I’m going to take a slight detour from the usual healthy eating/exercise/what chaps my butt topics and hit the topic of “credit.” In my previous post, I alluded to having screwed up financially and the excruciating process of now undoing the damage. Sort of like my health and weight. Physically, my brain is Captain Ahab to the Great White Belly (Don’t get the reference? “Moby Dick.” Instead of keeping up with the Whoredashians, why not catch up on great literature? I THINK a lot of it is free to download on Kindle or dirt cheap). Financially, it’s my brain (still Ahab) v. a truly ugly credit report (public records, charge offs, old, rusty collections). Ironically, my day job (when I have one) is analyzing other people’s credit. God/The Universe/The Powers That Be has/have a twisted sense of humor. After the post was published, I was asked about improving credit scores.
For starters, anyone trying to sell you a “FICO Kit” or credit cleaning service is a scam artist and that includes Suze Orman. As someone who has become a trusted source of information to millions, she should be ashamed of herself. THIS IS NOT A SYSTEM THAT CAN BE GAMED. No easy fixes and anything they can do, you can do cheaper (as in “for free”). Hold onto your $49.99 (or higher).
Step 1: Pull your credit report. There are 3: Experian, Transunion and Equifax that are used as sources of information in the mortgage industry. As a consumer, you are entitled to one free pull of each per 12 month period. Whether you choose to stagger them or pull all three at once is up to you. If you want your actual credit score, that’ll cost you. For the purposes of analyzing your report, YOU DON’T NEED YOUR EFFIN’ FICO SCORE. You will be offered credit monitoring services and other “up sells” as you gather your free info. This is because the credit bureaus are not going to make dime one from you exercising your court-ordered rights of knowing what’s on your credit report without having to pay for it. Unless you KNOW you are a victim of identity theft and you want to keep track, ignore the offers. Right now, just to figure out where you stand, you don’t need those services.
By the way, pulling your own credit report will not affect your credit rating. However, a lot of inquiries on your report by potential creditors could be a red flag (or at least a hot pink one) that the consumer is scrambling.
Step 2: Okay, let’s check for errors. Is your name correct? Your Social Security number? Your date of birth? Current and prior addresses? Employment history? If anything’s wrong, time to get on the phone and get it straightened out. And yes, as a credit professional, I am here to tell you that errors happen.
Step 3: Your credit history: Do you recognize the accounts? If not, get on the phone to the credit bureau. (You used to have to write to them). THIS PART IS IMPORTANT SO IT’S ALL CAPS: MAKE NOTES AS TO WHO YOU CALLED, THE NUMBER YOU CALLED, DATE AND TIME AND NAME OF PERSON ANSWERING THE PHONE, ACCOUNTS, AMOUNTS AND PROMISED ACTIONS. You may have to don your horned helmet and armor (Speaw and Magic Helmet if you’re Elmer Fudd) if they do not follow up as promised. Look, this is YOUR credit history. If you’re not willing to work/fight for it, why should anyone else? YOU are your first, best line of defense.
A credit report is broken down into public records (Bankruptcies, judgments) and credit line history: real estate lines (mortgages, including Home Equity Lines of Credit. They’re a bitch to underwrite), installment lines (auto, boat, RV, student loans (sound sinister music. The collection process on those bastards needs to be reformed. The credit companies were Bush’s biggest campaign contributors and they got draconian bankruptcy and student loan collection laws passed. Fuckers)), secured/unsecured loans. (If you’re confused as to the difference between these and your Visa card: installment loans are x number of payments at x amount to fully pay off (amortize) the loan). And finally, revolving credit (credit cards). You may get a $1,000 credit line on a Visa, but you don’t use that all at once (or rather, you really, really, really shouldn’t. VERY bad move) and if you pay it down, you can charge more on it back up to the credit limit (and sometimes over because the bank wants those over/late fees. That’s where they make their profits).
And finally, collections. I don’t think I need to tell you these are bad marks on credit and that despite having pretty clear laws on what is prohibited behavior, violating the law is more common than obeying them. However, that’s a whole other blog post and I WILL need my horned helmet and armor for that discussion.
Let’s say your credit report legitimately reflects some “dings.” What to do depends on what they are. Let’s say you had to go to the emergency room, you have insurance, but there are a couple of medical collections on your record. As an underwriter, we don’t take those too seriously BUT you may want to have a “Come to Jesus” phone call to your insurance carrier if those medical collections are open (unpaid). After all, it’s on YOUR credit report. If they’re closed, they’re paid, no worries.
Bankruptcies: Bad, but with the economic issues we’ve experienced since 2008, no longer uncommon and no longer a stigma. They’ll be on your credit report 10 years. When I was working in subprime lending (prior to Bush’s bankruptcy “reforms”), one could declare Chapter 7 (liquidation of debts) every 7 years. I saw a lot of loans with serial filers; 7 years and one month after the previous discharge, the borrowers had filed again. And had it granted. By the way, Chapter 13 bankruptcy is a “workout” plan, sort of like the Chapter 11 that GM, American Airlines and various corporations use to regroup so they can continue business.
Judgments: bad. And they sit on your record for 7 years. Make arrangements to pay them (or get them discharged in a bankruptcy if it’s come to that) and get a copy of the satisfaction from the court. You may need it. You don’t want those to remain open. If you were evicted, in California, that stays on the Unlawful Detainer Registry 7 years (and anybody who tells you it’s forever is lying and trying to buffalo you into doing something financially unsound and stupid).
Foreclosures/Short Sale/Deed in Lieu: Again, like bankruptcies, these have become more common with the economic downturn. In order to get a new mortgage, the foreclosure/short sale/deed in lieu must be 7 years old for conventional and 3 years for FHA. They will want a 12 months VOR (Verification of Rent) for FHA and 24 months for conventional (Fannie Mae and Freddie Mac guidelines) mortgages. (Thanks to Nicole Smith for providing the correct timeframes).
Collections: If the original creditor has written off the account as a profit & loss, they will have sold it to a third party debt collector for pennies on the dollar (dealing with these rat fuckers WILL be a separate topic). Contact the original creditor and see if you can work with THEM or at least verify the final amount they wrote off. I’ve had a few accounts that had been charged off and sold, but the original creditor gladly took the money. It did NOTHING for my credit profile, but then neither does paying the third party guys. It does, however, clear the conscience and piss off the likes of Allied Interstate and Vital Recovery Services. They deserve it. Collections will age off your credit report after 4 years. The Statute of Limitations for collections is generally 4 years from the month in which the account went 180 days past due. (Check your state) Collectors do not want you to know that.
Late payments: Are they 30 days, 60 days, 90 days late? And how long ago did they occur? Understand that if you’re applying for a mortgage, you will be asked for an explanation (illness, job loss, divorce) The longer you’re able to make your monthly payments on time since the late payments, the better your profile gets. Improving FICO is like rebuilding your home after a disaster. First, you assess the damage (analyzing the report), clear away the debris (correcting false information on the report) and then, you rebuild from the ground up.
What is rebuilding? Speaking as an underwriter, we look at a bankruptcy from its discharge date (Chapter 7) and how the consumer has behaved (credit-wise) since then. Rebuilding is making the payments on time and in full and keeping that going for at least 12 months. In my case, it was necessary to re-establish credit with a secured card and it will be necessary to make the payments in full and on time (by the way, if you have to go this route, check with your bank first to see if they offer it. There’s no guarantee of acceptance, but if you already have accounts with them, they know you. If not, a few banks offer secured cards and you can compare terms side by side on the Internet. Citibank is the only one that pays interest on the savings account securing the card).
A stellar piece of advice I was once given: “It never hurts to have a credit union in your back pocket.” Very true. And since they’re non-profit, the fees are a lot more reasonable than commercial banks. They offer credit cards, installment loans and mortgages, just like Citi and Bank of America.
DON’T run your cards up to their limit, even if you can and do sustain the payments. Pay them down and keep the balances low.
Once you’ve established, let’s say 6 months, of a solid payment history (no lates, no overages), you could apply for a small unsecured loan through your bank. This is where the credit union comes in handy.
If your credit has gone bad for whatever reason, you’ll receive a lot of offers from shady credit card companies like Cortrust and First USA that specialize in “high risk” credit and charge 25% and higher on their credit cards. There is a massive industry with a lot of tentacles (high rate credit cards, payday lending, auto loan title lending) based on lending to desperate people who can be taken advantage of. Do yourself a favor and opt out of these pre-screened offers: www.optoutprescreen.com. It will also minimize the number of unknown inquiries on your credit report. Speaking as an underwriter, if we see inquiries on your credit report, we will ask for an explanation. “I don’t recognize this” is kind of weak.
Like losing weight, rebuilding your credit can be done, just not overnight. You’re playing a long game. It’s kind of analogous to that asshat Rupert Murdoch building television networks in the US. That was his end game. Minor problem: only US citizens can own radio and TV networks and stations (learned that one from “Working Girl” and it’s true). Rupert was an Australian citizen. It’s a seven year process to become an American citizen. Rupert bit the bullet, went through the 7 year process, pledged allegiance to the flag and the Constitution, then went out and set up Fox. (Yes, and thank you so much for Sean Hannity and that constipated turtle, Charles Krauthamer).
So, 1) Know where you stand, 2) make sure everything’s correct on the report, 3) tie up the loose end and 4) ya gotta rebuild it brick by brick. Or on-time payment by on-time payment.