Tips on Rebuilding Your Credit

Tips on Rebuilding Your Credit

September 30, 2019         Written By Tracy Farnsworth

Debt in America is climbing across the board and credit card debt is no exception. In 2019, several areas of consumer lending jumped and credit cards accounted for 26.2% of all consumer debt. Auto loans increased by $59 billion. Mortgages increased by $407 billion. Student loans increased by $73 billion. More concerning is the growth that credit card debt has seen. Credit card debt topped the $1 trillion mark in 2019 and those figures were tallied before the COVID-19 pandemic caused skyrocketing unemployment rates. By April 2020, the unemployment rate rose to 14.7%, an increase of 10.3% in just one month.

Time will tell how long it takes to get people back to work, but until then, millions of consumers are still struggling with a variety of loans and rising expenses, wondering how they will pay for it all. According to the American Bankruptcy Institute, bankruptcy filings by individuals or households with consumer debt surged well past a million and topped 1.5 million in 2010, but they started to decrease in 2014. By 2019, only 752,160 consumers filed bankruptcy, which was only a slight increase from 2018. While bankruptcy rates have declined and stabilized in the past decade, it’s unlikely to stay that way.

Economists predict sluggish growth and a tepid recovery for the near future with the closure of businesses and loss of jobs due to the coronavirus pandemic. These are not strong enough ropes to rescue the many Americans who are struggling to hang on until better times return. 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 rebuild your credit and some courses of action to avoid.

Credit Counseling

If your credit score is subprime 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 circumstances.

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:

1.  Are you licensed to offer services in my state? Will you provide a copy of that license so that I can verify it?

2. How do you calculate my repayment amount? How does the debt repayment plan work? Can I access monthly reports online to see how my debts are being repaid? Will I get statements in the mail?

3. What are your fees? Are there set-up fees, monthly fees, or both? Ask for a specific fee schedule and ask them to put it in writing. Follow this up with a question about what happens if you cannot afford to pay the fees and/or monthly repayment amount.

4. Will you help me fix my current problems and develop a plan for avoiding problems in the future? What do I do if my creditors are calling me and saying there are problems? Do I refer them to you or provide them with a letter from your agency that I have a debt repayment plan through you?

5. What are the qualifications of your counselors? How are they trained? Are your counselors accredited or certified by an outside organization? Can I view their certifications/qualifications?

6. How do your employees and the agency make money?

7. What security protocol does your agency use? When I send information like account numbers and my SSN, what measures do you use to keep that information safe?

If the credit counseling firm dodges a question or refuses to put something in writing, move on. You do not want to deal with a company that sidesteps questions or will not commit to a promise by putting it in writing.

Debt Management Plan (DMP)

If your financial problems come from too much debt or your inability to repay your unsecured debts like credit cards, student loans, and medical bills, 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 negotiates a payment schedule that is approved by both you and your creditors. You deposit money each month with the credit counseling organization, which uses those deposits to pay your unsecured debts. Your credit counselor may work out agreements with creditors to lower your interest rates or waive certain fees. 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 your credits have accepted the proposed plan and get it in writing. Then, review statements from creditors to make sure they have received your payment each month. If there are discrepancies, ask your credit counseling agency where the missing payment is and why it was not made.

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 so it’s not a hardship.

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. Again, get that in writing. You do not want 48 months to pass and find out that you still owe money.

Look for an organization that offers a range of services, including budget counseling, 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:

1. How will my enrollment in your DMP affect my credit? Be aware that the DMP counselors cannot remove negative information from your credit report. The steps that are taken can only help you improve your credit history as payments are made on time and debt is reduced.

2. How is the amount of my payment determined? What happens if I can not afford the payment due to changing circumstances? It’s best to sign up for DMP while considering changes. If you lost your job and had to rely on a lower income? Would you take a second job or would you still be able to make the payments with less pay? Don’t sign up for a DMP if there is no way you would be able to afford the payment that’s recommended.

3. What kinds of debt are not going to be included in your DMP? If the DMP is not going to help with your car loan, you must make sure you are still paying your car loan on your own. Get a list of the debt it will help with and make sure you’re taking care of the rest of your debt.

4. How will you know that all creditors will be paid by the due date? How will you get statements and updates about the debt you’re paying off? Can you sign up for online access or are monthly statements mailed to your address?

5. What happens when I pay off my debt using a DMP? Will a counselor help me apply for new loans

When you are selecting a DMP, do your research. Read reviews and ask your state’s attorney general if there are complaints against DMP firms that are on your shortlist.

Debt Consolidation

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 not 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. While you cannot declare credit card interest on your income taxes, mortgage and home equity interest does count as a deduction if you itemize.

Debt Negotiation Programs

Debt negotiation is not the same as credit counseling or DMPs. It can be very risky. With debt negotiation, you make deposits into a savings account held by the debt negotiation company. Once there is money built up, they talk to your creditors about agreeing to lower the amount you owe in exchange for an immediate payoff. For example, you owe $6,000 to your credit card company and could pay it off if they would reduce that debt to $3,500. They agree to take that immediate payment for the lowered amount and close your account.

Risks include the creditors refusing to negotiate your debt. They are not obligated to do so. Plus, debt negotiation firms often start with the lowest amounts of debt. Debt with higher balances is saved until last, which means they are accruing interest and possibly over-the-limit fees, which drives up your debt. If you have been advised to not make payments on your credit cards while they negotiate, it can also drive up late payment fees and put black marks on your credit report. 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 increase quickly and the fees add even more. If done incorrectly it could 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. Check with your attorney general for advice before you enter any contract. A debt negotiation company may describe itself as a “nonprofit” organization, but there is no guarantee that the services they offer are legitimate. Plus, these companies often 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.

Be aware that the Internal Revenue Service may consider any amount of forgiven debt to be taxable income. If you owe $6,000 and the creditor settles for $3,500, the $2,500 you save may be counted as income by the IRS when you file your taxes. You could end up with a substantial tax bill at the end of the year.

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 your credit report. There is no reason to pay a company to do it for you. Plus, 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.

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. The FTC states these four requirements must be met. If the company you are working with will not meet these requirements, walk away as it is not following FTC rules.

  • Pricing and fees must be explained fully and clearly. The money you deposit remains your money and can be withdrawn at any time without paying a penalty. You are also entitled to any interest.
  • The firm administering the savings account with the debt negotiation firm cannot be affiliated with that firm and cannot be paid a referral fee.
  • You must be given a clear picture of how long it will take before the company makes a debt settlement offer to the creditor.
  • The company has to tell you how much you are going to save before it negotiates with your creditor on your behalf.
  • If you are told to stop making payments, the company has to tell you what risks you face when payments are stopped.

Secured Cards

Use secured credit cards to improve your credit score. A secured credit card is backed by a deposit you make with the credit card company. Many have small credit limits, such as $750, that backs any purchases you make. As you purchase items and make monthly payments, those on-time payments appear on your credit report. Timely payments show you are being responsible and that is key to improving your score.

Should you be unable to pay, the company is not losing anything as you make that initial deposit as collateral when you apply for the card. As you keep making payments, the company can review your account and increase your credit limit, which is a clear sign you have been making the right moves and improving your credit score. Apply for a secured credit card and start rebuilding your credit.

There are many different ways that you can go about rebuilding your credit if you have suffered a financial hardship in the past. It is not an easy road and different paths work better for different situations so you will want to do your research before committing to any of the above options to determine which would be best for you. One thing that is consistent with all the options is paying down your debts, on time, and negotiating with your creditors is the best way to get back on track with rebuilding your credit.

This entry was posted in Consumer Tips and tagged No tags added

The information contained within this article was accurate as of September 30, 2019. For up-to-date information on any of the terms, cards or offers mentioned above, visit the issuer's website. Many of the offers on this article are from our affiliate partners, and LowCards.com may be compensated if you take action with any of our affiliate partners.

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tracy

About Tracy Farnsworth

Tracy Farnsworth went straight from a business track in high school to a full-time job in mortgage banking in Burlington, Vermont. After having children, she built a freelance career in content writing and took online classes as time allowed. She completed Social Media Marketing and Digital Marketing certificate programs with Ireland's online Shaw Academy and completed several courses in SEO and analytics. In her free time, she's the “mom” to a very clingy rat terrier, and the pair walk at least a mile every day. She's also a novice baker who is trying to master the art of sourdough bread.