If you have any credit score repair questions, send me an email: famouskjohns@gmail.com. I also offer free credit repair services / consumer credit counseling service. Simply post a link to my website somewhere on the web, and I will help get just about anything off your credit:). Before you consider accepting a bad credit loan, whether for a home, car, or personal loan, please follow the simple steps for credit repair I have outlined below. Believe it or not, fixing your credit is easier than it seems, and your bad credit history can easily become a thing of the past.
Two years ago, despite having no credit card debt, I found myself with a FICO credit score of around 500, in the bottom 7% of the population. How did this happen?
I paid a credit card more than 60 days late
I paid another credit card more than 30 days late
For 8 years, I moved every single year. In this time, I ended up never making the final payments on a cable bill, an electricity bill, a gas bill, and 2 phone bills.
I didn't pay a $3000 hospital bill.
An apartment sent me a $1400 bill for damage to the carpets and cleaning which I refused to pay.
All of these items were legitimate, yet today not a single one can be found on my credit report, and my credit scores are in the mid 700s.
This story began when I decided that, at age 32, I should own a home. I live in Florida, which is a homestead state1, so putting money into a house would protect me in other ways as well. After looking at a few places, I called a mortgage broker to see what kind of loan I would be eligible for. He had bad news: with only limited credit card history and no other mortgage or loan history on my record, along with a dozen derogatory items, no lender would give me a dime. Still, I wanted a house, and I have what is known as 'rich man's son syndrome': I am used to getting what I want. Thus began my quest for a perfect credit score.
I talked to a lawyer who is in the collections industry and several mortgage brokers, and the consensus was that I would have to wait a few years before my credit score would recover. Technically, after 7 years a derogatory item on your credit report must be removed; after about 2 years it weighs less heavily on your score. I had no desire to wait years for my credit to improve, so I started a shock and awe campaign to improve my score. Twelve months later, I didn’t have a single derogatory item on my credit report. My credit report with Experian, Transunion, and Equifax all show 0 derogatory entries. No late payments, no paid collections - nothing. My credit is perfect and my credit scores are all in the 700s.
The first step I took was paying off all my smaller debts. A month later, I pulled my credit score again and it had barely gone up. After further investigation, I determined that this was because I was still left with about 10 derogatory entries on my credit report related to the debts I had just paid off. A paid collection item on your credit report is better than an unpaid collection, but it looks bad to lenders, regardless. Having a paid collection in your history makes you statistically more likely to fail to repay a loan, thus your credit score is lowered.
I needed the paid collection derogatory entries removed from my credit report, so I disputed every one of them with all 3 credit bureaus. I highly recommend disputing online, but you can also do this in writing, by fax, or by telephone. After you dispute the item, the credit bureau will notify the reporting party that you have disputed their claim. The offending party then has 30 days to respond to the credit bureau in writing with proof that the charge is yours or the entry will automatically be deleted from your report. The beauty of this system (for those with bad credit) is that the burden is on the collection agencies to do actual work. If you have already paid off your debt, the collection agency has no financial incentive to do work. They already have your money and it doesn’t help them in any tangible way to have a derogatory item sitting on your credit report. For this reason, I assume, my initial disputes to the credit bureaus eliminated about half of the paid collection derogatory items on my report.
For the remaining items, I began a massive letter writing a campaign to the collection agencies and original creditors. I accused them of fraud, claimed to have never lived at the address where the bill originated, claimed I paid the debt on time, threatened to report them to their state’s attorney general, the better business bureau, and I even filed one lawsuit in small claims court2. The initial letters eliminated a few more of the ‘paid collection’ items on my credit. Over time, with more disputes and letters, the derogatory items slowly trickled off my credit, until one day they were all completely gone. If you send the letters with signature confirmation required, they will be taken more seriously. I have included links to form letters to the credit bureaus and your creditors at the bottom of this page. This method will probably not work if you actually still owe the creditor money.
After these initial disputes and letters, I was still left with a few derogatory items on my credit report: two unpaid debts and two late payments to credit card companies.
The unpaid debts turned out to be very easy to get off my score. I called up the collection agencies and told them “I’ll pay this debt immediately, if you remove it from my score altogether instead of marking it as a paid debt.” In both cases, they accepted my offer, I paid the debt, and the mark was removed altogether from my credit within 2 months. If I had known this technique in the start, I could probably have avoided having all the ‘paid collection’ items in the first place. The key to this is insisting on absolute removal of the item from your record, not marking it paid.
Now I was left with only two derogatory items on my report: the late payments to my credit card providers. I wrote letters to my credit card companies stating that I had been a very good client of theirs for years, and that it was insulting for them to mar my credit based on “their carelessness”. I wrote that I had changed addresses, and when I moved I called up their customer service office and told them my new address. How could I be responsible for their customer service department’s poor execution? Surprisingly, they believed my claims (or at least didn’t care enough to dispute them) and deleted the late payments from my score.
After a year of work, I have a completely clean credit record. I bought a $400,000 home putting only 10% down, got a great interest rate, and I don’t even have a job. I can get car loans and $10,000 limits on my credit cards. It’s amazing what good credit can do. The moral of the story, however, is that when it comes to credit, an ounce of prevention is worth a pound of cure. I should have been careful to pay all my bills on time in the first place and that is the most important advice I can give anyone: protect your credit like your firstborn. It’s very easy to get bad credit and very hard to improve it once you do. My techniques didn’t avoid a dime of debt, and I spent countless hours working to get all the negative entries removed from my credit.
The purpose of this article was to outline a few non-standard techniques -- that are not supposed to work, but do -- for improving your score and provide some basic credit information. Credit is a difficult topic to completely understand because the exact method for calculating credit scores is kept secret. There are a plethora of websites available to provide you with conventional information on how to improve your credit score and what your credit score means. The suggestions these sites have for improving your credit score are useful and important to understand, but they take years to become effective. If you have multiple derogatory entries, their advice won’t help you for a long time.
Here are some important credit tidbits I discovered on my journey up the credit ladder.
Loan cosigners won't help you:
Having your parents cosign a loan won't help you. You'd have to put the loan entirely in their name for it to be much use, and that presents another series of ownership and taxation problems. It also won't help build your own credit. I haven't figured this one out entirely, but it must come down to the same statistics and probabilities that determine everything else: Having a parent cosigner doesn't make someone with bad credit less likely to default.
One derogatory item can have a significant impact on your score:
If you have a perfect credit history, one new late payment of more than 30 days can lower your score over 100 points. Why is this? Again, its just statistics. If you spent your entire life making credit card payments on time, and then all of a sudden you make a late payment, there is a good chance that you are having a financial problem, which makes you more of a risk. After a couple of years, derogatory items start affecting your score less (but still significantly), but they remain on your report for seven years.
Credit cards are a great way to build credit from a young age:
Revolving credit (credit cards) is an important factory in your credit score. If you don’t have credit cards, get them. For credit purposes, you should have 2-4 credit cards. You should owe less than 25% of the limit on your credit cards, or your score will go down. The longer you have had your credit cards without making a payment late by more than 30 days, the higher your score will go. Improving your credit score in this way takes a long time, but it is ultimately necessary and a good reason to get a credit card immediately, no matter how young you are.
Credit inquiries affect your score, but not much:
FICO scores only count inquiries from the past year. Each recent inquiry on your credit score can drop your score by 2-4 points. Pulling your own credit does not affect your score so you can do it as often as you would like. This means that you can check your score as often as you would like using online services. When a mortgage broker pulls your credit score for you, your score will go down. When I was trying to improve my score, I signed up for the monthly subscription program for each site, so that I could pull my score for free as often as I liked to keep up to date on the status of my disputes.
Online credit scores sometimes differ from the scores your mortgage broker will tell you:
Your credit score is calculated using a proprietary and secret formula that is not available to the public or to most online sites. The online sites use a best guess approximation of the formula to generate your score, which can be fairly inaccurate. When your mortgage broker pulls your score, he gets the real deal. I experienced this personally when experian.com was telling me my credit score was 650 and my mortgage broker was telling me the score was 600, based on the exact same information.
You can improve your score by putting your name on a family remembers credit card:
Find an older family member or friend who trusts you completely, and have them add you as a cardholder on their oldest credit card. Make sure that the credit card company understands that this is to be done to help your credit score and that they ask for your social security number. Also make sure that they verify this card has never had a late payment. Once you are added, the payment history of the card will be added to your credit score.
Moving is dangerous for your credit:
Lenders like to see stability. Some websites claim that changing addresses often can hurt your credit. When you move, make sure to forward your mail so bills don’t get lost. You can forward your mail using the United States Postal Service change of address form.
Beware of alternative loans such as minimum payment loans:
Minimum payment loans are not inherently evil. They can get you into a home you couldn't otherwise afford. Be careful with them, however. Mortgage brokers often push these loans on you because they get paid an obscene amount of money for them. A broker can make 3% of the total loan value on certain minimum payment loans. This would be $30,000 on a $1,000,000 loan. Mortgage interest rates tend to be higher on these loans. Why do lenders pay so much for these loans? Obviously, because the loan terms are very unfavorable to the borrower and the lender is making a fortune on it. Try to remember this next time your mortgage broker is telling you about that great 1.9% interest loan he can get you.
Your mortgage broker is key:
When getting a loan, find a smart, experienced, knowledgeable, helpful, energetic mortgage broker. They all get paid the same, so you might as well have the best one. Mortgage brokers are like mothers. Everyone thinks their own is the best. Bad Credit Mortgage Bad Credit Mortgage Loans are extremely dangerous. It can seem tempting to take a bad loan to get into a house, but the second your house stops appreciating, you will be losing money. A good refinancing mortgage rate can come if you fix your credit after you buy your house, but beware of a large prepay penalty that are often included with a bad credit loans.
General Credit Information Links:
http://en.wikipedia.org/wiki/Credit_rating
http://money.howstuffworks.com/credit-score.htm
http://homebuying.about.com/cs/yourcreditrating/a/credit_score.htm
http://moneycentral.msn.com/content/Banking/Yourcreditrating/P38053.asp
Pulling your credit scores:
I recommend you use each credit bureau’s site to pull your score for that bureau, as opposed to doing a three-in-one pull from one site. This method is guaranteed to get you the most recent information.
www.experian.com – pull your Experian credit report.
www.truecredit.com – pull your Transunion credit report (this site is owned by Transunion)
www.equifax.com – pull your Equifax credit report. I have found that your Equifax credit score pulled on this site is the most accurate score. The scores pulled on truecredit.com and experian.com tend to be 30-50 points higher than the score your mortgage broker will tell you it is, Equifax disputes are also handled in the most timely manner.
1) Florida's homestead exemption provision is one of the most protective in the United States, giving no limit to the value of property that can be protected from creditors.
2) I won the small claims court case. This would probably make an interesting subject for another article.