Repairing your credit may save you money.
Over the near term, interest rates will rise. This week, the Federal Reserve increased the rate it charges banks for emergency loans. This was the Fed’s first tangible move to tighten credit following the Great Recession. Additionally, in order to finance the burgeoning national debt the government will become a more active player in the credit markets. Consumer interest rates on credit cards, car loans, home mortgages, etc. will all be headed up.
The rates that lenders charge consumers are based on two major factors. First, lenders look at the individual’s capacity to pay, as measured by their income in relation to their monthly payments. Next, they look at their past payment history, as measured by their credit report. A poor credit history is viewed a higher risk and therefore requires a higher return to the lender, for taking that risk.
Repair your credit
An individual can have damaged credit for several reasons. The most obvious reason is a poor payment and credit history. However, according to a recent study by the Public Interest Research Group, 25 percent of the credit reports surveyed had serious errors that could result in credit denial, 79 percent contained other serious mistakes and errors and 30 percent contained credit accounts that had been closed by the consumer, but remained listed as open.
Steps to credit repair
The Fair Credit Reporting Act sets the standards that credit reporting bureaus and creditors must follow in reporting credit files. The act also gives individuals the right to challenge the accuracy of their credit report, request a reinvestigation within a reasonable amount of time and have errors corrected or deleted.
n Get a copy of your credit reports. You can get a free copy from all three reporting agencies by going to www.annualcreditreport.com. You can also get your credit score for a small fee. Review your credit reports and look for errors, inaccuracies and negative credit items.
n Write dispute letters to the credit bureaus on the items you believe are errors or inaccuracies. Send your letters by certified mail with a return receipt requested. Keep copies of your letters and mail receipts. The Federal Trade Commission has sample dispute letters and more detailed information on the Web site www.ftc.gov.
n The credit bureaus must reinvestigate the disputed items by contacting the information provider and requesting an investigation of their file and a follow-up report.
n The credit bureau is required to report the results of the reinvestigation to the individual. If there is an error or inaccuracy it must be corrected. However, if the information provider confirms the original information, the individual has the right to appeal. If there is no response from the information provider in a reasonable amount of time, the disputed item must be corrected or deleted.
After the reinvestigation is completed, the credit bureau is required to provide the individual with written results and a free updated copy of their credit report.
Dealing with real debt
If an individual has damaged credit because of a poor payment or credit history, there are two primary options. The self-help option works for most people. The first step of this option is to create a realistic budget. Then, develop a 12-month plan to either eliminate or substantially reduce high interest rate debt. The overall objectives should be to reduce the total debt level, lower interest rates and reduce the number of creditors.
If self-help is not enough, contact a legitimate non-profit credit or debt counseling service. The counseling service can set up a payment plan, in which the individual makes one monthly payment to the counseling agency, which then pays each of their creditors. The service can save money by negotiating lower payments and possibly lower interest rates. Most people can pay off their unsecured debt in three to five years by following these plans. The National Foundation for Credit Counseling has a referral line that automatically directs calls to the individual’s local area. For more information, call (800) 355-2227 or visit www.nfcc.org.
No quick fix!
There is no quick fix for repairing damaged credit. Avoid the scams and either do it yourself or seek help from a legitimate credit counseling service. The money you save by paying lower interest rates can be used to help achieve your financial goals.
Michael G. Shinn, CFP, Registered Representative of and securities and investment advisory services offered through Financial Network Investment Corporation, member SIPC. Visit www.shinnfinancial.com for more information or send your comments or questions to [email protected]. © Michael G. Shinn 2010.