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REPAIRING CREDIT

What do you do if your credit is in poor shape? First, try for an FHA approval. Although FHA is not designed for people with bad credit, it is much more lenient and minimum credit score requirements are less stringent. But if you're still in bad shape and you can't get an FHA loan, then you're going to need to take steps to reestablish credit and work to repair the damaged credit items.

If your scores are low, if s likely that your bad credit experiences were recent, within the past two years or so. Most people with bad credit started with good credit, and then something bad happened, such as a loss of job, a divorce, or a death in the family. Tragic events all, but not something that can't be overcome. But first let's examine true mistakes, reporting errors, and how to properly fix them.

Once you find out that your credit is less than stellar, suddenly be attuned to credit repair companies' advertisements: “Let us legally fix your credit!” or some such promise. Although the credit repair companies can in fact help repair credit, they can't do anything you can't do on your own.

One method these companies use is the “30 days or remove” tactic. By law, the three credit reporting agencies are required to validate the questionable item within 30 days or remove it from the credit report entirely.

For instance, you see that a collection account from an old cell phone company has appeared on your credit report and you think it's not yours. The credit repair agency will contact the bureau with a standard dispute letter that cites the federal law about removing information from credit files within 30 days if it can't be verified.

Once the request is received, the bureau will contact your old phone company or its collection agency. The bureau will ask if the negative information belongs to you. And if so, can they prove it? The collection company will typically respond with something to the effect of: “Yes, this information is valid. Here's a copy of the contract with his Social Security number.”

Or not. If the account can't be confirmed, the credit repair agency will demand that the negative item be removed from the credit report. Then, the credit repair agency repeats the effort with the other two bureaus in similar fashion.

Sometimes the credit repair company will repeatedly ask the bureau to validate the same account — hoping the bureau will fail to do so within 30 days. If that happens, even if the account was valid, it may be legally removed!

Credit repair companies don't work for free. Typically, they collect money up front; after that, they may not follow through and actually do anything for you. Consequently, these companies don't enjoy a good reputation. If you do have a legitimate claim you should dispute the information yourself directly with the bureau.

You can go online at the various bureaus' websites or you can call them on the phone. But the best way to dispute an item is to write a letter identifying the offending account. Send the letter via overnight mail and get a signature upon delivery. Once they sign the form, the 30-day clock begins to tick — and you have a record.

On the 31st day, if the creditor hasn't asked for an extension (they can get an automatic 15-day extension), then you demand the item be removed. By law they must do it.

Credit bureaus haven't gotten many awards for customer service and they can be very bureaucratic. Just call their 1-800 number and see what I mean. You're likely to be solicited to join their credit-monitoring service. Then you'll talk to a customer service representative who cannot get the mistake fixed.

The fact is, if your credit report contains a mistake, the best way to get it fixed is by having your loan officer do it for you.

That's right: your loan officer. Remember, credit bureaus are for-profit enterprises. They make money by storing and reporting consumer credit histories. And they get lots and lots of business from mortgage companies. These agencies even hire sales representatives to solicit business from mortgage companies.

Credit-reporting agencies all offer the same service: providing credit reports and credit scores. To add value, they need to provide additional services to lenders.

So, instead of waiting 30 days to see if a bureau will remove a mistaken item, take your documentation to your loan officer. She will contact the credit bureau and forward the documentation to the right person there.

Once the credit agency reviews the item and confirms it doesn't belong there, it removes it. Just like that — in a matter of minutes. The negative item is removed and the credit company issues a new report.

But sometimes you need to take it one step further and address the credit score as well. It's possible that your credit score was calculated using the bad data. So, you'll need to make sure a new credit score is issued as well.

Credit bureaus have a feature called a rapid rescore that they offer to lenders that will not only remove the bad information but also recalculate the credit score as if the bad information were never there.

This is critical if your score is too low to qualify for financing. This service isn't free to your lender; rapid scores cost up to $50 per account per bureau. When a mistake appears on a credit report, the FICO scoring model can't determine whether it's an error; if it's on the report, it's calculated as part of the total credit score.

This is a common problem for people who have experienced bankruptcies. During a bankruptcy, credit accounts are either discharged or paid back over time. When the bankruptcy discharges old debts, sometimes the accounts aren't properly reported as having been included in a bankruptcy; instead they still show as outstanding accounts, even though the old debts are no longer legally valid. The big problem with such an occurrence is when a credit report shows a past bankruptcy and a current outstanding collections account. One of the worst things that can happen to a credit score is to have negative information in a credit file after a bankruptcy has been discharged.

Day after day, the credit score is getting hammered, all without the consumer's knowledge. The consumer thinks his credit is being repaired as the bankruptcy recedes further and further into the past. But in reality the credit is becoming worse and worse.

This is where a rapid rescore can help. Provide a copy of the bankruptcy discharge papers to your loan officer. She will forward the documentation showing that the offending accounts were included in the bankruptcy and aren't outstanding.

A rapid rescore will review the bankruptcy papers, remove the items, and run another series of credit scores as if the mistakes were never there. I have personally seen credit scores improve by more than 100 points in this fashion.

When the items are in fact not mistakes but are legitimate, the best thing to do is repair them as early as possible. If there are collection accounts, contact the collection agency and make arrangements to pay them. Then, make certain you got the proper documentation from the collection company indicating that the account was paid in full. When you pay those collection accounts, the reporting bureau is supposed to fix the mistake and report the correct information to the other credit bureaus.

The key phrase here is “supposed to.” You'll want to follow up with the bureaus to make sure they've done their part and show the account as paid. Keep your documentation in a safe place.

Once you've taken care of your accounts by correcting any mistakes and settling with your creditors, you'll simply wait for some time to pass and reestablish credit. How can you reestablish credit if your credit has been hurt? First, make certain that whatever event caused your credit to deteriorate to begin with is fixed. Then you can take the next steps.

There are credit companies that specialize in working with those who are or have recently gone through tough times. These companies also buy information from credit-reporting bureaus to find people with hurt credit to whom they can issue a credit card. Don't be surprised when you get a credit card offer in the mail; it just may be from one of these companies.

When credit has been damaged, a lender will want to see that you can handle credit responsibly again. You do this with a new credit account. Your credit line will be small, anything from $200 to $1,000, but it will still be a credit account. Lenders typically like to see a minimum of three credit trade lines being used after bad credit has been repaired.

Take baby steps. Don't think you have to do everything at once and just work on one account at a time. Soon, you'll find that your credit scores have improved as the negative information moves further beyond the two-year timeline.

Then concentrate on keeping your balances at 30 percent of your available credit. Even if your limit is $1,000 and not the $10,000 you had before your credit was hurt, the credit score doesn't look at how large the credit line is but how you use it.

 
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