credit ..............................................................23 Conclusion.................................................................................................24 2 PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER PICKING UP THE PIECES I t happens to many people sooner or later: a financial challenge knocks you down and your credit goes down with you. How can you stop the descending spiral of financial collapse? The good news is: while it does take some time and effort, even the worst credit can be salvaged and be well above average again within 12 months! This book details strategies that will get you back on a positive financial track and help you rebuild your credit quickly. HOW YOUR CREDIT SCORE IS CALCULATED It's hard to develop a plan if you don't understand what factors influence your credit scores. The exact calculation is a secret, but certain aspects of your financial life affect your score in predictable ways. 3 PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER Fair Isaac Corporation is the most respected provider of credit scores. You can find their website at: www.myfico.com. Your credit score has 5 components: 1. Payment History (35%): This is simply a question of whether or not you make your payments on time. The more current the information, the more it will count toward your credit score. So being 90-days late right now is worse than having been 90-days late last year. 2. Amounts Owed (30%): This is mostly your credit utilization. How much of the credit available to you in your current accounts are you currently using? The less, the better. 3. Length of Credit History (15%): The longer, the better. For example, having an account for several years has more of a positive impact than having only 6 months of credit history. 4. New Credit (10%): What percentage of your accounts are new accounts? It sends up red flags and lowers your score if you're getting a lot of new credit. 5. Types of Credit (10%): It helps your credit score if you have a variety of types of credit. A mortgage, car loan, and credit card are more favorable than 3 credit cards. 4 PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER Credit scores range from 300 to 850. Keep in mind that you have 3 credit scores, one from each of the 3 major credit bureaus. A decent credit score from the bank's perspective is about 680. "Creditor. One of a tribe of savages dwelling beyond the Financial Straits and dreaded for their desolating incursions." -Ambrose Bierce START YOUR EMERGENCY FUND Almost without exception, every credit mess was precipitated by one of two factors: 1. You didn't have enough money in savings to financially weather the issue. 2. You established more debt than could be supported by your income. Part of restoring your credit is taking steps to ensure that the same thing doesn't happen again. After all, you don’t want to put in all this work, just to have another crisis undo all your efforts. 5 PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER While it can take a significant amount of time to save 3-6 months of living expenses, your first goal should be to get $500 in your savings account. While this isn't a lot of money, it’s frequently enough to handle most minor emergencies. "Friendship, like credit, is highest when it is not used." -Elbert Hubbard LIMIT YOUR SPENDING Did you know that approximately 25% of the world's population doesn't have electricity? I'm not suggesting that you have your electricity shut off. But if there are many people in the world doing fine without electricity, do you really need many of the products and services you have right now? In the United States, the vast majority of people have far more than they really need. Cutting back on some luxury items will help you recover faster from a financial disaster. Consider these items you might be able to do without: 6 PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER 1. Multiple Cars. Do you really need 2+ vehicles? Maybe you do, but having one car might be manageable with some effective planning. For example, if both of you work, perhaps you could leave the house 10 minutes earlier and drop your spouse off at work. Car pooling is also an option, as well as public transportation. ❖ You not only potentially save on the expense of a car payment, but also thousands of dollars a year on maintenance, gas, and insurance. If you sold your extra cars, what could you do with that extra money? ❖ Consider what you would do if a law were passed that said you could only own one vehicle; I'm sure you'd come up with some ideas about how you would deal with that situation. 2. Cell Phone. Humans survived thousands of years without cell phones. But, "What about emergencies?" Okay, how many emergencies have you had in the last 5 years where a cell phone was critical? In all likelihood, less than one. ❖ Is it worth paying $1,000 a year? ❖ Get a CB for your car. The police monitor the emergency channel and you can call anyone you need to call. ❖ At the very least, get an inexpensive pre-paid phone and eliminate your landline. 7 PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER 3. High Speed Internet. If you're not making your living online, the internet is probably little more than a distraction. Watching television and playing on the internet are undoubtedly the biggest time wasters in the US. ❖ So many places offer free wireless access that you can easily check your email and do whatever else you have to do. 4. Eating out. The average family spends 40% of their total expenditure for food eating out. It's outrageously expensive compared to buying food at the grocery store. 5. Cable TV. Get a hobby, read a book, or do something with your friends and family in lieu of cable TV. It's shocking how many very, very successful people don't even own a TV; that's not a coincidence. These are just some of the bigger things, but they can also get you thinking about other things you could potentially minimize or remove from your daily or monthly expenses. “There are four things every person has more of than they know; sins, debt, years, and foes.” -Persian Proverb 8 PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER THE IMPORTANCE OF AN EFFECTIVE BUDGET No one likes to make a budget or live by one, but it's important to understand how much money you're spending and where it's being spent. There are tons of easily accessible and free resources available online to help you develop a realistic budget. Review your budget weekly and you'll be well on your way to fixing money habits that may be wasting much-needed funds. Freeing up some money to use for rebuilding your credit will speed up your financial recovery and make it that much easier for you. Not only will a budget help you recover from a financial disaster, but the process of creating one that works well for you and learning to stay within it can also help you implement new, positive money strategies that serve you well the rest of your life. “Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.” -Ogden Nash 9 PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER INCREASE YOUR INCOME Eliminating some unnecessary services (like Cable TV) might leave you with a lot of free time on your hands. That free time could be spent on generating additional income. Life is too short to take on a second job that you dislike, but you can surely find something to do that is enjoyable and will provide some extra money. It doesn't need to pay a lot to make a significant difference. This is especially true if you've given up an activity that costs money for a new activity that earns you money! ELIMINATE YOUR DEBT Nearly everyone has more debt than he or she should. Drowning in debt is one of the most common causes of financial disasters. So it’s best to get rid of your debt as soon as possible, especially when trying to get back on track. Ideally, the only debt anyone should have is debt that is being used to generate income, like a mortgage on a rental property that provides a positive cash flow. There are 2 basic strategies you can follow to eliminate your debt: 10 PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER 1. Pay the debt with the highest interest rate first. 2. Pay the debt with the smallest balance first. So, you would pay the minimum balance on all your current debts, except for one of the above. You put all your extra income toward that debt. When it is paid off, you move on the next one. The first choice is better financially; the second choice is easier psychologically, because it's easier to see progress. It’s critical to refrain from creating new debt while paying off the old! Such actions would be totally counterproductive to achieving your goal. “It is the debtor that is ruined by hard times.” -Rutherford B. Hayes 11 PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER REBUILD YOUR CREDIT Rebuilding your credit has 3 components: 1. Minimize the effect of older, negative information. 2. Have negative information removed. 3. Create new, positive credit. It’s much easier to get new credit after you’ve dealt with the negative information and improved your score, so let's tackle those topics first. Minimizing the Effect of Older, Negative Information Newer information in your credit report has more weight than older information of the same kind. With this in mind, you want to earn some good marks with your creditors now that the bad times are behind you. These techniques will start your credit score climbing again: 1. Pay on time. A significant part of your credit score is based on your payment history. If your account is past due, that obviously is damaging to your credit score. Being 90-days past-due is considerably worse than being 30-days past due. 12 PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER ❖ Start making all your payments on time. The longer your account has been current, the better your credit score will be. 2. Pay down your balances. Another large component of your credit score is the percentage of your available credit that you’re using. For example, if the total amount that you could charge on your credit cards (your card limits) is $10,000 and you currently owe a total of $7,000, then your utilization ratio is 70%. ❖ The lower the ratio, the higher your score. “The man who never has money enough to pay his debts has too much of something else.” -James Lendall Basford Having Negative Information Removed This is probably the information you were expecting when you started reading this book. Don't ignore the previous information or you're likely to end up in the same place. Every successful endeavor needs a solid foundation to support it. 13 PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER Having your negative information removed from your credit reports will take some time, but if you're aggressive, you can eliminate any negative information on your credit report, even a bankruptcy. The success rate on accounts that are still open isn't very good, but on accounts that are closed, this process works extremely well. This is the same series of steps that reputable credit repair agencies use: 1. Get a current copy of your credit report from the 3 major credit reporting agencies. The Fair Credit Reporting Act stipulates that you can receive a free copy of your credit report from each of these 3 agencies every year: Equifax, TransUnion, and Experian. ❖ The official place to get your free copies is https://www.annualcreditreport.com. Any other website isn’t truly "free" – no matter what they claim. 2. Analyze your credit reports. Your report will typically tell you what items are harming your credit score, but make your own assessment as well. No one cares about your credit more than you do. Make a note of all the negative information. The general order of negative items, starting with the worst is: ❖ Bankruptcy ❖ Foreclosures ❖ Repossessions 14 PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER ❖ Loan Defaults ❖ Court Judgments ❖ Collections ❖ Past due Payments ❖ Late Payments ❖ Credit Rejections ❖ Credit Inquiries – Your own inquiries do not count here. 3. Write letters to the credit bureaus disputing the information. Realize that the credit bureaus would rather you dispute the information electronically; it makes things much easier on them. This is not in your best interest. The more work you create for them, the more likely they are to drop the ball. ❖ Sending a letter is well within your rights. You can find many sample letters online. ❖ The critical items to include are: ü Relevant account information: Name of account, amount owed. ü State that you are disputing the accuracy. ü Your name, date of birth, address, social security number, and a copy of your driver's license. These items are required, and they will 15 PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER simply return your request and ask for these items if you don’t include them. ❖ Your first dispute should be "These are not my accounts." We will cover subsequent disputes below. ❖ You only need one letter for each credit bureau; you can list multiple accounts on each letter. 4. Send the letters registered or certified mail. This is important as you’ll need proof of when the letters were received by the credit bureaus. Using these mail services will give you the proof that you might require later. 5. Keep excellent records. Keep copies of all your letters, the responses you receive, and the receipts from your mailings. Also keep detailed records of any phone conversations. At a minimum, you should record the time, date, to whom you spoke, and what was discussed. 6. Wait. After the credit bureaus receive your dispute, they are required to do the following: ❖ The credit reporting agencies must respond to all disputes from consumers within 30 days. ❖ If you have a complaint that documentation for your disputes was disregarded, the credit bureaus have to consider and transmit to your 16 PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER creditor all relevant evidence you submitted the first time. ❖ You’ll receive written notice of the results of the investigation within five days of its completion, including a copy of the amended credit file if it changed based on the dispute. ❖ Once information is deleted from a credit file, the credit bureaus cannot reinsert it unless the entity supplying the information certifies that the item is complete and accurate and the credit bureau notifies the consumer within five days. 7. Review your results. It's exciting when you receive your responses from the credit bureaus; it's a little like Christmas, but you never know what you're going to get. There are only 3 possible results: ❖ The item has been removed. This usually means that too much time passed (remember, they only have 30 days), or the creditor didn't want to be bothered and never verified the information. It’s also possible the records were corrupted in some way, or they consider the account information to actually be incorrect. This is ideal! ❖ You don't get a timely response. From the time they receive your letter, you must have a response in your hands within 35 days. That's one of the reasons the record-keeping is so important. We'll cover how to handle this situation below. 17 PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER ❖ The item comes back 'verified'. We will deal with this in #8. 8. Take the Next Step: ❖ If the 35 days passed without getting a response, send them a letter stating that they did not comply with the law and you would like all the accounts you disputed removed from your account immediately. ❖ If the items came back as 'verified', request information regarding the method of verification. All verifications are done electronically with a system called e-oscar. The courts have ruled that this method is not sufficient, as no one is actually reviewing accuracy of the information. ü The bureaus have 15 days to respond to your request. Simply tell them you want to know how they verified the information. Do this via the phone, or it will take forever. ü Call the credit reporting agency listed at the phone number listed at the top of your report. ü Give them the report reference number and tell them you'd like to know the method of verification per FCRA Section 611(a)(7) . ü You can be certain they did not call the original creditor, but instead used a 3rd-party database to verify. If they can't give you solid evidence that they called the original creditor and they verified the 18 PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER information, ask for the original creditor's phone number. ü Call original creditor and ask for the records. ü If the original creditor can't provide them (they will typically claim that the collection agency has them). Get that person's name and direct line. If they do have them, insist that you are sent a copy under the new FACTA act. ü If you are sent records, review them and see if they are acceptable. If they are not, take the next step. ❖ If the original creditor has no records: ü Call the credit bureau back and tell them the original creditor has no records. ü Inform the credit bureau that they must open another dispute. The new information for the dispute is the name and number of the person to whom you have just called at the original creditor. ü If they refuse, inform them you will sue for willful non-compliance under section FCRA § 616. ü If they still refuse, send the information via certified letter along with an intent to sue letter. If not, they will give you a new 19 PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER confirmation number (write it down and write down the date, too!). The credit bureau has 30 days to get back to you. ❖ If you have written records that show that the original creditor cannot substantiate the negative listing(s) they have reported on your credit report: send the records via registered mail to the credit bureaus. Include an intent to sue letter informing them of your intentions if the items are not deleted. 9. Repeat. With any items that you were unable to remove, resubmit your dispute with a different reason. Here are several that will keep you busy for awhile: ❖ I didn't pay late that month. ❖ Incorrect amount. ❖ Incorrect account number. ❖ Incorrect original creditor. ❖ Incorrect charge-off date. ❖ Incorrect date of last activity. ❖ Incorrect balance. ❖ Incorrect credit limit. ❖ Incorrect status - there are about 20 of these. ❖ Incorrect high credit - the highest amount you used. 20 PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER “A hundred wagon loads of thoughts will not pay a single ounce of debt.” -Italian Proverb What About Credit Repair Companies? As you can see, there can be a little bit of work to do everything yourself. There’s no shortage of companies willing to take on your credit repair chores for you. There are plenty of companies that do a lousy job, but there are also some good ones. This is one of those times that it pays to be very thorough in your research. There are limitations with credit repair firms; most will only dispute a few items per month, so the process can take longer to dispute every negative item in your credit report. Typically, you’ll be charged a monthly fee in return for a specified amount of work. The better companies do a good job, but they don't do any better than you can do by yourself. If you have the money but you're short on time, it's not a bad idea, provided you really do the work to find a reputable company. 21 PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER Suing the Credit Bureaus This may sound drastic, but it happens all the time. If they’re in violation of the law, the credit bureaus can be fined up to $1,000 per violation. They’re rarely willing to go to court and will almost always settle just before going to the judge. But if they don’t settle first, the trick is you have to show up to court. The credit bureaus will always show up, just to see if you show up. Rest assured, they will settle 99% of the time and agree to remove all the negative information. You might even be able to get part of the fines out of them if you can show that you have a strong case. Debt Settlement If you're really in way over your head with debt, it’s possible to have your unsecured debt (credit cards) reduced dramatically. If you're way behind on your payments, you're likely already hearing from one or more collection agencies. Did you know that these collectors are always authorized to accept less than the full amount as payment in-full? This pay-off amount can be as low as 25%. Be sure to get any settlement 22 PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER agreement you make in writing; what is said on the phone means nothing. However, if you're current with your payments, it's not going to happen. Why would they be willing to deal if you're paying? Also, you may be responsible for declaring the forgiven amount on your taxes as income; this is only true if the IRS considers you to be solvent. Solvent means that your assets are greater than your debts. This strategy is certainly a negative on your credit report. But you know how to deal with that now. “Ten million dollars after I’d become a star I was deeply in debt.” -Sammy Davis, Jr. Creating New, Positive Credit It's not enough to just get rid of the bad stuff. The real key is to pay everything on time from now on. It has to be a priority. It also helps to add some new, unblemished credit. Depending on your situation, your options might be limited, but there are options. 1. Secured credit cards. A secured credit card works just like a regular credit card, only you make a deposit with the credit card company. If you 23 PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER 'give' them $1,000, then you can have a credit card with a $1,000 limit. These cards aren't really great, but you do what you have to do. You get your deposit back when you cancel the card. 2. Secured loan. The bank is happy to loan money if you can provide enough collateral. For instance, if you had $2,000 in your savings account, the bank would be happy to loan you $1,500. But, you would have to allow them to freeze your savings account until the loan is paid off. 3. Remember to get a variety of credit. Get a bank loan, a secured credit card, and a store credit card. That would be a simple, but great start. “If you think nobody cares if you’re alive, try missing a couple of car payments.” -Earl Wilson CONCLUSION Having bad credit is usually either the result of bad decisions made over a long period of time or lacking enough emergency funds to take care of a sudden financial challenge. 24 PICKING UP THE PIECES: REBUILDING YOUR CREDIT AFTER FINANCIAL DISASTER It’s important to remove the cause(s) of your credit woes. This likely means you need to increase your income and decrease your debts and your spending. Consider that if you have sufficient income and your debts and spending are low, you don't have any financial pressure. Once you’ve dealt with the cause of your financial disaster, establish your emergency fund, even if it's just $500 to start! Focus on removing the negative items from your credit report. The laws around this really do favor you, the consumer. Companies take full advantage of the laws all the time, but for once, things are in your favor. Use these credit laws in a way that supports you and your family. Be aggressive; now is one of those times that being aggressive is appropriate. Get new credit, even if it means establishing secured accounts, and maintain a stellar payment record. Your credit report will show that your financially troubled times are behind you. You can rebuild your credit after financial disaster! The sooner you start, the sooner you’ll reap the benefits. “Who goeth a borrowing. Goeth a sorrowing.” -Thomas Tusser 25 We hope you enjoyed your Special Report! Curtis Rose is an experienced professional with extensive experience in all aspects of personal finance. Curtis writes and publishes articles, courses, guides and special reports on his personal finance blog. 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