Tips on Rebuilding Your Credit
Credit card debt is falling and fewer cardholders are defaulting on credit card loans. But those trends don’t tell the whole story when it comes to personal finances. Many households are still struggling with a variety of loans and rising expenses. They wonder how they will pay for it all. According to the American Bankruptcy Institute, bankruptcy filings by individuals or households with consumer debt surged 15% to 781,150 for the first six months of 2010 when compared to year ago levels. The Bankruptcy Institute predicts there will be more than 1.6 million new bankruptcy filings by the end of 2010.
Economists predict sluggish growth and a tepid recovery for the near future. These are not strong enough ropes to rescue the many Americans who are struggling to hang on until better times.
So what do you do? Let go and give up? File for bankruptcy and start over? Keep charging on your credit card until you finally default? Here are a few options that could help you re-build your credit and some courses of action to avoid.
If your credit score is sub-prime or you are struggling to make minimum payments, a legitimate credit counselor may be able to help. A credit counselor can advise you about budgeting, teach money management skills, and suggest techniques that are based on your individual circumstance.
Be very careful in selecting a credit counselor. Select a reputable one like the National Foundation for Credit Counseling. You can find a local affiliate by visiting http://www.nfcc.org. The Justice Department also provides a list of approved counseling agencies at
http://www.justice.gov/ust/eo/bapcpa/ccde/cc_approved.htm. Read all agreements carefully before signing anything. All verbal promises must be in writing.
Here are some questions to ask a credit counselor:
* What are your fees? Are there set-up and/or monthly fees? Get a specific price quote in writing. What happens if I can’t afford to pay?
* Will you help me fix my current problems and develop a plan for avoiding problems in the future?
* Are you licensed to offer your services in my state?
* What are the qualifications of your counselors? Are they accredited or certified by an outside organization? How are they trained?
* Do your employees make money if I pay a fee or make a contribution?
Debt Management Plan (DMP)
If your financial problems come from too much debt or your inability to repay your debts, a credit counseling agency may recommend that you enroll in a debt management plan (DMP). A DMP may not be for everyone. A credit counselor will thoroughly review your financial situation, then give you a customized budget and advice on managing your money.
In a DMP, your credit counselor develops a payment schedule with you and your creditors. You deposit money each month with the credit counseling organization, which uses your deposits to pay your unsecured debts, like your credit card bills, student loans, and medical bills. Your credit counselor may work out agreements with creditors to lower your interest rates or waive certain fees, but double check with all your creditors to be sure they offer the concessions that a credit counseling organization describes to you. Before you send any payments to the credit counseling organization, make sure the creditor has accepted the proposed plan. Then, review statements from creditors to make sure they have received your payment.
Your DMP may prohibit you from applying for or using any additional credit while participating in the plan. This helps you get serious about paying down the debt you have, but it is also unlikely that creditors will give you credit anyway.
DMPs take time and discipline to be successful. You must make regular, timely payments, and the DMP could take 48 months or more to complete. Ask the credit counselor to estimate how long it will take for you to complete the plan.
Look for an organization that offers a range of services, including budget counseling, and savings and debt management classes. Avoid organizations that push a debt management plan (DMP) as your only option before they spend a significant amount of time analyzing your financial situation. Make sure you understand how your DMP will work. Here are some questions to ask about DMPs:
* How will you know that all creditors will be paid by the due date? How will you get statements and updates about your account?
* How is the amount of my payment determined? What if the amount is more than I can afford? If you can’t afford the monthly payment, don’t sign up for a DMP.
* What debts will not be included in the DMP? You will still be responsible for paying these on your own.
* How will enrolling in a DMP affect my credit? Keep in mind that counselors cannot remove negative information from your credit report.
* What happens after I complete the DMP? Will you help me when it is time to apply for a loan?
Before the credit crash, consolidating debt into a home equity line of credit was a popular and easy way to lower the cost of debt. The requirements for these have tightened dramatically. Even if you qualify, these loans may not be worth the risk because they require you to put up your home as collateral. You could lose your home if you can’t make the payments or if your payments are late.
Consolidation loans are also costly. In addition to interest on the loans, you may have to pay “points,” with one point equal to one percent of the amount you borrow. However, these loans may provide certain tax advantages that are not available with other kinds of credit.
Debt Negotiation Programs
Debt negotiation is not the same as credit counseling and DMPs. It can be very risky. If you don’t do it correctly, it will have a long-lasting impact on your credit report and hurt your ability to get credit. Many states now have laws regulating debt negotiation companies and the services they offer. A debt negotiation company may describe itself as a “nonprofit” organization, but there’s no guarantee that the services they offer are legitimate. Your creditor may not even accept partial payment of a legitimate debt, and if you stop making payments on a credit card, late fees and interest usually are added to the debt each month. This can cause your original debt to double or triple and the fees add even more. Most debt negotiation companies charge a fee to establish the account with the debt negotiator, a monthly service fee, and a final fee of a percentage of the money you’ve supposedly saved.
Creditors aren’t obligated to negotiate a settlement, but they must provide accurate information to credit reporting agencies, including late payments and failure to pay monthly payments. This can hurt your credit report. Be aware that the Internal Revenue Service may consider any amount of forgiven debt to be taxable income.
You should also avoid credit repair clinics that claim to help clean up credit reports for a fee. You already have the right to have any inaccurate information removed from you credit report. No one holds a magic eraser to remove accurate information from your credit report. Only time and a conscientious effort to repay your debts will improve your credit report. In July, the FTC enacted new rules to protect consumers from predatory practices of debt settlement companies. Debt relief companies that sell products over the phone may not charge a fee before settling a debt for a consumer and they will be prohibited from making misrepresentations