In part 1 of this series on credit we talked about how important credit has become in surviving the current home depreciation environment and avoiding the ARM Reset Foreclosure Trap. In part 2 of the credit series we looked at the elements that comprise your credit score. Part 3 covered improving your score on your own and outlined the importance of credit management and protecting your credit report. In this part of the series we’ll look at options for improving your credit using third party services. Here is a recap of the series so far and where we are at to date:
Credit Series Overview
- Why credit is so important
- Understanding elements of credit
- Improving your score organically
- Improving your score using 3rd party help
- Managing your score
A note before we begin. Before you agree to work with any third party to improve your credit score you need to do the following things:
- Know and understand your current score, and understand the items on your credit report. You can do this by signing up for MyFICO, an inexpensive, accurate way to keep tabs on the accuracy of your credit report.
- Know and understand what is legal and what is illegal when it comes to credit repair.
- Check with the Better Business Bureau for any third party you choose to work with.
- Carefully examine the fees charged and the results guaranteed by the party you choose.
How to Avoid Scams
Just like in mortgage, if it’s too good to be true, it probably is. Ignore any company that makes any of the following claims:
- We can erase your bad credit - guaranteed!
- We can remove bankruptcies and judgments permanently!
- Get new credit instantly!
- Form a personal corporation and get all the credit you need, now!
These all represent untrue statements about credit repair. You are setting yourself up for disappointment if you do business with these types of firms.
Your Rights When Engaging a Credit Repair Service
From the Federal Trade Commission Web site on Credit Repair:
By law, credit repair organizations must give you a copy of the “Consumer Credit File Rights Under State and Federal Law” before you sign a contract. They also must give you a written contract that spells out your rights and obligations. Read these documents before you sign anything. The law contains specific protections for you. For example, a credit repair company cannot:
- make false claims about their services
- charge you until they have completed the promised services
- perform any services until they have your signature on a written contract and have completed a three-day waiting period. During this time, you can cancel the contract without paying any fees
Your contract must specify:
- the payment terms for services, including their total cost
- a detailed description of the services to be performed
- how long it will take to achieve the results
- any guarantees they offer
- the company’s name and business address
I have heard horror stories of people sending thousands of dollars to “credit repair” companies only to find their situation unimproved and their precious cash squandered on false hope. Do not let this happen to you. As with all financial situations do not rush in to a decision; and always get a referral if possible.
Types of Third Party Credit Repair Companies
Consumer Credit Counseling - These companies take all of your outstanding debt, analyze the creditors, balances and interest rates compared to your monthly income. They then negotiate with all of your creditors to reduce your overall debt and monthly payments. While this sounds good; it really looks bad on a credit report. This is a red flag to an underwriter reviewing your credit history. Some banks will consider this almost as negatively as a bankruptcy. While it may be beneficial to consult with a credit counselor to help game plan a way out of your debt; it can be very costly to your future credit options should you engage them to restructure your outstanding debt.
If you choose to work with a credit counselor simply use them to help remove disputed items that appear on your report. They can provide you templates and contacts to help you remove incorrect information on your report.
Consumer Law Offices - Lawyers like to tout that they are more effective than credit counseling companies because, well, they are lawyers. The truth is that they take the same steps as everyone else to remove disputed items. There is nothing inherently bad about using a law firm to remove credit items that are erroneous; its just that they don’t have different avenues than other organizations that may be less expensive.
Individual Credit Counselors - There are many independent “credit experts” who offer services to repair or improve your credit score. They may be former employees of the above types of firms or not. As long as you use the same precautions in researching and selecting them as the above companies they can be a reasonable alternative to the above.
The Best Alternative?
Most people turn to third party companies when they are desperate and in need of help. This is the wrong time to begin to work on your credit profile. The best bet may be to do it yourself. Using a copy of your credit report and some template correspondence you can effectively clean up your credit report with out having to pay the fees associated with the above services. The bottom line is that, all things considered, being your own credit counselor may be your best bet.
If you’d like samples of the template letters you can use to dispute items on your credit report please email me at morganb@blownmortgage.com and I’ll be happy to send them to you. if you’d like a detailed white paper on how your credit score impacts your home financing options please email me as well. Much of this information is based on the FTC’s Consumer web site on Credit Repair - you can learn more by visiting the FTC site.
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