Sticks and stones may break your bones, but a "derog" (derogatory entry) on your credit report can really hurt you!

Destroying credit repair myths:

The first myth is that information in your credit profile cannot be easily changed.  Nothing could be further from the truth!  Not only can inaccurate information be corrected with relative ease, any information that is not verified within a reasonable time must be removed.  The Fair Credit Reporting Act demands it!  Recent FCRA amendments, as well as portions of the Fair and Accurate Credit Transactions Act make it difficult for creditors to reinstate inaccurate information after its successful removal.  The FACT Act also protects victims of identity theft and is a major improvement over portions of the Fair Credit Billing Act.  Sample letters and repair strategies are indicated below for your further edification.

The second and truly most dangerous myth is that “file segregation” is a useful method of credit repair.  Where it may appear useful, it is also illegal to create or use a false identity such as a new Social Security Number (SSN) or Employer Identification Number (EIN).  Applying for an EIN or SSN under false pretences is a felony, and using false information on a loan application is also a felony.  Yet this dangerous scam continues to be perpetrated in books, on radio & television, via email, in print ads, and on countless websites.  I urge everyone to avoid any credit repair scheme that suggests file segregation as a solution to your credit woes.  After all, a felon with squeaky-clean credit is still a felon -- and prison guards are not likely to be impressed by a stack of platinum credit cards! 

The third myth is that paying off an old collection account will improve a person’s credit score.  Balderdash!  Paying off an old unpaid collection (without first arranging removal of this negative information with the creditor) will cause immediate damage to a person’s credit.  Why?  Because payment will indicate current activity on what may otherwise have been a dormant (thus benign) collection item.  Recent activity (such as recording payment of the collection item) will cause a ten to thirty point drop in one’s credit score.  It is far better to leave drowsy canines undisturbed.  Learn more about the Fair Debt Collection Practices Act here.

The fourth myth surrounds closing inactive revolving credit accounts.  I know of many otherwise competent bankers, loan officers, and real estate professionals who parrot this utterly absurd foolishness.  Although you cannot blame them entirely for their ignorance.  I recently received a CD-ROM of marketing and "educational" materials from a MAJOR mortgage banking institution (which shall remain anonymous).  On this disc was a "Home Buyer's Presentation" that continues to promote this mythical folly.  This misleading presentation will be seen by millions of people for years to come -- and taken as "truth" by inexperienced brokers and their ill-informed borrowers.

Let me be perfectly clear on this point.  Inactive accounts pose absolutely no threat whatsoever to a borrower’s creditworthiness, although an excessive number of inactive accounts should be discouraged.  If you must close any accounts, you must begin closing only those opened most recently.  Long-standing accounts actually help to determine a person’s creditworthiness, even if the accounts are currently inactive.  Whenever a long-standing account is closed, there is a very good chance that the person’s credit scores will suffer a ten to thirty point credit score decrease.  Why?  Because their credit history is needlessly shortened.  If you must close a revolving credit account, close only those opened most recently!  It is just that simple.

NOTE:  I recently lost the opportunity to "create" another 800 score borrower.  According to a three-month-old credit report FAXed to my office, she had a 799 score.  I would have ordinarily recommended that she show modest activity on any long-standing accounts with the highest credit limits.  A sack of groceries or tank of gas each month is all that it requires. This would have catapulted her scores to 820 or higher in a matter of a few months.  What did she do the month prior to our introduction?  She closed three inactive accounts, using the excuse that she never used them.  As a result, her mid-score plunged to 760 because she lost many precious years of flawless credit history.  Most importantly, she closed the only tradeline account with a five-digit credit limit -- this could have become her personal point-generating engine.  Instead, it has been lost forever.  It is unlikely that she will have another shot at an 800 score in her lifetime, since she is 69 years old and living on a modest fixed income.

 

NOTE: In a related encounter with "the Credit Union From Hell" (name available on request), I was informed that it was their standard policy to refinance their loans using the same account number.  This lunacy must stop!  While this poorly-planned practice may have less effect on customers with sterling credit, it damages the scores of those with bruised credit.  I had been working with a gentleman for several months to improve his scores sufficiently to obtain 100% financing.  I had his mid-score up to a 576 when I recommended that he refinance his truck and motorcycle loans to reduce his debt-to-income ratios (a commonplace solution).  As a direct result of refinancing his loans with these idiots, all of his credit scores fell an average of forty points.  This immediately condemning him to a maximum of 90% financing!   It took months to recover from his Credit Union's practice of wiping out his previous payment history (two years each for two tradelines in this case).  I closed this fellow's 100% loan in December 2004 after his score had finally risen to 575.  I am confident that his credit scores will rise another 100 points over the next year of timely mortgage payments.  I caution all Credit Union members -- and those who bank with small community banks -- to ask about the lender's refinance policies BEFORE refinancing any installment loans.  If they routinely re-use the same account numbers, thereby wiping out valuable payment history, take your business to another institution.  No one deserves to have their credit history foreshortened by bad banking policy!

The fifth and final myth to be shattered involves bankruptcy and the notion that it enables a person to simply “wipe the slate clean”.  Surely, filing bankruptcy may halt harassing phone calls, but a few well-placed letters to collection agents will produce the same result.  Bankruptcy will liquidate assets to settle debts for dimes on the dollar, but this too is something that anyone can negotiate for themselves.  The worst part is that a bankruptcy will remain as a derogatory public filing on a person’s credit report for at least ten years.  Tradelines that are settled in a bankruptcy will be branded for all others to see as “included in bankruptcy” -- accompanied by all prior damage associated with late payments and non-payment of debts.  After bankruptcy, a person's previous payment history becomes meaningless, no matter how timely it may have been up to that point.  Thus, the bankrupt individual’s credit depth effectively drops to zero.  Secured credit cards and double-digit auto loans are the only “risk” that most future creditors are likely to find acceptable until someone else paves the way.  Nevertheless, the very worst thing that any bankrupt individual can do is to not reestablish their credit!  Without reestablished credit you will remain as a pariah to any potential creditor!

I advertise that I can lend one day out of bankruptcy -- indeed, I often lend within the first year after a bankruptcy discharge.  However, a borrower in such a position had better be prepared to come to the closing table with a very large stack of cash or significant equity in their property (15% to 20%), because my investors are not easily convinced that another bankruptcy might be just over the horizon.

Foreclosures carry even greater uncertainty.  Nevertheless, I will fight to convince my investors that the event was an isolated occurrence, and frequently lend to the recently bankrupt or those facing foreclosure.  Recent foreclosure proceedings will usually keep the borrower's LTV (loan-to-value) at or below 65% or possibly 70%.  Do not expect miracles for the first three years after any foreclosure proceeding has begun (issuance of the Notice of Default or NOD) even if the property is redeemed prior to the Sheriff's Sale!  Again, reestablished credit is key to your future borrowing power.

There are many other myths, untruths, and bald-faced lies surrounding credit – far too many to list here -- often parroted by the best intentioned but ill-informed loan officers.  Repairing your credit or removing errors is not nearly as difficult as one might think!  You can do it yourself if you try.

CREDIT RESTORATION TECHNIQUES

The techniques that I discuss here will assist in restoring your credit profile. These are the very same techniques that credit restoration attorneys use, and for which they charge thousands of dollars to perform.  Their sole advantage is that they have a law degree -- and you don’t!  Attorneys generally perform their magic more quickly and more efficiently than you can.  However, I must advise you that not all credit restoration attorneys are alike, since precious few are worth half of what they may charge.

Some credit restoration attorneys offer programs that feature low, affordable monthly payments.  While this may sound inexpensive, it is often a trap.  In reality, they have absolutely no motivation to correct your records quickly, nor do they have any reason to stop billing you!  Suddenly, a large up-front fee of a reputable credit attorney and fast results holds the clear advantage when purchasing or refinancing your residence or commercial property. I much prefer the latter, and have referred my valued customers to a couple of very competent and ethical credit restoration attorneys.

When a person decides to repair their own credit, it is crucial for them to direct their energies to each of the three major credit bureaus (listed below).  A single derogatory entry that appears in only one of the bureaus' repositories may be sufficient to deny you credit.

What the credit bureaus (credit reporting agencies) don’t want consumers to know:

1.   You can challenge (validate) each derogatory entry in your credit report at any time.  The credit reporting agency must investigate the matter at your request.  The bureau is compelled by law to remove the derogatory entry from your file whenever they are unable to establish its validity within a “reasonable period” (thirty days).  The verification process soon becomes costly, but only to creditors.

2.   Each derogatory entry in your credit report must be proven as accurate; otherwise, it cannot remain on the report.  When a credit reporting agency is unable to verify the entry, it must be removed from your file.  Score one for the consumer.

3.   Many creditors find it difficult to re-verify a derogatory entry within the allotted thirty days.  Almost as often, the credit bureau may be unable to handle your dispute quickly or properly.  In either case, the derogatory entry must be deleted from your file!  Overworked administrators, lethargic clerks, and slow mail service have unexpectedly become your dearest friends.

4.   The older the derogatory entry, the more difficult re-verification becomes.  It becomes near impossible to verify a derogatory entry when critical records have been misplaced, archived, or destroyed within the previous year.  Bumbling bureaucrats, clumsy geeks, and misdirected email have just joined your close circle of friends.

Where to begin:

Order a tri-merge credit report from one of the major credit bureaus (links provided below) to see what your creditors are saying about you behind your back.  You can also obtain a FREE Annual Credit Report by clicking this link.  Although useful, it does not disclose your actual credit scores.  Integral to your mortgage application, however, I will provide one tri-merge credit report (with scores from all three credit bureaus) free of charge when you apply for a loan.  This is a $15 to $50 value depending upon who is doing the billing.

Box 2002 Allen, TX 75013 (888) 397-3742	Box 740241 Atlanta, GA 30374 (800) 685-1111	Box 1000 Chester, PA 19022 (800) 888-4213
www.experian.com	www.equifax.com	www.transunion.com

Closely scrutinize your credit report to identify any erroneous entries and all derogatory history.  I routinely perform this inspection during the mortgage application process and draw your attention to any obvious errors, duplicate entries, and serious derogatory items.  I will provide constructive criticism, when required.  Many so-called "credit counselors" may charge hundreds of dollars for what may turn out to be inferior service.

In a recent survey (Mistakes Do Happen 2004) conducted by the National Association of State Public Interest Research Groups, there are serious errors on 79% of all credit reports.  Minor errors usually pose no threat to obtaining a loan approval.  Serious errors and duplicate entries, on the other hand, can make a person appear much less creditworthy and definitely places your loan approval at risk.  At the very least, it will cost you money in the form of higher interest rates -- lots of money!

Dispute in writing each error or unexplained item in your credit report.  You must send separate letters to each of the three credit bureaus (indicated above).  Use the downloadable example letters provided below and adapt them to your specific needs.  Never use pre-printed dispute forms!  Never use letterhead paper either.  Disputed items will generally be corrected or removed within 30 to 60 days.  Derogatory entries that cannot be verified must also be removed by the credit reporting agency.

Negotiate with your creditors and any collection companies by telephone.  Their contact information is usually listed on your credit report.  Ask them nicely to remove their derogatory entries or to change them to positive feedback (on all three credit bureau repositories) upon receipt of your settlement.  If they agree in principle, the ask the creditor's representative to put the terms of your negotiations in writing -- ON THEIR LETTERHEAD.  In this way, you have their express intentions in writing which may be forwarded to the three major credit bureaus in the event that they fail to live up to their part of the bargain.  If the creditor objects to putting anything in writing, you can remind the creditor or collection agent that without their signed letter, you have absolutely no incentive to fulfill your obligation.  Escalate your request to the next level by asking for a supervisor and repeat your generous offer to settle the debt on your terms.  Above all, be polite.  Never become argumentative or belligerent when discussing the matter, no matter how unreasonable the party at the other end may seem.

This strategy only works with unpaid collections and late payments on open active accounts.  You have lost all leverage on paid collections and closed accounts.  It is generally advised to wait at least two years in order to dispute paid collections and late payments on closed accounts (since it probably will take that long for the creditor to archive or misplace your records).  Again, this is presuming that the errors are indeed inaccurate.

Lastly, it is advisable to increase your credit limits on all revolving credit accounts periodically, once you have cleared up the most pressing issues.  If you have a good track record with a particular creditor, they may even increase your limit without pulling a fresh credit report.  The reason that it is important to increase your credit limits is that it reduces your debt ratio on the account in question and, as a result, it will increase your credit score!

Documents for download (Microsoft Word format)

Sample Credit Report Request Letter

Sample Credit Report Correction Letter

Sample Disputing Credit Denial Letter

Sample Request to Re-schedule Debt Letter

Sample Request to Raise Credit Limit Letter

 

Longevity of Good and Bad News

Below is a definitive list of exactly how long information can remain on your credit report (more commonly known as the Statute of Limitations).  These are generalities that apply in most States, although there are a few exceptions.  Please consult you State's Attorney General for applicable law in your area.

• Delinquencies (30 to 180 days) may remain seven years from the date of the initial missed payment.
• Collection accounts may remain seven years from the date of the initial missed payment which led to the collection.  Whenever a collection account is paid in full, it should be marked as a "paid collection".
• Charge-offs may remain seven years from the date of the initial missed payment that led to the charge off, even when payments are later made on the charged-off account.
• Closed accounts accounts may or may not have a zero balance, but they are no longer active. Closed accounts with delinquencies may remain seven years from the date they are reported as closed, whether closed by the creditor or by the consumer.
  NOTE:  Positive closed accounts may remain up to ten years.
• Credit cards reported as lost will continue to be listed for two years from the date the card was reported lost, provided that there are no delinquencies before that date. Delinquent payments that occurred before the card was lost are reported for seven years.
• Chapter 7, 11, and 12 bankruptcies may remain for ten years from the filing date.
• Chapter 13 bankruptcies may remain seven years from the filing date.
• Accounts included in bankruptcy may remain seven years from the date they were reported as "included in bankruptcy".
• Civil or small claim judgments may remain seven years from the date that the judgment was filed.
• Child support judgments may remain seven years from the date that the judgment was filed.
• Foreclosures (or transfer of deed in lieu of foreclosure) may remain seven years from the filing date.
• Unpaid tax liens may remain fifteen years from the filing date.
• Paid tax liens may remain seven years from the date paid.
• Inquiries listed on your credit report will remain for a minimum of one year from the date that the inquiry was made, although some may remain as long as two years.  Inquiries that you initiate or those required for employment will be visible only by you.
• Paid positive accounts may remain ten years.
• Positive open accounts may remain indefinitely.
• Negative account information is generally purged from your credit report after seven years if not limited by the above rules.

Timing is everything.  You may want to take on a higher-interest loan today, knowing that a long-standing derogetory item may be coming off your credit report within the next year or two, then refinance into a fixed rate program.  Please keep in mind that serious derogs such as bankruptcies and foreclosures severely hamper your ability to borrow only for the first three years after discharge or receipt of an NOD. 

Quick Fix

Several quick fixes may be found on my downloadable Stupid Credit Tricks flyer or in my newsletters.  I also have the ability through the credit agency through whom we pull credit, to correct or remove erroneous tradelines.  Documentation is required (e.g., paid receipts, canceled checks, zero-balance statements, etc.).  The cost to correct a single tradeline is $30 to $40 per credit bureau.  In other words, if we need to correct only one tradeline entry that reports to only one bureau the cost is quite minimal.  However, if the tradeline reports to all three credit bureaus, the cost is significant.  It ordinarily takes less than a week for the changes to populate into your profile.  Some corrections will not improve your scores, while others can move your scores significantly.  I provide this service only for my personal customers.  If you have numerous derogatory entries on your credit report (inaccurate or dead-on), it may be less expensive to pay a legitimate repair service to clean up your credit profile.

Know your rights!

Below is a disclosure required by the Credit Repair Organizations Act that every legitimate credit restoration organization must provide.  Run, do not walk, from any credit repair organization that does not require acknowledgment of the following CROA-mandated disclosure!