Credit Repair Guide

There are several key things that a credit report reveals about a person – which is one reason employers frequently use them as part of the employee screening process. A full credit report isn’t really necessary. The credit score alone tells a lot about someone, since high credit scores can only be achieved by practicing fiscal responsibility and diligent money management. The details of how the score is achieved can be telling, but the score alone tells its own story.

Do you pay on time?

This is probably the most important factor in your credit score, and therefore it’s important to potential lenders, landlords and employers. It comprises 35% of your credit score, the single largest factor in the calculation. Surprisingly, there are people who are able to pay, but have a terrible history of not paying on time. Whether or not you have the ability to pay isn’t really relevant; what is relevant is whether you demonstrate fiscal responsibility by actually making payments on time.

What do you owe?

The amount of credit you use makes up the second-largest portion of your score (30%). Do you have multiple credit cards that are at, or nearly at, the limit? This will lower your score.

For a secured loan, a lender will evaluate your debt-to-income ratio. Your debt-to-income ratio is based on an algorithm of your income versus your level of debt and available credit. If an underwriter of a secured loan feels your debt-to-income ratio is too high (i.e., your monthly obligations will be difficult to pay if you use all the credit available to you), you may not be approved for a loan, or you may be required to pay off and/or otherwise close some of your credit accounts before being approved. However, when you get unsecured loans, such as credit cards, your debt-to-income ratio is not calculated. Therefore, this component of your credit score becomes crucial to institutions granting unsecured lines of credit.

Using all the credit available to you will lower your score. The rule of thumb is to keep credit cards at 30% or less than the total credit limit on the card.

Are you expanding your use of credit?

Every time you apply for credit, your score takes a hit. At 10% of your score, this isn’t a large factor. It can also be a good-bad thing to apply for credit. You have to have credit to establish a credit history and therefore a credit score; however, multiple applications in a short period of time can signal a desperate need for more credit and the possibility that you’re using one form of credit to make payments on another because you can’t otherwise afford your monthly obligations.

What you can learn about someone

It should be obvious why a high credit score is important to a lender or anyone  providing regular services, such as utilities, a landlord and a telecom company. What is less obvious is why a potential employer would want this information. To a potential employer, a high credit score demonstrates responsibility and follow through, traits that are desirable in an employee. If you don’t pay your bills on time, it is assumed that you have issues with being responsible in other matters, or that you are not the type of person to follow through.

While it might be useful to have credit score information about significant others, people you’re dating or even neighbors, this is not information just anyone can obtain. You have to have a legitimate reason to obtain someone’s credit score or credit report, and you have to have their permission.

As the housing boom peaked, consumers saw credit limits raised and lines of credit on their homes offered at attractive rates. Banks and lenders offered new card accounts at record rates, then enticed consumers to transfer card balances to equity lines of credit.

Ads in magazines and on television offered up a lifestyle that was inviting and exciting – all paid for on credit. You could buy whatever you wanted, go on exotic vacations if you only had the right credit card, which lenders were happy to provide. Talk of a housing bubble was drowned out by images of living the good life and moving up. Consumers were not only encouraged to lap up increasingly easy credit cards and rising credit limits, but the promise of a solid investment in a home bolstered by rapidly rising home values encouraged many into homes with 100% loans, no money down and low interest rates.

Average credit spending rose, while median pay was declining and cost of living was rising. Households accumulated more and more credit cards. Banks doubled the amount of new cards issued to customers with tarnished credit, the group most likely to tap into additional credit and the least able to afford it. Banks encouraged customers to use their inflated home values to pay off these mounting card debts by using equity lines of credit. Falling interest rates encouraged consumers to refinance and they, in turn, were encouraged by lenders to take equity out of their homes.

All this came crashing down when the housing bubble did indeed burst. Unfortunately, the reckless extension of credit placed many consumers at financial risk, contributing to the vulnerability that many are currently feeling.

Consumers now find their credit lines being closed or reduced, with a consequent reduction in their credit score that limits their ability to obtain more credit; and which may, in fact, affect auto insurance rates and even employment opportunities. Using the home equity to pay credit debt or finance a lifestyle many couldn’t afford put homes at risk as home values dropped, resulting in many being “upside down” on their home loans. Many are burdened with loans they can no longer afford on homes they cannot sell for an amount anywhere near what they owe on them.

And those least able to afford the credit are now squeezed by banks assessing higher interest rates at a time when the Fed is lowering interest, as well as increasing penalties for late payments and over-limit charges. People with nowhere else to go are being forced to pay high interest on the credit cards they’ve come to depend on to meet their daily living expenses.

At the heart of the problem is a double jeopardy: lenders don’t make money unless consumers are spending money, and consumers are spending money they cannot afford to spend, using lines of credit they shouldn’t have been given in the first place.

Subprime borrowers tend to use more of their available credit than others and are more likely to have little experience or understanding of the pitfalls of credit.

If you are already in trouble because of credit spending and reduced home values, your only option may be to negotiate with lenders for the best possible rate while paying off credit cards. This most likely requires reducing your overall spending to an absolute minimum, Eliminate any costs that aren’t necessary and seriously reconsider whether or not you HAVE to have some of the services you are currently paying for, such as cable TV. Remember – when you have achieved financial stability again, you can always add these luxuries back in.

Consumers should take a lesson: remember that the economy always cycles. Just because lenders want to extend you credit isn’t a good reason for using it. The equity in your home is money in the bank, but it will increase and decrease with economic cycles. It’s an investment, but it’s also where you and your family live. Don’t place it at risk by spending on things you don’t really need!

Credit card companies seldom teach first timers the proper way to use a credit card.  Why would they?  They make more money from people who don’t know exactly how to be responsible with a credit card.  In all the excitement of receiving your first credit card, there are some common mistakes that you can avoid to ensure your credit remains favorable.

One of the most common mistakes that beginners make with credit cards is charging more than they can afford.   At first, a credit card seems magical.  You can purchase almost whatever you wish, without having to spend any of your money.  This mentality is why many beginners max out their credit card within only a few months of receiving it.   The best rule of thumb is to charge only what you can afford to pay.  It may sound contradictory to the theory of a credit card, but it is the best way to keep your head above debt waters.

Another credit mistake that beginners often make is getting too many credit cards during a period of time.  With all the pre-approved offers in the mail and store clerks asking you to get their credit card, it can be tempting to open several credit cards at one time.  Many beginners think the more credit cards they have, the more they will be able to spend.  While this is true, there is another side to that coin.  The more you spend, the more you will have to pay.  Chances are if you have several cards with balances, you will run into some difficulty making the payments.  One or two credit cards are sufficient for someone just starting their credit history.

Paying the minimum payment only gets many beginners into more debt than they expected.  When you make only the minimum payment it usually covers the interest and a small amount of the credit card balance.  It could take years to pay off a balance as low as $300 when you pay the minimum payment.  Although you don’t have to pay the entire credit card balance every month, you should pay a little more than the minimum balance.  This is especially true if you are continuing to accrue new charges.

Many people get in trouble with credit cards because they don’t fully understand how the card works.  Most people only know that they get a piece of plastic in the mail that they can use to swipe in stores and pay the bill later.  Understanding how credit cards work can help you use them responsibly.

Credit card companies make money when you pay interest.  The company determines the amount of interest you pay each month by using the annual percentage rage, or APR.  There are two basic kinds of APRs: fixed and variable.  A fixed APR doesn’t vary much over a period of time.  Should your credit card company change the APR, they must inform you before it is increased.  The variable APR can change from time to time.  You can find out which kind of APR you have by looking at your credit card application.

The grace period is the number of days that you can pay off your credit card balance without receiving a finance charge.  In most cases, the grace period only applies to new purchases that you make.  If you already have a balance on your credit card from a previous month, new purchases will not have a grace period.  Your grace period is usually printed on your monthly credit card statement.

In some situations, your credit card may have certain fees associated.  The annual fee is a yearly fee you must pay for having the credit card.  The late-payment fee is charged when the credit card company receives your payment after the due date.  If you use your card for a cash advance you can be charged a cash advance fee that is either a flat fee or a percentage of your advance.  A balance-transfer fee is incurred when you transfer a balance from another credit card.  Should you go over your credit limit you could be charged an over-the-credit-limit fee.

Many credit card companies offer incentives for the use of their credit card.  The most common type of incentive is a rebate on the purchases you have made.  This rebate is sometimes is made in cash (via check) or as a credit to your credit card account.  Frequent flier miles, car rental insurance, and travel accident insurance are other incentives that are offered.  Another feature offered by many credit cards is insurance that covers payments to your balance should you become disabled or unemployed.

A good credit history is essential in today’s society. Traditionally, you only had to worry about having a good credit history for credit cards and large purchases such as home and automobiles. However, good credit is vital in even the smallest financial transactions, like getting your utilities turned on or establishing cellular phone service. When you don’t have good credit, these service providers require you to pay a deposit to establish service. Start building a good credit history as early as possible to avoid paying hefty deposits.

Paying your bills on time is the easiest thing you can do to build a good credit history. Even bills that aren’t credit cards should be paid on time. While utilities and similar bills aren’t regularly included in your credit history, when unpaid, they can wind up on your credit report as a collection. Collections have a negative impact on your credit.

The timeliness that you pay your bills has the biggest impact on your credit history. When you are current on all your bills, lenders view you as less of a credit risk. This, in turn, will benefit you with lower interest rates than if you had delinquent payments in your credit history.

You don’t have to pay the full amount of your credit card balances each month, but you do need to make at least the minimum payment. Any time you pay less than the minimum payment, the creditor reports your payment as being late for that month.

Always be aware of your credit limit and balance for your credit cards. Be careful that you don’t go over your credit limit. When you exceed your credit limit, your creditor will charge an extra fee, in addition to your regularly scheduled payment. This extra fee can make it harder for you to make your minimum payment. Not only that, going over your credit limit will be included in your credit report. Future creditors will deem credit limit overages as an inability to handle credit.

If you have any credit cards that are not being used, and you don’t anticipate using them, these should be cancelled. Make sure the balance of the card is complete paid off before cancelling the credit card to continue building a good credit history.