University of Arizona law professor Brent White has the radical idea that people who keep paying on underwater mortgages do so to avoid the shame of foreclosure and because of what they think that foreclosure will do to their financial life.
He goes beyond that to say that these kinds of emotional reactions are actively cultivated by the government and others in order to encourage homeowners to honor their financial obligations and to ignore other options that may be legal and make more sense financially.
At the same time, he believes that financial institutions make rational, logical, unemotional decisions based on maximizing profits or minimize losses. His bottom line is that these different ways of approaching the problem makes homeowners suffer more than banks.
Deciding to Stay or Walk
If you want to read the whole paper, feel free to download it. Mortgage311.org has reviewed the paper (rather quickly) and found a few interesting things. He talks about what a homeowner should think about when considering whether to walk away from a mortgage, including what is the current value of one’s home, what is the the cost to rent a similar home, how long the owner intends to stay in the home, and the estimated appreciation or depreciation of the current home.
He states that with this kind of information, plus information on their current mortgage payments, that it would be simple to make a purely financial decision to stay or walk. He also says that one of the biggest worries, a drop in credit score, can be overcome in a couple of years after a foreclosure.
Real Life Is More Complicated
Anyone who has an underwater mortgage and who is able to keep up payments knows that the decision to stay or go is more complicated than just a financial decision. If you walk away from a home mortgage, that means you have to find somewhere else to live, and if it is far enough away, you have to find new schools, hair salons, grocery stores, and maybe even a new job.
If you find yourself in a situation where you have to decide to stay or walk, it won't be an easy decision no matter how much data you have. Before you have to make that decision, it may be better to find another solution, from negotiating with your lender to cutting back in other areas. Whatever you do, make a decision based on both logic and emotion, and make sure you don't make the decision before you have had time to really think it over.
November 21, 2009
The Credit Revolt Movement - Things to Think About Before You Join
Ann Minch, who had been a loyal bank customer for over a decade, and with more than six years using their credit card without any late payments or over limit charges, got a notice from her bank that that credit card interest rate would jump from 12.99% to over 20%. Although she carried a balance on her card, she had never missed a payment or charged beyond her credit limit. It looked as though the bank raised the rates as a way to increase their revenue. She is not alone. Across the US, banks are increasing their interest rates and fees, lowering credit limits, and in some cases canceling accounts of card holders who have not done anything wrong.In many cases, the behavior of individuals doesn't matter. The banks are dealing with normal changes that come with recessions, things like more customers defaulting on loans, they also have to deal with changes coming in early 2010 that will make it harder for banks to change the rules on consumers. Between now and next year, one of the areas where they have an opportunity for profit are from those credit card holders who carry a balance on their cards and who pay at least the minimum every month.
The Beginnings of a Debtor's Revolt
Ann Minch did two things. She decided to revolt against what she thought was an unfair practice be refusing to make any more payments until the bank changed her rate back to the old rate. She also made a YouTube video in September 2009 that had almost half a million by mid-Novmember.
What Happens If You Revolt and Stop Making Payments
Ann's actions attracted a lot of media attention, and that attention probably led the bank to change her rates to the old rates. It's too early to tell if her actions lead to a broader debtor's revolt or to changes in banking policy. One thing is certain--if you follow Ann's lead you may not get the result she got and things may get worse for you. Your bank could cancel your card, and your credit score could go down, making it harder to get a loan or to open up another credit card account.
Whether you stop making payments or keep making payments, the banks will not go away, nor will your need for credit. If you are having trouble with your bank over your credit card, you should think of things to do that won't affect your credit score or leave you stranded with out a credit card.
Things You Can Do if Your Credit Card Goes Bad
If your bank or credit card company has done things like increase your rates, add fees, reduce your credit limit, or has started to hassle you in other ways, there are a bunch of things you can do:
- Talk to your financial institution - You can always ask the fees be taken off, rates reduced, or credit limits changed. If your bank, credit union, or credit card company is reasonable, there is no reason to revolt.
- Close the Account - If you don't want to deal with your current credit card, close your account and go somewhere else. Before you do, make sure where you are going has rules you can live with.
- Transfer Your Balance to Another Card - If you already have another card that allows you to transfer a balance, then you can do that before you close down your old card. Make sure you check to see if there are any fees or other issues you have deal with on the old card or the new one.
- Get Another Card - If you don't have an alternate credit card, you should start looking for one as soon as your current credit card company starts adding restrictions and fees or raising your rates. You should definitely do this while you are in good standing with your other card. If you join the debtor's revolt and stop making payments on your old card, your credit score could drop and you may have problems finding another card on good terms.
- Pay Your Card In Full Each Month - If you don't carry a balance, it really doesn't matter what kind of interest rate your credit card charges. So long as your credit card doesn't do anything else to you like charge fees just to have a card, or reducing your credit limit, you should be OK.
- Stop Using Credit Cards - If you have cards you don't use or need, then close down those accounts. Also, if you use several cards and have trouble keeping track of each account, simplify your life and reduce the number of cards you use. If you can do your normal activities without using a credit card, you may want to kick the credit card habit and go without. Be careful with this step, since many activities such as buying online, ordering by phone, renting cars, or buying plane tickets may be a lot more difficult if you don't have a credit card.
What Is Your Credit Score and How You Can Make It Better
Understanding Credit Card Balance Transfers
November 11, 2009
10 Things to Know About Pawnshops
If you are in a situation where you are under financial stress, especially if you have cash flow issues, or you are looking for anything that will keep you out of mortgage trouble for even one more month, you have to look at all available options. Going to a pawnshop for a short term loan, or even to sell some of your property may be an option worth checking out.
If you have never dealt with a pawnshop or a pawnbroker, you should know a few things before you walk through the door or pick up the phone.
1. What is a pawn shop?
A pawnshop is a business that offers short term loans secured by some kind of property. Depending on the particular pawn shop, it may also buy items outright, or sell new or used items.
2. How is a pawnshop different from a payday loan business?
As explained in an earlier Mortgage311.org article, payday loan businesses give you short term loans based on the fact that you have a regular paycheck. If you don't pay back a pawnshop loan, the pawnshop or pawnbroker will simply keep your item, and you will not be charged any additional fees.
3. How does a pawnshop loan work?
The basic procedure is that you bring in the items that you want to pawn (collateral), the pawn shop determines how much it is worth, and gives you a loan based on the value of your collateral (typically about half the value of the collateral). You then get a cash loan, and have some period of time to pay back the loan and fees (typically up to about 90 days), or to pay a smaller amount to renew the loan.
Once you pay back the loan in full, you get your collateral back. The terms of the loan are typically spelled out in writing on a pawn ticket you receive when you get the loan. The information required on the pawn ticket is often determined by local or state laws. An example of the required information on a pawn ticket is in this sample pawn ticket form from the State of Texas.
4. How big of a loan can I get?
That depends on what kind of collateral you have and on the pawnshop you are using. The loan can be in the tens of dollars or in the tens of thousands of dollars, it all depends on what you have to offer and what kind of deal you can make.
5. What happens if I don't pay the loan back?
If you don't pay back the loan, the pawn shop keeps your collateral.
6. Will getting a loan from a pawnshop affect my credit score?
Pawnshops don't check your credit before giving a loan. The item or items that secure the loan are all that you need to get a loan. Also, if you don't pay back the loan, none of the credit reporting agencies will be told.
7. What kinds of collateral can I use to get a pawnshop loan?
Depending on the pawnshop, you can get a loan on almost anything you can imagine. Because pawnshops have to be able to sell your collateral if a loan isn't paid, what they will take depend on the pawnshop. Typical items include things that are both small and valuable. Jewelry, musical instruments, coins, weapons, home electronics, and collectible items are some examples. Some pawnshops take larger items like cars, boats, or motorcycles.
8. Are pawnshops legal?
Pawnshops are quite legal, and in most states operate under specific rules with respect to where they can operate and what services they can offer to the public. You should be sure to only deal with fully licensed pawn shop to provide the maximum protection to you the consumer.
A variety of federal laws and regulations also apply to pawnshops, pawnbrokers, and their customers. Among them are laws and regulations designed to prevent money laundering, require disclosure of credit terms, protect your personal information, and limit interest rates and fees for military personnel.
9. Do pawnshops only do personal loans?
Pawnshops work with individuals or businesses. What matters is whether your collateral is something the pawnshop wants.
10. Are pawnshops only for poor people?
Pawnshops are for anyone who needs a loan and who has valuable items that can be used for collateral. Although it may surprise many people to hear this, rich people have money problems too. Even someone with a six-figure income can be laid off and have a cash crunch.
November 9, 2009
Know Your Repo Rights - How to Deal with Vehicle Repossession
Most of us need cars, whether we like it or not. If you are having trouble keeping up with your mortgage payments, one of the things that you might want to stop doing is making your car payment or paying for car insurance. Be careful, if you’re late with your car payments, or in some states, if you don’t have adequate auto insurance, your vehicle could be taken away from you.
When you finance or lease a vehicle, your creditor or lessor has important rights that end only when you have paid off your loan or lease obligation. These rights are in the contract you signed and the law of your state. For example, if you don’t make timely payments on the vehicle, your creditor may have the right to “repossess” — or take back your car without going to court or warning you in advance. Your creditor also may be able to sell your contract to a third party, called an assignee, who may have the same right to seize the car as the original creditor. More simply put, if you don't make the payments, you may get a visit from the repo man.
Your creditor’s rights may be limited. Some states impose rules about how your creditor may repossess the vehicle and resell it to reduce or eliminate your debt. Creditors that violate any rules may lose other rights against you, or have to pay you damages. However, you should still know some basics about the repo game.
Seizing the Vehicle
In many states, your creditor can seize your vehicle as soon as you default on your loan or lease. Your contract should state what constitutes a default, but failure to make a payment on time is a typical example.
However, if your creditor agrees to change your payment date, the terms of your original contract may not apply any longer. If your creditor agrees to such a change, make sure you have it in writing.
Once you are in default, the laws of most states permit the creditor to repossess your car at any time, without notice, and to come onto your property to do so. But when seizing the vehicle, your creditor may not commit a “breach of the peace.” In some states, that means using physical force, threats of force, or even removing your car from a closed garage without your permission. If something like this is happening to you, avoid confrontation and call the cops.
Should there be a breach of the peace in seizing your car, your creditor may be required to pay a penalty or to compensate you if any harm is done to you or your property. A breach of peace also may give you a legal defense if your creditor sues you to collect a “deficiency judgment” — that is, the difference between what you owe on the contract (plus repossession and sale expenses) and what your creditor gets from the resale of your vehicle.
Selling the Vehicle
Once your vehicle has been repossessed, your creditor may decide to either keep it as compensation for your debt or resell it in a public or private sale. In some states, your creditor must let you know what will happen to the car. For example, if the car will be sold at public auction, state law may require that the creditor tell you the time and place of the sale so that you can attend and participate in the bidding. If the vehicle will be sold privately, you may have a right to know the date of the sale.
In any of these circumstances, you may be entitled to “redeem” — or buy back — the vehicle by paying the full amount you owe (usually, that includes your past due payments and the entire remaining debt), in addition to the expenses connected with the repossession, like storage, preparation for sale, and attorney fees. Or you could try to buy back the vehicle by bidding on it at the repossession sale.
Some states have consumer protection laws that allow you to “reinstate” your loan. This means you can reclaim your car by paying the amount you are behind on your loan, together with your creditor’s repossession expenses. Of course, if you reclaim your car, your future payments must be made on time, and you must meet the terms of your reinstated contract to avoid another repossession.
Any resale of a repossessed vehicle must be conducted in a “commercially reasonable manner.” Your creditor doesn’t have to get the highest possible price for the vehicle — or even a good price. But a resale price that is below fair market value may indicate that the sale was not commercially reasonable. “Commercially reasonable” may depend on the standard sales practices in your area. A creditor’s failure to resell your car in a commercially reasonable manner may give you a claim against that creditor for damages or a defense against a deficiency judgment.
Personal Property in the Vehicle
Regardless of the method used to dispose of a repossessed car, a creditor may not keep or sell any personal property found inside. In some states, your creditor must tell you what personal items were found in your car and how you can retrieve them. Your creditor also may be required to use reasonable care to prevent anyone else from removing your property from the car. If your creditor can’t account for articles left in your vehicle, you may want to speak to an attorney about your right to compensation.
If your vehicle (car, boat, ATV, etc.) is at risk of being repossessed, you should make sure that you keep valuable items, especially cash, checkbooks, mail, IDs, etc. out of the vehicle.
Paying the Deficiency
Any difference between what you owe on your contract (plus certain expenses) and what your creditor gets for reselling the vehicle is called a “deficiency.” For example, if you owe $10,000 on the car and your creditor sells it for $7,500, the deficiency is $2,500 plus any other fees you owe under the contract. Those might include fees related to the repossession and early termination of your lease or early payoff of your financing. In most states, your creditor is allowed to sue you for a deficiency judgment to collect the remaining amount owed as long as it followed the proper procedures for repossession and sale. Similarly, your creditor must pay you if there are surplus funds after the sale proceeds are applied to the outstanding contract obligation and related expenses, but this situation is less common.
You may have a legal defense against a deficiency judgment if, for example, your creditor breached the peace when seizing the vehicle, failed to sell the car in a commercially reasonable manner, or waited too long before suing you. An attorney will be able to tell you whether you have grounds to contest a deficiency judgment.
It is a good idea to keep as much information about the repossession in writing or in some other form. For example, if your garage was opened to get to a car, take pictures of the garage and surrounding area. If you filed a police report, get the report number or the actual report.
Electronic Disabling Devices
Some creditors might not provide you with financing unless you agree to the installation of an electronic device that prevents your car from starting if you do not make your payments on time. Depending on your contract with the lender and your state’s laws, using that sort of device may be considered the same as a repossession or a breach of the peace. How your state treats the use of these devices could affect your rights. Contact your state consumer protection agency or an attorney if you have questions about the use of these devices in your state.
Talking with Your Creditor or Lessor
It’s easier to try to prevent a vehicle repossession from taking place than to dispute it after the fact. Contact your creditor as soon as you realize you will be late with a payment. Many creditors work with consumers they believe will be able to pay soon, even if slightly late. You may be able to negotiate a delay in your payment or a revised schedule of payments. If you can reach an agreement to change your original contract, get it in writing to avoid questions later.
However, your creditor or lessor may refuse to accept late payments or make other changes in your contract — and may demand that you return the car. If you agree to a “voluntary repossession,” you may reduce your creditor’s expenses, which you would be responsible for paying. But even if you return the car voluntarily, you still are responsible for paying any deficiency on your contract, and your creditor still may enter the late payments or repossession on your credit report.
Finally, if you are facing, or already in, bankruptcy, ask an attorney for information about your rights to the vehicle during that process.
When you finance or lease a vehicle, your creditor or lessor has important rights that end only when you have paid off your loan or lease obligation. These rights are in the contract you signed and the law of your state. For example, if you don’t make timely payments on the vehicle, your creditor may have the right to “repossess” — or take back your car without going to court or warning you in advance. Your creditor also may be able to sell your contract to a third party, called an assignee, who may have the same right to seize the car as the original creditor. More simply put, if you don't make the payments, you may get a visit from the repo man.
Your creditor’s rights may be limited. Some states impose rules about how your creditor may repossess the vehicle and resell it to reduce or eliminate your debt. Creditors that violate any rules may lose other rights against you, or have to pay you damages. However, you should still know some basics about the repo game.
Seizing the Vehicle
In many states, your creditor can seize your vehicle as soon as you default on your loan or lease. Your contract should state what constitutes a default, but failure to make a payment on time is a typical example.
However, if your creditor agrees to change your payment date, the terms of your original contract may not apply any longer. If your creditor agrees to such a change, make sure you have it in writing.
Once you are in default, the laws of most states permit the creditor to repossess your car at any time, without notice, and to come onto your property to do so. But when seizing the vehicle, your creditor may not commit a “breach of the peace.” In some states, that means using physical force, threats of force, or even removing your car from a closed garage without your permission. If something like this is happening to you, avoid confrontation and call the cops.
Should there be a breach of the peace in seizing your car, your creditor may be required to pay a penalty or to compensate you if any harm is done to you or your property. A breach of peace also may give you a legal defense if your creditor sues you to collect a “deficiency judgment” — that is, the difference between what you owe on the contract (plus repossession and sale expenses) and what your creditor gets from the resale of your vehicle.
Selling the Vehicle
Once your vehicle has been repossessed, your creditor may decide to either keep it as compensation for your debt or resell it in a public or private sale. In some states, your creditor must let you know what will happen to the car. For example, if the car will be sold at public auction, state law may require that the creditor tell you the time and place of the sale so that you can attend and participate in the bidding. If the vehicle will be sold privately, you may have a right to know the date of the sale.
In any of these circumstances, you may be entitled to “redeem” — or buy back — the vehicle by paying the full amount you owe (usually, that includes your past due payments and the entire remaining debt), in addition to the expenses connected with the repossession, like storage, preparation for sale, and attorney fees. Or you could try to buy back the vehicle by bidding on it at the repossession sale.
Some states have consumer protection laws that allow you to “reinstate” your loan. This means you can reclaim your car by paying the amount you are behind on your loan, together with your creditor’s repossession expenses. Of course, if you reclaim your car, your future payments must be made on time, and you must meet the terms of your reinstated contract to avoid another repossession.
Any resale of a repossessed vehicle must be conducted in a “commercially reasonable manner.” Your creditor doesn’t have to get the highest possible price for the vehicle — or even a good price. But a resale price that is below fair market value may indicate that the sale was not commercially reasonable. “Commercially reasonable” may depend on the standard sales practices in your area. A creditor’s failure to resell your car in a commercially reasonable manner may give you a claim against that creditor for damages or a defense against a deficiency judgment.
Personal Property in the Vehicle
Regardless of the method used to dispose of a repossessed car, a creditor may not keep or sell any personal property found inside. In some states, your creditor must tell you what personal items were found in your car and how you can retrieve them. Your creditor also may be required to use reasonable care to prevent anyone else from removing your property from the car. If your creditor can’t account for articles left in your vehicle, you may want to speak to an attorney about your right to compensation.
If your vehicle (car, boat, ATV, etc.) is at risk of being repossessed, you should make sure that you keep valuable items, especially cash, checkbooks, mail, IDs, etc. out of the vehicle.
Paying the Deficiency
Any difference between what you owe on your contract (plus certain expenses) and what your creditor gets for reselling the vehicle is called a “deficiency.” For example, if you owe $10,000 on the car and your creditor sells it for $7,500, the deficiency is $2,500 plus any other fees you owe under the contract. Those might include fees related to the repossession and early termination of your lease or early payoff of your financing. In most states, your creditor is allowed to sue you for a deficiency judgment to collect the remaining amount owed as long as it followed the proper procedures for repossession and sale. Similarly, your creditor must pay you if there are surplus funds after the sale proceeds are applied to the outstanding contract obligation and related expenses, but this situation is less common.
You may have a legal defense against a deficiency judgment if, for example, your creditor breached the peace when seizing the vehicle, failed to sell the car in a commercially reasonable manner, or waited too long before suing you. An attorney will be able to tell you whether you have grounds to contest a deficiency judgment.
It is a good idea to keep as much information about the repossession in writing or in some other form. For example, if your garage was opened to get to a car, take pictures of the garage and surrounding area. If you filed a police report, get the report number or the actual report.
Electronic Disabling Devices
Some creditors might not provide you with financing unless you agree to the installation of an electronic device that prevents your car from starting if you do not make your payments on time. Depending on your contract with the lender and your state’s laws, using that sort of device may be considered the same as a repossession or a breach of the peace. How your state treats the use of these devices could affect your rights. Contact your state consumer protection agency or an attorney if you have questions about the use of these devices in your state.
Talking with Your Creditor or Lessor
It’s easier to try to prevent a vehicle repossession from taking place than to dispute it after the fact. Contact your creditor as soon as you realize you will be late with a payment. Many creditors work with consumers they believe will be able to pay soon, even if slightly late. You may be able to negotiate a delay in your payment or a revised schedule of payments. If you can reach an agreement to change your original contract, get it in writing to avoid questions later.
However, your creditor or lessor may refuse to accept late payments or make other changes in your contract — and may demand that you return the car. If you agree to a “voluntary repossession,” you may reduce your creditor’s expenses, which you would be responsible for paying. But even if you return the car voluntarily, you still are responsible for paying any deficiency on your contract, and your creditor still may enter the late payments or repossession on your credit report.
Finally, if you are facing, or already in, bankruptcy, ask an attorney for information about your rights to the vehicle during that process.
November 5, 2009
What Is Your Credit Score and How You Can Make It Better
There are quite a few myths and rumors about what your credit score is and how you can make it better. Knowing the facts from the fiction is important if you want to have an easier time getting your loan approved or even getting a credit card.
What Is a Credit Score?
A credit score is part of a system creditors (like banks and mortgage companies) use to help determine whether to give you credit. It also may be used to help decide the terms you are offered or the rate you will pay for the loan. The most widely used credit scoring system creates a FICO score, which can be as low as 300 and and as high as 850. Generally, a score in the 700s is a good score, and one below 600 is not so good.
Information about you and your credit experiences, like your bill paying history, the number and type of accounts you have, whether you pay your bills by the date they’re due, collection actions, outstanding debt, and the age of your accounts, is collected from your credit report. Creditors compare this information to the loan repayment history of consumers with similar profiles. For example, a credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points — a credit score — helps predict how creditworthy you are — how likely it is that you will repay a loan and make the payments when they’re due.
Why Should I Care About My Credit Score?
If your score is high, that means you are a lower than average credit risk and you would likely get a loan with a higher loan with a lower interest rate. If you have a lower score, you may still get a loan, but for a smaller amount at a higher interest rate. If your score is low enough, you may not be able to get a loan from a bank, or even a credit card. The better your credit, the higher your credit score and the lower the risk to a bank or other creditor.
How Can I Get a High Credit Score?
Your credit score is a reflection of your financial life. If you have been responsible when it comes to paying bills on time, and don't miss loan payments on expensive items like cars and homes, you are doing many of the right things for a high score. If your credit report indicates that you have paid bills late, had an account referred to collections, or declared bankruptcy, then your score may drop.
Many scoring systems look at how close you are to reaching your credit limits. If you are close to maxing out your credit cards or home equity loans, then your score can drop. If you have a long credit history with a record of on-time payments, that is also a good thing for your score.
The number and type of accounts you have could also raise or drop your score. Although it is generally considered a plus to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many scoring systems consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may have a negative effect on your credit score.
Every time you apply for credit or a loan from some business, credit reporting agencies will receive and inquiry from that business. Many inquiries over a short time is a signal that you are looking for more credit, which means you are looking to take on more debt. In most cases, this will lower your score.
Surprisingly, your score may get lower if you reduce the amount of available credit that you have. It makes sense that having too many loans and credit card debt may lower your score because it means a greater risk of not paying on time. There are some cases where you may be doing what you think is the right thing, but it may hurt your score. For example, if you have four credit cards with a a $10,000 limit but zero balance, and one card with the same limit but a $5,000 balance, you are using 10% of your available credit. If you decide to cancel all the zero balance cards, you are now using 50% of your available credit. Depending on your other financial activities, a credit reporting agency may focus on the increase in the percentage of available credit used and reduce your credit score.
Your Credit and Your Life
Think about your credit report as a story about your financial life. Not the story of you as a person but the story of your financial habits and behavior. It doesn't include your entire history. Credit reporting agencies may not care about your good behavior with credit cards you had 20 years ago, but they will care very much about your current cards. Bad financial events in the distance past may not matter much on your credit report now, but serious recent events like personal bankruptcies certainly will.
What About These Credit Repair Companies I Hear About?
The short story is there is no shortcuts to better credit, most of the companies that promise to improve your credit won't be able to do that, but you won't find out until long after they have taken your money.
Other Mortgage311.org articles cover credit repair scams. If you were denied credit or didn't get the kind of terms you think you deserve, it may be because of a mistake on your credit report, there are steps you can take to correct errors in your report, but the bottom line is that in most cases, you have the score that you deserve. If you make an effort to practice financial discipline and avoid the financial traps that lead to lower scores, your score will rise over time.
What Is a Credit Score?
A credit score is part of a system creditors (like banks and mortgage companies) use to help determine whether to give you credit. It also may be used to help decide the terms you are offered or the rate you will pay for the loan. The most widely used credit scoring system creates a FICO score, which can be as low as 300 and and as high as 850. Generally, a score in the 700s is a good score, and one below 600 is not so good.
Information about you and your credit experiences, like your bill paying history, the number and type of accounts you have, whether you pay your bills by the date they’re due, collection actions, outstanding debt, and the age of your accounts, is collected from your credit report. Creditors compare this information to the loan repayment history of consumers with similar profiles. For example, a credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points — a credit score — helps predict how creditworthy you are — how likely it is that you will repay a loan and make the payments when they’re due.
Why Should I Care About My Credit Score?
If your score is high, that means you are a lower than average credit risk and you would likely get a loan with a higher loan with a lower interest rate. If you have a lower score, you may still get a loan, but for a smaller amount at a higher interest rate. If your score is low enough, you may not be able to get a loan from a bank, or even a credit card. The better your credit, the higher your credit score and the lower the risk to a bank or other creditor.
How Can I Get a High Credit Score?
Your credit score is a reflection of your financial life. If you have been responsible when it comes to paying bills on time, and don't miss loan payments on expensive items like cars and homes, you are doing many of the right things for a high score. If your credit report indicates that you have paid bills late, had an account referred to collections, or declared bankruptcy, then your score may drop.
Many scoring systems look at how close you are to reaching your credit limits. If you are close to maxing out your credit cards or home equity loans, then your score can drop. If you have a long credit history with a record of on-time payments, that is also a good thing for your score.
The number and type of accounts you have could also raise or drop your score. Although it is generally considered a plus to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many scoring systems consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may have a negative effect on your credit score.
Every time you apply for credit or a loan from some business, credit reporting agencies will receive and inquiry from that business. Many inquiries over a short time is a signal that you are looking for more credit, which means you are looking to take on more debt. In most cases, this will lower your score.
Surprisingly, your score may get lower if you reduce the amount of available credit that you have. It makes sense that having too many loans and credit card debt may lower your score because it means a greater risk of not paying on time. There are some cases where you may be doing what you think is the right thing, but it may hurt your score. For example, if you have four credit cards with a a $10,000 limit but zero balance, and one card with the same limit but a $5,000 balance, you are using 10% of your available credit. If you decide to cancel all the zero balance cards, you are now using 50% of your available credit. Depending on your other financial activities, a credit reporting agency may focus on the increase in the percentage of available credit used and reduce your credit score.
Your Credit and Your Life
Think about your credit report as a story about your financial life. Not the story of you as a person but the story of your financial habits and behavior. It doesn't include your entire history. Credit reporting agencies may not care about your good behavior with credit cards you had 20 years ago, but they will care very much about your current cards. Bad financial events in the distance past may not matter much on your credit report now, but serious recent events like personal bankruptcies certainly will.
What About These Credit Repair Companies I Hear About?
The short story is there is no shortcuts to better credit, most of the companies that promise to improve your credit won't be able to do that, but you won't find out until long after they have taken your money.
Other Mortgage311.org articles cover credit repair scams. If you were denied credit or didn't get the kind of terms you think you deserve, it may be because of a mistake on your credit report, there are steps you can take to correct errors in your report, but the bottom line is that in most cases, you have the score that you deserve. If you make an effort to practice financial discipline and avoid the financial traps that lead to lower scores, your score will rise over time.
November 2, 2009
How to Correct Mistakes on Your Credit Report for Free
Your credit report contains information about where you live, how you pay your bills, and whether you’ve been sued or arrested, or have filed for bankruptcy. Consumer reporting companies sell the information in your report to creditors, insurers, employers, and other businesses that use it to evaluate your applications for credit, insurance, employment, or renting a home.
It is very important that you make sure that the information in your credit report is accurate. A good credit score can mean the difference between getting a loan with a great interest rate and not getting a loan at all. If you think that one or more items in your credit report are wrong or misleading, or if you think information that would help you is missing, then you should take some steps to correct any mistakes and omissions you find in the report.
If you think that there are mistakes on your credit report, you don't have to spend a lot of money to get them fixed. You may be able to take care of all or most of your credit report problems for little or no money. Follow these simple steps to get yourself on the path to a better credit report.
Step 1: Tell the consumer reporting company, in writing, what information you think is inaccurate. Include copies (NOT originals) of any documents that support your position. In addition to providing your complete name and address, your letter should identify each item in your report you dispute; state the facts and the reasons you dispute the information, and ask that it be removed or corrected. You may want to enclose a copy of your report, and circle the items in question. Send your letter by certified mail, “return receipt requested,” so you can document that the consumer reporting company received it. Keep copies of your dispute letter and enclosures.
Your letter may look something like the one below:
Consumer reporting companies must investigate the items you question within 30 days — unless they consider your dispute frivolous. They also must forward all the relevant data you provide about the inaccuracy to the organization that provided the information. After the information provider receives notice of a dispute from the consumer reporting company, it is required to investigate, review the relevant information, and report the results back to the consumer reporting company. If this investigation reveals that the disputed information is inaccurate, the information provider has to notify the nationwide consumer reporting companies so they can correct it in your file.
When the investigation is complete, the consumer reporting company must give you the results in writing, too, and a free copy of your report if the dispute results in a change. If an item is changed or deleted, the consumer reporting company is not permitted to put the disputed information back in your file unless the information provider verifies that it is accurate and complete. The consumer reporting company also must send you written notice that includes the name, address, and phone number of the information provider. If you ask, the consumer reporting company must send notices of any correction to anyone who received your report in the past six months. You also can ask that a corrected copy of your report be sent to anyone who received a copy during the past two years for employment purposes.
If an investigation doesn’t resolve your dispute with the consumer reporting company, you can ask that a statement of the dispute be included in your file and in future reports. You also can ask the consumer reporting company to provide your statement to anyone who received a copy of your report in the recent past. You can expect to pay for this service.
Step 2: Tell the creditor or other information provider, in writing, that you dispute an item. Be sure to include copies (NOT originals) of documents that support your position. Many providers specify an address for disputes. If the provider reports the item to a consumer reporting company, it must include a notice of your dispute. And if you are correct — that is, if the information is found to be inaccurate — the information provider may not report it again.
Adding Accounts to Your File
Your credit file may not reflect all your credit accounts. Although most national department store and all-purpose bank credit card accounts will be included in your file, not all creditors supply information to consumer reporting companies: some local retailers, credit unions, travel, entertainment, and gasoline card companies are among the creditors that don’t.
If you’ve been told that you were denied credit because of an “insufficient credit file” or “no credit file” and you have accounts with creditors that don’t appear in your credit file, ask the consumer reporting companies to add this information to future reports. Although they are not required to do so, many consumer reporting companies will add verifiable accounts for a fee. However, understand that if these creditors do not report to the consumer reporting company on a regular basis, the added items will not be updated in your file.
When negative information in your report is accurate, only the passage of time can assure its removal. A consumer reporting company can report most accurate negative information for seven years and bankruptcy information for 10 years. Information about an unpaid judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer. There is no time limit on reporting: information about criminal convictions; information reported in response to your application for a job that pays more than $75,000 a year; and information reported because you’ve applied for more than $150,000 worth of credit or life insurance. There is a standard method for calculating the seven-year reporting period. Generally, the period runs from the date that the event took place.
Why Everyone Should Check Their Credit Report
Regardless of your credit history, financial advisors and consumer advocates recommend reviewing your credit report periodically for three important reasons:
Getting Your Credit Reports for Free
Federal law requires each of the nationwide consumer reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months.
The three nationwide consumer reporting companies have set up a central website, a toll-free telephone number, and a mailing address through which you can order your free annual report. To order, visit annualcreditreport.com, call 1-877-322-8228, or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. Do not contact the three nationwide consumer reporting companies individually. They are providing free annual credit reports only through annualcreditreport.com, 1-877-322-8228, and Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.
You may order your reports from each of the three nationwide consumer reporting companies at the same time, or you can order your report from each of the companies one at a time. The law allows you to order one free copy of your report from each of the nationwide consumer reporting companies every 12 months.
For more details, visit the Federal Trade Commission's web site.
It is very important that you make sure that the information in your credit report is accurate. A good credit score can mean the difference between getting a loan with a great interest rate and not getting a loan at all. If you think that one or more items in your credit report are wrong or misleading, or if you think information that would help you is missing, then you should take some steps to correct any mistakes and omissions you find in the report.
If you think that there are mistakes on your credit report, you don't have to spend a lot of money to get them fixed. You may be able to take care of all or most of your credit report problems for little or no money. Follow these simple steps to get yourself on the path to a better credit report.
Step 1: Tell the consumer reporting company, in writing, what information you think is inaccurate. Include copies (NOT originals) of any documents that support your position. In addition to providing your complete name and address, your letter should identify each item in your report you dispute; state the facts and the reasons you dispute the information, and ask that it be removed or corrected. You may want to enclose a copy of your report, and circle the items in question. Send your letter by certified mail, “return receipt requested,” so you can document that the consumer reporting company received it. Keep copies of your dispute letter and enclosures.
Your letter may look something like the one below:
Sample Dispute Letter
Date
Your Name
Your Address,
City, State, Zip Code
Complaint Department
Name of Company
Address
City, State, Zip Code
Dear Sir or Madam:
I am writing to dispute the following information in my file. The items I dispute also are encircled on the attached copy of the report I received.
This item (identify item(s) disputed by name of source, such as creditors or tax court, and identify type of item, such as credit account, judgment, etc.) is (inaccurate or incomplete) because (describe what is inaccurate or incomplete and why). I am requesting that the item be deleted (or request another specific change) to correct the information.
Enclosed are copies of (use this sentence if applicable and describe any enclosed documentation, such as payment records, court documents) supporting my position. Please investigate this (these) matter(s) and (delete or correct) the disputed item(s) as soon as possible.
Sincerely,
Your name
Enclosures: (List what you are enclosing.)
Date
Your Name
Your Address,
City, State, Zip Code
Complaint Department
Name of Company
Address
City, State, Zip Code
Dear Sir or Madam:
I am writing to dispute the following information in my file. The items I dispute also are encircled on the attached copy of the report I received.
This item (identify item(s) disputed by name of source, such as creditors or tax court, and identify type of item, such as credit account, judgment, etc.) is (inaccurate or incomplete) because (describe what is inaccurate or incomplete and why). I am requesting that the item be deleted (or request another specific change) to correct the information.
Enclosed are copies of (use this sentence if applicable and describe any enclosed documentation, such as payment records, court documents) supporting my position. Please investigate this (these) matter(s) and (delete or correct) the disputed item(s) as soon as possible.
Sincerely,
Your name
Enclosures: (List what you are enclosing.)
Consumer reporting companies must investigate the items you question within 30 days — unless they consider your dispute frivolous. They also must forward all the relevant data you provide about the inaccuracy to the organization that provided the information. After the information provider receives notice of a dispute from the consumer reporting company, it is required to investigate, review the relevant information, and report the results back to the consumer reporting company. If this investigation reveals that the disputed information is inaccurate, the information provider has to notify the nationwide consumer reporting companies so they can correct it in your file.
When the investigation is complete, the consumer reporting company must give you the results in writing, too, and a free copy of your report if the dispute results in a change. If an item is changed or deleted, the consumer reporting company is not permitted to put the disputed information back in your file unless the information provider verifies that it is accurate and complete. The consumer reporting company also must send you written notice that includes the name, address, and phone number of the information provider. If you ask, the consumer reporting company must send notices of any correction to anyone who received your report in the past six months. You also can ask that a corrected copy of your report be sent to anyone who received a copy during the past two years for employment purposes.
If an investigation doesn’t resolve your dispute with the consumer reporting company, you can ask that a statement of the dispute be included in your file and in future reports. You also can ask the consumer reporting company to provide your statement to anyone who received a copy of your report in the recent past. You can expect to pay for this service.
Step 2: Tell the creditor or other information provider, in writing, that you dispute an item. Be sure to include copies (NOT originals) of documents that support your position. Many providers specify an address for disputes. If the provider reports the item to a consumer reporting company, it must include a notice of your dispute. And if you are correct — that is, if the information is found to be inaccurate — the information provider may not report it again.
Adding Accounts to Your File
Your credit file may not reflect all your credit accounts. Although most national department store and all-purpose bank credit card accounts will be included in your file, not all creditors supply information to consumer reporting companies: some local retailers, credit unions, travel, entertainment, and gasoline card companies are among the creditors that don’t.
If you’ve been told that you were denied credit because of an “insufficient credit file” or “no credit file” and you have accounts with creditors that don’t appear in your credit file, ask the consumer reporting companies to add this information to future reports. Although they are not required to do so, many consumer reporting companies will add verifiable accounts for a fee. However, understand that if these creditors do not report to the consumer reporting company on a regular basis, the added items will not be updated in your file.
When negative information in your report is accurate, only the passage of time can assure its removal. A consumer reporting company can report most accurate negative information for seven years and bankruptcy information for 10 years. Information about an unpaid judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer. There is no time limit on reporting: information about criminal convictions; information reported in response to your application for a job that pays more than $75,000 a year; and information reported because you’ve applied for more than $150,000 worth of credit or life insurance. There is a standard method for calculating the seven-year reporting period. Generally, the period runs from the date that the event took place.
Why Everyone Should Check Their Credit Report
Regardless of your credit history, financial advisors and consumer advocates recommend reviewing your credit report periodically for three important reasons:
- The information in your credit report affects whether you can get a loan or insurance — and how much you will have to pay for it.
- It’s important to make sure the information is accurate, complete, and up-to-date before you apply for a loan for a major purchase like a house or car, buy insurance, or apply for a job.
- It can help you deter, detect and defend against identity theft. That’s when someone uses your personal information — like your name, your Social Security number, or your credit card number — to commit fraud. Identity thieves may use your information to open a new credit card account in your name. Then, when they don’t pay the bills, the delinquent account is reported on your credit report. Inaccurate information like that could affect your ability to get credit, insurance, or even a job.
Getting Your Credit Reports for Free
Federal law requires each of the nationwide consumer reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months.
The three nationwide consumer reporting companies have set up a central website, a toll-free telephone number, and a mailing address through which you can order your free annual report. To order, visit annualcreditreport.com, call 1-877-322-8228, or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. Do not contact the three nationwide consumer reporting companies individually. They are providing free annual credit reports only through annualcreditreport.com, 1-877-322-8228, and Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.
You may order your reports from each of the three nationwide consumer reporting companies at the same time, or you can order your report from each of the companies one at a time. The law allows you to order one free copy of your report from each of the nationwide consumer reporting companies every 12 months.
For more details, visit the Federal Trade Commission's web site.
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