Expert Q&A Archive
How can I clean up my credit in order to purchase a house?
I am concerned about my credit because my debt is not in order. I am in need of information for ways to get the process started in order to clean up my credit. I would like to purchase a house in the future along with some type of business establishment. Since I am staring late in this arena I need some resources that I can use to help me begin the process of repairing my credit so that the mistakes of my past will not continue to be my demise.
Delores Lenzy - Jones, CPA, CIA:
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I would suggest that you check with some debt consolidators to consolidate your debt to one payment. You can then accelerate your payments to pay principal. To the extent you pay off principal, you do not have any associated interest. Ultimately, you can pay down your
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It sounds like you have two tasks in front of you. One is to take care of the debt you owe and the other is to build a stronger credit rating. I'd encourage you to take it one step at a time.
The first step is to tackle your debt. It would not hurt to talk with a non profit credit counseling agency to see what suggestions they can offer for paying off your debt.
If most of your debts are older, however, then you may need to handle them on your own. For example, if your debt consists of older unpaid medical bills or collection accounts, you will need to try to negotiate with those agencies to resolve those debts. You may be able to settle them for less than the full amount if you can't afford to pay the entire balance or if you dispute the amount they say you owe.
Once your debts are taken care of, then it's time to turn your attention to your credit reports. I have two suggestions here. One is to consider subscribing to a credit monitoring service that includes your FICO credit scores. You can get your free reports from AnnualCreditReport.com but, in your case, you may want to monitor your credit reports and see how your scores change over time as you dispute inaccurate information and/or try to build new positive credit references. My second suggestion is to educate yourself on how credit reports and scores really work. There are two books I recommend: You're Nothing But a Number by John Ulzheimer and Credit Scores and Credit Reports by Evan Hendricks (2nd edition).
Cleaning up your credit report takes time and persistence, but it is worth it! Good luck in your endeavors.
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I suggest National Foundation for Credit Counseling (NFCC) or Consolidated Credit Counseling. They should be free or sliding scale and they will help you sort through debt and move forward, check online or in phone book to find. Most legitimate local credit counseling offices are supported by contributions from banks, credit unions, and community-minded organizations such as United Way.
Another source to get started would be your bank or credit union and hear their recommendations. Some hold classes or seminars, but sounds like you need one-on-one help. Good luck. You can do this and succeed.
Martina A. Jimenez:
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I recommend that you get a free copy [of your credit report] from each credit reporting bureau (Transunion, Equifax and Experian) at www.annualcreditreport.com
and review the accounts that are listed. Check for errors such as duplicate listings, accounts that are listed open and should be closed, or old accounts that should be closed. Check for alias names and incorrect address. Make sure that your name and date of birth are correct. These errors can cause a reduction in rating. Confirm that the debt listed belongs to you. You can order these reports for free online or write to the bureaus.
If your debt is high and you are not able to pay them off in a timely manner you should go to www.cccsinc.org for assistance. They will guide you!
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First off, do not rely on a "credit repair" clinic or company to help you. They charge large fees, and you can do yourself what they are charging you to do. Next, get a free copy of your credit report through www.annualcreditreport.com
to see what you are dealing with. If there are mistakes on the report, you can dispute them through this website.
My advice is to pull all three reports to get an accurate picture. When you are looking at improving your score, your first priority is to make sure you are paying all your current bills on time. What you are doing today has more impact on your score then what happened last year. Next, start focusing on the collection accounts if you have them. If they have been on the report for a long time, you have a good chance at getting them to settle for a lesser amount. But, do not contact them if you are not in a position to pay. Let sleeping dogs lie. Again, the longer something is on the credit report the less influence it has on the score and, in most cases, things fall off the credit report after 7 years from the date of the last activity. If you are close to that period, wait it out and let it fall off.
Many communities have financial institutions that have products that will help you raise your credit scores. This could be in the form of secured credit cards, CD loans. (I really like this option. You pay on this loan and it goes directly into a savings account, and when you are done paying, you have this money, which has been earning interest. It is a great way to pay yourself and help your credit!!) My advice would be to go to a local credit union. Often times, they are the ones with these types of products. Raising your credit score can be a long process, but, don't get discouraged. It will happen. Pay your bills on time, don't go out and apply for too much credit, and keep balances low on revolving accounts. Good luck.
Sharon P. Hardy, CFE:
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This question seems to be one that is recurring in nature and has been addressed and answered many times in the past. To me, the very first thing that should be done is for this person to contact the creditors in question who have had an negative impact on her current credit situation. She must be sincere and very clear as to having a well-thought out plan of how she intends, if at all possible, to clear up and satisfy her debt owed to them. Many times, (a) creditor(s) is (are) more than willing to work out a debt elimination plan with the debtor, as well as to forgive some agreed upon portion of the existing debt.
Rachel Lane, CFP:
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A good place to start cleaning up your credit is reviewing your credit report. Three ways to do this are:
1. Online at www.annualcreditreport.com
2. By phone at 877-322-8228
3. By mail [complete request form online and print it out]
To get your actual score, you have to go through credit reporting agencies and pay for it (though some have free trials). [The credit reporting agencies are]:
I also discuss the following with my Wi$eUp class participants:
Ways to Manage your Credit Card Debt
1. Question your everyday purchases. Are they needs or wants? Calculate the true cost of something you really “need” or want. Example in [Wi$eUp] Handbook – Dorothy’s $2,600 [total spent] on groceries over a year’s time [using a credit card with an Annual Percentage Rate of 18%] cost her $223.63 in interest charges for one year! Food is a need, but it may have been her other “wants” that got her in the position of having to charge groceries in the first place.
2. Review your credit card statements as they come in, paying particular attention to the due date. Also note unknown charges (call and report them). Check the interest rate you’re paying. Call and try to negotiate it down. If you are having trouble making your payments, explain your situation and work out a plan that’s mutually beneficial. Communication is key!
3. If they are unwilling to negotiate, shop for other cards at www.bankrate.com
. Note the APR, annual fee and other fees (i.e., balance transfer fees).
4. Contact a nonprofit credit counseling agency. Otherwise you may be hit with high fees, and it could hurt your credit rating or increase your debt burden. Contact the National Foundation for Credit Counseling at www.nfcc.org
and click on “find a counselor now”.
5. Do it yourself. Pay off highest interest rate card first and apply that monthly payment to the one with the next highest rate -- “Power Payments” in [the Wi$eUp] Handbook. Or pay off the smallest balance first, which is more of a psychological benefit – a good feeling of accomplishment and confidence from paying off a debt altogether.
I hope this helps!
Gail V. Marquet:
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One of the best ways to clear debt is by using a "debt snowball." List your debts on paper, smallest to largest, and begin to attack them in that order. You will have a good sense of achievement as the list grows shorter. Another good idea is to go to daveramsey.com
and look for a Financial Peace University close to you. This is a 13-week course specifically designed to help you design your plan for getting out of debt and remaining that way. The only cost is the cost of the materials, which is nominal.
Wendy Weiss, Ph.D.:
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Please take a moment and go to the wiseupwomen.org website. Review Chapter 4 [of the Wi$eUp curriculum] - Credit in a Money World. Focus on Dorothy's use of her credit card. Also read about paying down your debt. See the example of Mary! Also look at the section on ways to build a good credit history.
Your goal should be improving your credit scores over time--say a period of years -- so that you can have the home, etc. that you want.
While the chapter says it all, let's give you a personalized response.
1. Think about your use of credit, especially Credit Cards, then act to limit the growth in your debt. Put a rubber band around all of your cards, or a sticker. Each time you go to pull out your card and use it, let that rubber band or sticker remind you of the cost of charging and the requirement that you will pay more for the thing you charge because of the interest charged to you. If you pay late and get a lot of late charges, it costs you even MORE!!!!
2. Develop a Plan to pay down your debt. This will be the first step in improving your credit scores Make it a goal to pay down all credit card debt and perhaps student debt. Give yourself a realistic deadline--say 2-3 years.
a. List every credit card you have and every debt-- the total owed.
b. ADD up that total.
c. Keep that number in mind, but DON'T LET IT scare you.
d. Develop a realistic plan to pay it all off--over a realistic amount of time.
3. Then start paying down all of your debt.
a. Target one card at a time. Pick the card with the highest interest rate and stop using it. Or, if you need a quick feeling of accomplishment, pick the one with the lower amount charged. It will be paid off more quickly.
b. Whichever card you target, stop charging on it.
RE-READ MARY'S EXAMPLE IN [the] WISE UP [curriculum]!!
c. Target an amount to pay off the card. HOW? Decide to use a decent amount from each paycheck to pay it off. That amount is more than the minimum payment due. Let's say you decide that decent amount is $50 or even $100 per month. If you get paid twice a month, save $25 (Or if you can,$50) from each paycheck, so that you have $50 (or even $100) each month ready to pay off your debt quickly. That amount will be your Power Payment. Each month pay the Power Payment in addition to the minimum payment due. Let's say your minimum due is $19 each month. Add on the power payment of $50 and you will send in a check for $69 (or if you can save the larger amount, then $119) each month. Do that until you pay off the first card completely. Stop using that card!!!
4. Then start paying down the next card you pick. Take that same power payment and add it to the minimum balance due on that next card. (You can keep that $19 a month from the last card as a reward. OR you can add it to your POWER PAYMENT so that you can pay off the next card more quickly. You will have an additional $69 or an additional $119 to add to your minimum balance due.) Apply the Power payment to the 2nd card, and pay it down over a year or more.
5. Always, always pay ON TIME. Send in your payment to make sure it reaches the credit card company (or other creditor) 1-2 days before the deadline-- so you will NOT have to pay any additional penalties.
6. Every year, check your credit history. Get your credit score! Watch it improve as you
1. Pay down your debt
2. Pay every bill on time
You will clean up your credit beautifully--with a good plan of action, following the plan you made for yourself, and patting yourself on the back each year --as you watch your credit score improve and your debt burden drop!!
Kim Nourie, CFP, CPA:
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Dear Wi$eUp Reader: Congratulations on wanting to make changes to improve your credit standing. A few suggestions to get you started:
1. Make a budget to determine how much debt you can pay down each month.
2. Review your debt and make a chart indicating the balance and the interest rate charged.
3. While it makes the most logical sense to start tackling the highest rate debt first, it may be more motivating to you to first pay down the smallest balance. Then, when that balance is paid off you can apply the monthly payments you had been making to the next smallest balance. Each time you pay off a balance you will have more funds available to expedite paying off the next balance.
4. Timeliness of payments – it is critical that you make your payments on time and even early to start impacting your credit score.
5. Once you pay off a charge card, do not close the account. When you close accounts and lower your available credit, you also lower your credit score. It may not seem fair, but that is how it currently works; however, just because you have available credit does not mean to use it.
6. Call the companies you owe money to and ask if they will lower your interest rate. If you are current on payment and show them that you recognize your need to be responsible with your credit, they may be willing to adjust your rate.
7. Obtain the help of a debt counseling service if you are not able to make a budget on your own or just need help going through this process. Make sure the company you work with has a good reputation. Here are some of the agencies that oversee debt counseling companies:
a. the National Foundation for Credit Counselors (www.nfcc.org), an agency that oversees the certification of counselors and requires member agencies to adhere to strict procedural policies, and
b.The Council on Accreditation (COA).
It is going to take years to repair your credit, but it will also be helpful in the short term to show that you have implemented steps to get back on track. Good luck, and don’t get discouraged.
Michael A. Masiello:
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There are many legitimate credit counseling bureaus that can help you. Check out this national site, and they should be able to connect you with local help: www.careprogram.us. Good luck.
Rebecca Schreiber CFP®:
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The first step to getting debt in order is to find out what you owe. This information is in your credit report, and you may view your credit report at www.annualcreditreport.com. Locate the open credit accounts, confirm that your current address is on each account, and make a list of how much you owe to each lender. The next step is to learn how much interest you are paying on each account. Continue to make the minimum payments on time to all of your open balances and apply any additional money to the account with the highest interest rate. Lenders want to make sure they are paid on time, so late payments drag down your credit score. Establishing a healthy credit score is the first step to gaining the trust of those you may want to borrow from in the future. Good luck!