Ask John:
Credit Improvement Basics
Out of the several hundred emails I got after the
Ask John
feature in the
September
Tidbits® newsletter, two of the more popular topics were the
following:
- How do consumers go about making sure that negative information
is eventually removed from their credit
reports? And…
- How do people go about starting the process of rebuilding their
credit?
Here is a prime example of the first one of these common questions:
Hey John, How can I make sure negative information comes off
my credit reports when it is time? Thanks.
Most negative information has to eventually be removed from the consumer's
credit files under FCRA law. In most cases, negative information
can only remain in your credit files for seven years. There are,
however, some cases where the negative information can remain
in your credit files for 10 years (such as Chapter 7 Bankruptcies).
And, there are some cases where the negative information can remain
indefinitely if it remains unpaid (such as federal tax liens and
defaulted student loans).
Most late payments, collections, charge offs, judgments, foreclosures,
and repossessions can only remain in your credit files for seven
years. After that point, these items must be removed. So,
the question you have is…"How can I make sure negative
information comes off of my credit
report when it is time?"
The credit reporting agencies all have a built-in program within
their credit reporting system that monitors the age of any negative
information that is on your credit reports. Once the age of that
item reaches the end of its reportable time, the credit reporting
agencies automatically remove it from your reports. You don't
have to do anything for this to happen. It's automatic.
Now, having said that, the date that's used to determine the age
of the negative item is sent to the credit bureaus by the company
that is reporting the negative item. If that date is incorrect,
then the credit bureaus will remove that item at an incorrect
time. Most people don't complain if the date is too old (because
the negative item will be removed sooner than it probably should
be removed), but a lot of people complain if the date is too recent
because they feel that they are being penalized by the negative
information longer than allowed by law.
How do you make sure that the dates are correct? Get copies of your
credit reports and look for the “purge from” date
or the “date of last activity.” Those are the same
dates that the credit bureaus use to determine when something
has to go. If you find an expired record that should have been
removed from your credit report, you can
file
a dispute
to have the matter corrected.
Now let's move on to the second most common question. Here's a prime
example of a common question we received about rebuilding credit:
Hi John, I have a question about trying to rebuild my credit.
I have a credit score of 558 and no one will give me a loan. I have
a prepaid Master Card that I thought would help me rebuild my credit.
Is that a good way to start? Any advice you have on how to help me
raise my score I would appreciate. Thank you.
It doesn't take that long to initially build good credit reports
and credit scores. That's as simple as opening up a few accounts
and managing them responsibly. After a few months, POOF!! All
of a sudden you have great credit and lenders are filling your
mailbox up with their offers.
But if something happens that damages your credit reports, your credit
scores could fall into the “subprime” world. It could
have been a failed business, a lost job, a death in the earning
family, a divorce, or just plain old poor credit management. Regardless
of the event, the outcome is the same: bad credit and low credit
scores. So the question posed to me (several dozen times) at
Ask John
was “How do I rebuild my credit, and is there a right
place to start?”
Here's the deal on rebuilding credit. It's not going to be as easy
as it was to build from scratch. Instead of having no credit,
now you have bad credit, and you'll have it for the next 7-10
years. As such, lenders are going to be very cautious about lending
you money or giving you one of their credit cards. And those who
will do credit related business with you are going to treat you
like a high-risk borrower. That means higher interest rates, higher
fees, and lower credit limits…and in some cases, decline
letters.
First off, you have to be realistic. You're not going to get a $25,000
platinum credit card right after you filed for bankruptcy. You're
not going to get a 0% car loan if you have a repossession or foreclosure
on your credit reports. What you need to do is to focus on rebuilding
your credit, and that means doing business with lenders who may
not be your first choice.
Second, you're going to probably have to endure some
secured credit cards
for a while. That's actually a great way to rebuild your credit.
You give a lender a cash deposit and they issue you a credit card
with your credit limit being the same amount as your deposit. If
you don't pay them…fine, they'll just keep your money. These
companies often charge expensive fees and have very high interest
rates. That's their way of making money when doing business with
a high-risk consumer.
And lastly, if you are thinking of
buying a house
or
a car
or anything else that's expensive, you should really think hard before
you do it. Paying 15% on a home loan is painful, just like paying
29% on a car loan. I realize that we all need to get around and we
all need a place to sleep, but as soon as your scores improve to,
say, the mid 600's, you should think about refinancing as soon as
you can and get out of those ridiculous interest rates.
After a number of years of good credit management, your credit scores
should have gone up high enough that you can re-enter the world
of “prime” borrowing. That's assuming that you've
rebuilt your scores by establishing new accounts and managed
them responsibly this time around. Time is your friend when it
comes to credit scores. The older those negative items are, the
more your scores will improve. Good luck!
Do you have a credit question? Send it to AskJohn@credit.com!
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