After my last article on Credit Modeling 101 a friend called inquiring about methods of re-establishing credit. As many often do, this friend had made bad financial decisions earlier in his life. These decisions have since resulted in accounts going to collections. Mind you, this is the only credit history this individual has, rest assured with that type of history one would be hard pressed to find financing from anyone but sub prime lenders. This article outlines the steps needed to re-establish credit history. First we shall address negative items that even I have fallen victim too. Whoops!
Like most other Americans I did not get off to a perfect start in terms of credit. My profile has a few collections that are less than $100. These were filed in 2003, so they are a few years back there. After a few years you can dispute these items and the creditors must provide proof within 30 days that the debt is valid. This is how credit-repair companies work. Credit Repair companies are essentially letter writing houses to do this on your behalf. What a deal! Pay someone to mail some letters out for me! According to the Fair Credit Reporting Act the burden on proof is on the consumer reporting agency (Credit Bureau) and the information provider (debtor). Keep in mind also that after 6 years a debtor can NOT collect on an unsecured debt. Unsecured meaning that there is no collateral attached to the loan (auto loan has a car and mortgage has a home as collateral). There will be references provided at the end of the article to point you in the right direction if you want to do some more background.
You’re in a rut! Your credit has a few negative remarks on it, and it seems as though you can’t even get a small loan at a jewelry store. You need credit to build your credit, but you can’t get the credit you need nothing seems to work. Your last hope seems to be frittering away. Have you tried a Credit Union? Credit Unions are partly subsidized by some large group of people and usually charge a membership fee to join.
If the credit union turns you down (some companies you can squeak by as they will only pull one particular bureau. If your derogatory items don’t report on that bureau they will most likely give you a small UNSECURED credit card. This is what happened in my experience as Experian reported 0 of my derogatory items). you are then looking to get a SECURED credit card. Basically you go into a bank and put a sum of cash down as collateral and then the bank gives you a card with that amount as a credit line. The terms are usually pretty horrible as they know that people who apply for secured financing only do so as they can’t get financed elsewhere. After you get this secured financing you can let this report to the bureaus for 6 months or so then this will establish some form of payment history that is not a derogatory item. This will begin to overshadow the collections and past items that you’ve had (unless they are MAJOR debacles).
After the secured financing is reporting for a few months you will probably start to receive pre-screened offers of credit in the mail for other credit cards. Avoid these as without very much credit history, credit diversity or payment history inquiries affect your score a lot more than someone who has been established for 10 years. Inquiries can only really put a big ding on your credit if you have very little credit history. Most credit models don’t penalize you for ‘shopping’ for financing when securing a house or auto.
Next item up is to find some sort of auto-financing. Credit unions are typically the most lenient here as well so try to only deal with them. After you get on-time payment history for a few months to a year or two you should no problems buying a house. Revert back to my previous article for a ‘maintenance schedule’ on how to keep an 800 credit score!
References:
1. How to dispute information at the credit bureaus.
http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre21.shtm
2. What is a secured credit card?
http://www.epinions.com/content_2507776132
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Good Blog. I will continue reading it in the future. Nice layout too.
Aaron Wakling