Ask John: Credit Improvement BasicsOut 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:
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 CreditExperts@credit.com!
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