The Truth About Credit Repair

How many times have you seen an advertisement for credit repair?  Countless times, I'm sure.  They all make promises of erasing bad credit with guaranteed results.  Well, as the old saying goes...if it sounds too good to be true, it probably is.  I chose to write about this because of my experience in helping clients' with their credit reports.  I've heard horror stories of people forking over $1,000 with virtually no results.  Even the guarantee they paid for agreed to rid the report of only 25% of the negative entries.  Think about it.  If you have 4 negative items, would you pay $1,000 to get rid of only one of them?  When you consider that they could have done the same thing themselves for free, it's downright nauseating!
Even people with good credit have inaccuracies on their credit reports.  If you have any inaccurate negative items on your report, it could cost you thousands in higher interest payments.  Also, by knowing how the scoring models work, even mild changes in how you carry your balances can make HUGE a difference in your scores.  I feel it's also important for everyone to know that low credit scores not only affect mortgage rates, but also auto loans, credit card rates, insurance rates, and even employment opportunities!  It's behooves you to keep a periodic check on your own credit report.  Most people don't know about the insurance rates, but ask your agent!  :-)

Why Do I Bother With The Concept of Credit Repair? 

When I first became a loan officer, the only leads I got were people that other lenders turned down.  I decided that if these lemons were the only leads Realtors would send my way, then I had to learn how to make some lemonade!  Through taking classes, researching other websites, joining internet bulletin boards, talking with attorneys, and a lot of trial and error, I found a recipe for lemonade that truly works!  I inadvertently created a "niche" service that no one else offers.  By increasing peoples' credit scores (some 100 points or more), I got these people approved for loans when no one else could.  I accomplished several things at the same time here.  The part that makes it all TRULY worth it is the feeling I get knowing that I helped some good people become HOMEOWNERS when everyone else told them "no" and they never thought it was possible.  I now had clients for life and earned referrals like you wouldn't believe.  I also showed those realtors how a really good mortgage consultant (such as Tony D. Howell..hehehe) turns lousy leads into qualified buyers.  This put money in their pockets and in mine.  Also, they now trust me with their more qualified leads.  They know I am going to take care of any client that they send my way.  Can you say win-win-win?  I love it!  Anyway, enough about me....

What Really IS a Credit Score?

A credit score is simply this:  "a numerical score which reflects a snapshot of a person's credit profile at one particular moment."  It's important to know that scores can and do fluctuate on a monthly or even weekly basis.  There are steps you can take that can influence that score if you know how they work. 

How Are Credit Scores Calculated?

Let's start by taking a look at how the computers calculate your score and how much weight is given to each category.  Simply knowing this information can increase your score by 20-50 points in just a few months (or decrease it if you don't understand it!)

• 35% - Payment History
  The bottom line here is pay your bills on time!  As we all know, late payments are BAD.  Charge-offs, collections, judgments, foreclosures, and bankruptcies fall into this category. 
• 30% - Ratio of Balances Owed
  Having maxed out credit cards is never a good sign of managing credit responsibly.  Ideally, you want to have your balances at around 30%-35% of the limit. 
• 15% - Length of Credit History
  The longer you have had an account with a positive history, the more likely you will continue to pay your bills on time.  A lot of newly opened accounts here can be a negative thing.
• 10% - Healthy Mix of Credit
  Most scoring models like to see various uses of credit.  Ideally...a mortgage loan, an installment account (one where the balance decreases each month) such as a car loan or student loan, and 4-5 revolving accounts such as credit cards.
• 10% - Inquiries
  Credit scoring models don't like to see a lot of inquires for multiple types of accounts in a short amount of time.  This usually indicates financial instability and someone is searching for money to get out of a bind.

What Can I Do To Improve My Scores?

In relation to the categories above, take a look at your credit report (see below on how to obtain a free copy) and look where you may be lacking in any one or more categories.  FIRST AND FOREMOST, LOOK FOR INACCURACIES or anything older than 7 years!  If you do notice something that's plain wrong or outdated, dispute it!  (see below for details on how to dispute) 

• If you have late payments, you have 2 options.  The first one will only work if its only one or two lates over a LONG period of time.  Call the company and ask nicely for it to be removed.  If they say no, ask for a supervisor.  Be nice, beg, beg, and beg some more, whatever!  This sounds crazy, but really is the simplest way to get late payments off.  Sometimes it works!  The second way is to start a dispute process.  Sometimes you get lucky and it's really easy.  Other times its a complicated, time-consuming process, but may be worth a shot.  I'll discuss this in much more detail later on...
• If you have high balances on some cards but low ones on others, spread the balances around.  I've seen people consolidate credit cards from a few high interest cards to one low interest one to save money.  But for the sake of applying for a mortgage, temporarily transfer some of them back around to the magic 30%-35% of the credit limit.  Example: on a $1,000 card, no more than $350 on it.  Or just pay them down to that amount.  You get the idea.  Another thing to think about is American Express cards.  These are typically paid in full every month.  If you pay it off today and have your credit pulled tomorrow, it may still show as not paid.  You have to give them time to report your most recent payment history.  Most credit cards only report to the bureaus once per month.  When they report is anybody's guess.  Some only report once every 3 or 4 months.
• By all means...NEVER, NEVER, NEVER close old accounts!  There seems to be this myth floating around out there that people should close their old accounts that they don't use anymore.  NOOOOO!!!!!  Bad idea, I cannot stress that enough!  You never want to lose years of a good payment history by closing them.  In fact, if you haven't used them for a couple years, they may have gone "stale" in the scoring model.  I say charge a tank of gas and pay it off when the bill comes to re-age them into the most recent scoring models.  Or transfer a portion of some other card's balance over to them temporarily. 
  Here's a good example of why you shouldn't close them.  Let's say you had 2 cards with a $5,000 limit and a $2,500 balance on each of them.  You had these cards for several years and one day you got a new $5,000 card with some 0% interest rate for 6 months and consolidated the balances with the new card.  You may be thinking, "Oh, a friend told me I should close those other accounts before applying for a mortgage."  Then you do it and here's what happens....you just went from having $15,000 worth of credit only owing a total of $5,000 and several years of solid payment history.....to having a $5,000 line of credit that is now maxed out and only a few months worth of payment history.  See what I'm getting at now?
• Having a healthy mix of credit was pretty self-explanatory.  With the exception of 1 thing.  If you have an installment loan from a finance company such as Beneficial, the credit scoring computers have been programmed to know that most of their clients go there because of bad credit.  So it sometimes affects you negatively just by having an account with them, regardless of payment history.  If you have any accounts from high-risk finance companies, pay them off.  If you don't have any, keep it that way!  Go to a regular bank for an installment loan.
• Inquiries, now this one can be tricky to understand.  Inquiries only ding your score by a few points each.  But if you go apply for a couple credit cards with Visa, a store credit card with Belk's, a gas card at Texaco, some credit line for furniture, a new car loan, and then a mortgage....that would spell TROUBLE!  Every single one of those inquiries can add up and make a substantial drop in score.  But here is the important flip side.  Inquires of the same type within 30-45 days only count ONCE!  What this means is that you can apply with 8 different mortgage brokers within 30 days and your score would only drop by about 5 points total.  The thing is, the scoring models have been updated to understand that people are much more financially savvy nowadays and they realize that people will shop around for the best deal.  This also applies for shopping for a car loan, but not and house and a car at the same time!

What About Paying Collections or Charge-offs?

This one is tricky.  If it is older than 3 years and less than $2,000, I wouldn't advise paying it.  WHAT?  That's right!  In NC (your state may differ) nobody can sue you in court after 3 years.  If the amount is less than $2k, its not that big of a deal anyway.  And if the debt is that old, its gone "stale" and isn't affecting your score that much anymore.  Besides, after 7 years it goes away anyway.  If you were to pay it now, it could update in the computer as Paid Collection.  Which seems better than a charge off, but by bringing it up into the present, it could actually lower your score because it's no longer stale.  If it's over $2,000,  or less than 3 years, you might consider a settlement for less than amount owed, which requires negotiation with the creditors.  If you have the money, only offer full repayment in exchange for complete removal from the credit bureaus.  They will tell you it can't be done, or that it's illegal, but remember you're talking to a collection company.  They want your money and will tell you anything they want.  Most employees aren't aware of the laws, and are trained improperly.  I know because I used to work for one, and I hated it.  I decided to make a career change where helping people can be so much more rewarding.

An interesting side note about collections and inaccuracies:  Lets say you have a $500 credit card from XYZ store and had been making late payments for 2 years.  At some point you just stop paying it altogether.  (Yeah, I know, but people do it all the time)  After XYZ exhausts all avenues of collection, they will sell the debt to a collection company for less than the balance owed.  The collection company may add additional fees, late charges, additional interest, etc. and trys to collect THAT amount from you.  If they can't collect, they will report you to the credit bureaus also.  Now XYZ can still report the former late payments but the amount owed should be zero.  But this isn't always the case.  Sometimes they both still report an unpaid balance, which is inaccurate.  Worse yet, if the collection company gets tired of not being able to collect, the debt is sold again for a fraction of the amount owed and another collection company harrasses you for an even higher amount.  This can happen over and over.  Meanwhile, each former collection company should delete their balance you owe them.  Most of the time they do not.  You could have 6 or 7 entries of collections on your credit report that are really the result of only one account.  Now this is illegal and gives you many reasons to dispute all of the accounts.  But if you didn't know that, you wouldn't do it.  You just accept that your credit sucks because you didn't pay your bills. 
Now lets say it got sold 6 times over 5 years.  The most recent collection company that owns it reports it as being opened this year and now you owe like $2,000.  Worse yet you owe anywhere from $500 to $2000 from each different collection company.  See the endless cycle of corruption?  You now assume it will be 6 more years before this new one goes away.  But in reality, your last late payment with XYZ was over 7 years ago.  Can you say OUTDATED?  Yup, FCRA says that this info is now outdated and obsolete and all you have to do is ask for it to be removed and it goes away.  But not just the XYZ account...ALL the collection accounts related to that original XYZ account must now be taken off.  This is important information that most people just don't know.  This is the one type of dispute that works really well!  Imagine the difference in score when 7 collections go away at once by writing one letter!

How Do I Get  A Free Copy Of My Credit Report? 

The best place to obtain one is http://www.annualcreditreport.com/.  You will not get a free credit score here, but you can request a copy of your report from each of the three credit bureaus.  You can purchase a score from each or all of them, but you don't need a score to make sure the credit report is accurate.  For a free credit score, call your local mortgage broker.  If he or she won't do it, call me!  (shameless plug)
Do NOT go to http://www.freecreditreport.com/ that is blasted all over TV!  It is NOT free!!!  They will want you to give them a credit card for a trial of their credit monitoring service!  If you don't cancel it, they will start billing you every month for something you don't need.  Additionally, the scores they give you are NOT accurate.  A Realtor friend of mine tried that "free" site.  As you know, Realtors write off everything, and she needed a "stated" loan to qualify for her next purchase on an investment property.  But when I pulled her score, she realized the "free" site overstated her credit score more than 70 points, and now could not get the stated loan she needed.  I can get her score back up, but it takes time and that particular deal was lost.  If she had come to me sooner, I could have got her on the right track in time to save the deal.

How Do I Dispute Inaccurate Items On a Credit Report?

The FTC establihed the Fair Credit Reporting Act (FCRA) so that the average consumers can dispute inaccurate items on their credit report.  The easiest way to dispute items is to file an online dispute at each of the credit bureaus' websites.  The credit bureaus have 30 days to investigate each dispute with the creditor and report their findings back to you.  As I said earlier, you could get lucky.  If during the investigation the creditor fails to respond back to the credit bureau in the 30 day window, the item could go away.  However, if they do eventually respond, it could show back up.  That isn't very likely, but it could happen.  These disputes usually just come back as "verified" anyway.  An article from the FTC about disputes can be found here.  That's some good advice if you have all the documentation to prove you weren't late 5 years ago.  Or you have some way of proving that you didn't open an account that is showing up in your name.  See what I'm getting at?  I've done what the FTC said to do, and got mediocre results. 

Are There Other Ways To Dispute Items?

This is the real reason I started writing this blog...so pay attention!  The process can be a bit complicated and time consuming.  Removing negative entries from a credit report is always a touchy subject.  If a client tells me that he needs my help removing this item because he really wasn't late, then I feel compelled to help him.  The most important thing to remember is that I believe in the old "innocent until proven guilty" mentality.  How can one prove that they really weren't responsible for these negative entries when they never really happened?  What proof can one provide about an account they never opened?  I believe that if these things really did happen and the late payments and charge-off's are legitimate, then its up to the creditors and credit bureaus to prove it.  By using the laws afforded to us by the FCRA and carefully wording dispute letters, we can force the creditors and credit bureaus into doing just that, obeying the federal law.  If they can't or won't prove it, then the items disappear.  However, I don't recommend that anyone outright lie about a negative entry, it's just not ethical!  The following information is for people with genuine inaccuracies.  I have used the following techniques with great success.  I have compiled about 50 different letters on my hard drive for disputing different types of issues.  I am confident that almost anything can be removed with enough due-diligence.  However, if you legitimately have bad credit, then proceed at your own risk.  Please know that I am not an attorney, and the following information is purely for educational purposes only!

1. The first step is to obtain a copy of all three credit reports.
2. Write a letter to all 3 bureaus disputing any old or outdated personal information.  This includes old addresses, wrong addresses, wrong birthdays, aliases or misspelled names, and old employment information.  Don't even bother with account disputes just yet, unless they're older than 7 years.  THIS STEP IS CRUCIAL!  (Everybody has these inaccuracies on their credit report, I don't care who you are...I even had them on mine!)  Be sure to include a copy of your driver's license with current address, your social security card, and a recent piece of mail (such as a utility bill) with the correct name and address.  This is the easiest letter to write.  Make copies of all letters you send from here on out.  Send each letter certified mail with return receipt requested!  Write down the dates they were mailed, the dates you get the green cards back, the dates you get responses, and save all receipts from the post office.
3. You will get the green cards back (SAVE THESE) in a few days.  After about 30 days, you should receive updated reports and the old/outdated personal info should be gone.
4. Look at the new credit reports for any old accounts with late payments on them.  Dispute 3 or 4 of these items (not all 20 of them at once...if you have 20 negative items, you're obviously lying to start with, you really just don't pay your bills!) with a new letter to each of the credit bureaus.  Now that old addresses are gone, the chances are much higher that these items don't match the records on file from the original creditors.  Chances are pretty good that these will go away as well, especially if they are more than 3 or 4 years old.  Always remember to send the letters certified mail return receipt requested (CMRRR).
5. In about 30 days, you'll get some updated reports.  If they do go away, start the process with 3 or 4 more items.  Repeat this process as many times as needed.  Now some of the items won't go away the first time; they'll just say "verified".  If that happens, you write a letter to each CREDITOR (not credit bureau) asking for "VALIDATION" of the debt including a copy of the original agreement signed by you, detailed account statements reflecting the calculation of the debt they say you owe, and records of any payment histories.  Clearly state that a copy of a final bill is not validation and is unacceptable, you want VALIDATION!  Ask for them not to publish any erroneous information about you to anyone until this matter is resolved, including the credit bureaus.  Again, send the letters CMRRR.
6. Now the process gets tricky.  As soon as you get the green card back, fire off another letter to the credit bureaus disputing the account that you just disputed with each creditor.  This is called a "one-two punch" and usually VERY effective.  Now if it comes back verified again from the credit bureau before you receive the validation of the debt from the creditor, there is a violation of FCRA law.  No creditor is allowed to verify a debt with the credit bureau during a current validation dispute.  You may able to sue the individual creditors for actual damages, attorney fees, court costs, etc.  But again, consult your attorney before considering proceeding with any such legal action. 
7. If any law was broken, write another strongly worded letter threatening to sue the creditors for their willful violation of FCRA laws.  Quoting actual statutes they violated is a nice touch.  This final punch usually gets you a carefully worded apology and a letter stating that you don't owe anything and all negative entries from their company will be removed from all credit bureau files immediately.
8. If at any time the original creditor provides the requested validation, and it is accurate...then I will no longer help with any credit repair.  The usual response is, "Oh I must have forgotten about that."  Or something to that effect.  But hey, it's their lie, they can tell it like they want to. If they still want a loan, I'll help them get whatever I can at whatever rate is available to them.  (If they still want to do credit repair on their own, they can do it without my knowledge or sample letters.) 
9. Medical collections are usually the hardest things to remove although FCRA has specific statutes about them and the Final Rule of the HIPPA makes sharing public information about medical records illegal.  This specifically includes past, present, and future payments of health care.  Why medical collections even show up on a credit report is beyond me, but I see them all the time.  I don't understand them because most of the time these are the result of people going to the doctor, paying their co-pay, and leaving the rest to insurance.  Then the insurance pays a portion of the bill (they should have paid it all), and the remaining amount gets sold to a collection agency.  The consumer may not even know about it until years later when they apply for a mortgage.  Where's the paperwork now?  Oh yeh, it's gone.  There should be a law against this type of corruption, but fighting insurance companies is like fighting big tobacco.  The bright side is that lenders don't consider medical collections against you, but those collections do affect your scores.  I am still trying to figure this one out and when I conquer this battle, I'll keep you guys posted!

Where Can I Find More Information About FCRA?

An explanation of FCRA is available from the FTC and can be found here.  An actual copy of FCRA can be found here, but it's almost impossible for most people to understand any of its legal jargon.  I strongly recommend everyone check out the first link!  Consumer's rights get violated everyday, but most people don't know what their rights really are.  Creditors know this and exploit this fact because they know they can get away with it.  Since people don't usually call them out on it, what are the chances that they'll keep doing it?  You guessed it!

Where Can I Find Example Letters To Write To The Credit Bureaus?

There is a letter straight from the FTC that can be found on their article "Credit Repair: Self Help May Be Best".  However, that is just one form letter that may not reflect you actual situation.  I've found some other letters that are written for most of the different steps I described above.  These letters can be found at www.mix6.com/credit.  This is also one of the best self-help websites I've seen that actually tells people what to do, how to do it, examples of letters, and it really is free. 
Another really good site for information on all sorts of credit issues is http://finance.groups.yahoo.com/group/credit-repair.  They have more sample letters for almost any situation and you can freely post a question to the group if you can't find your answer.  There is some good advice on how and when to proceed on legal issues when creditors or the credit bureaus themselves violate the law.  Search the archives, files, and database that they have there.  GREAT info!!  I've almost become a regular on there. 

Are There Any "Magic Tricks" That I Can Do To Boost My Credit Score Quick?   

**UPDATE:  This loophole was phased out at the end of 2007.  I am leaving it in here because you may have heard or read about it somewhere.  It used exist and could be used with no problem.  However, too many people took advantage of the system and exploited it for financial gain by charging people money to add their name on someone else's card.  The system has been changed.**
There sure is!  The best way (and it's LEGAL) is to become an authorized user or "piggy back" on someone else's credit card.  The only hard part is finding the right person's card to piggy back on.  The idea is that you need someone that already has good credit, does not have a co-signer on the account, has had the card for a long time, has a low balance on it, and a perfect payment history!  Chances are a parent or other relative may have one of these cards just hanging out in their wallet.  See if they will add you as an authorized user.  There is NO RISK to them whatsoever!  What happens is that the credit card company will issue the parent (or whoever) a new card with your name on it.  When they receive it, tell them to cut it up, you never want to see it or charge anything on it.  Then the good payment history that they had for all this time somehow pops up on your credit report.  None of your other credit history will ever show up on their report, and none of their other credit shows up on yours.  This is an amazing tool!  The catch?  If they have a high balance on the card, it hurts your debt-to-income ratio.  Additionally, if they have a poor payment history now or in the future, it reflects negatively on you as well, so choose carefully! 

Another good thing to do is go to http://www.optoutprescreen.com/ and register.  This site was also set up by the FTC to stop pre-screened offers of credit in the mail.  It takes a couple months for the offers to finally stop, but I haven't received one in years!  The only credit I get, I ask for directly.  Now they claim that by doing this, it doesn't affect your score, but I believe otherwise.  Regardless of that, I believe that by stopping these random credit card offers from circulating in the mail, you decrease your chances of identity theft. 

What Should I Do In Case Of Identity Theft?

WOW!  That's a completely different blog that I intend on tackling at a later time!  In the meantime, check out the FTC's advice, which can be found here.

What Other Credit Advice Can You Offer?

Well it's taken many hours to write and compile this blog.  I've tried to cover the most common questions I've been asked during my career.  I could go on and on about specific situations, but that could take forever.  If you have specific questions, please feel free to email them to me.  I might just post your question in a future blog or newsletter.  You might also want to look at the many other consumer reports from the FTC that can be found here.  Thanks for reading my blog.  I hope it helps a lot of people!

Copyright 2007 Tony D. Howell