Credit Recovery
There is no quick fix to past credit problems. The impact of past credit problems on your credit score credit will gradually lessen and your ability to obtain future will gradually improve as you change your credit habits over time. Suppose Jane made foolish financial decisions in her early 20’s and now she has unpaid student loans, judgments from two credit card companies, a repossession deficiency balance and a federal tax lien on her credit report. Yesterday Jane hit the lottery for enough money to pay off all of her creditors and make a clean sweep of her credit history. Will she have good credit once her creditors receive payment and report her accounts paid to the credit bureau? No, however, Jane is now in the perfect position to re-build a good credit history. Jane must find a lender willing to give her a second chance on a loan or credit card as a means of re-building her credit history. She should expect it to take from 12-18 months of making her new credit card or loan payments on time before she sees any significant improvement in her credit score. Jane should also follow-up by obtaining her credit reports periodically to be sure that her past credit items are reported paid in full. Most people aren’t lucky enough to receive a financial windfall like winning the lottery. Most consumers in Jane’s position are faced with the challenge of repaying those student loans, credit card companies, the auto lender, and the IRS one month at a time while they are re-building good credit history. The positive side to this is regular monthly payments to existing creditors can be used in conjunction with on-time payments on a new debt to create an even stronger pattern of good credit habits. The two biggest challenges most people are faced with is obtaining credit from a lender willing to give you a second chance and being disciplined enough to change past financial habits. Your Second Chance for a Good Credit Score A secured credit card or secured loan is what most lenders are willing to extend to consumers as a second chance. You will complete a loan application and be considered like any other credit applicant. If you are approved the financial institution will require you to make a deposit into a savings account that will be held as security for your debt. Typically you must be able to save between $500 and $1000 for a minimum security deposit. For this reason a secured loan may not be an immediate answer for everyone. But a security deposit can be a goal to save toward. If you are approved for a secured loan your loan amount will likely be equal to your security deposit. If you are approved for a secured credit card your credit limit will typically be between 50% and 90% of your security deposit. Your security deposit is not available for you to withdraw until you either pay off the loan or your lender approves the conversion of your loan or credit card to an unsecured type.
Be an Educated Borrower There is a whole group of lenders within the financial industry who specifically market their credit products to people who are looking for a second chance. Most lenders who specifically offer products to what is referred to as the “sub-prime” market are legitimate and reputable but not all. Be an educated borrower. Read the fine print. If you know you have had past credit problems look out for offers with unreasonable interest rates, loan application fees, required security deposits prior to loan approval, eligibility requirements like age or income levels, annual fees on credit cards, or companies with “900” numbers to call and make application. Don’t expect to be approved for the best advertised interest rate but do shop around for the best rate offered to you. Carefully review all offers of second chance credit. Be aware of the penalties for paying late or going over your approved credit limit. If the late fees and over limit fees are in excess of $25-$35 per month you may want to pass on the offer. On credit cards be aware of the minimum monthly payment versus the monthly finance charge. If the minimum monthly payment you are billed is not greater than the monthly finance charge your balance will increase not decrease with each passing month. If you aren’t sure if a credit offer is a good deal for you don’t hesitate to call USPS Federal Credit Union. Ask for Joan Burgess in Financial Counseling, 301-856-5000 extension 900. Good Credit History is Hard Earned and Should be Carefully Tended Your credit union is here to serve your financial needs. If we aren’t able to extend you credit at this point in your life we have other services like our Financial Counseling program that we want you to take advantage of. Financial Counseling is free to all members of USPS Federal Credit Union regardless of whether you became a member today or ten years ago, have past due loans or no loans, have $5 on deposit or $5,000 on deposit. Our Financial Counseling services are for every member. If USPS Federal Credit Union or another lender approves you for a loan or credit card and you know this is your second chance treat it like it is your last chance. Be aware of your balance and credit limit. Do not exceed your credit limit. Make your payment on or before your due date. Do not take advantage of any grace period on late fees. Even though you are not being assessed a late fee you are still paying after your due date and it will affect your payment history. Remember, there is no quick fix to past credit problems. You should not expect any significant change in your credit score for at least 12-18 months. If you are faced with repaying collection items, charged off items, judgments and other derogatory credit items on a monthly basis you could be facing several years before you see an improvement. Good credit history is hard earned and should be carefully tended.