A Consumer's Guide to Credit Repair

Bad credit is always bad for anyone. The person who has gained a bad credit history due to a long record of outstanding debts is at a disadvantages when it comes to making purchases—he or she will be turned down every time he tries to apply for a new credit card and, consequently, will be confined to buying those things which he is able to pay for immediately. And all transactions will have to be made by cash or check—and if his financial history also includes too many bounced checks, then no one will accept those from him either, so he must figure out in advance how much cash to bring with him on each shopping trip. (Debit cards, the use of which simply results in funds being withdrawn from the holder's bank account, may still be a viable option, however.) It is not a pleasant situation to be in.

Of course when people end up in such a fix it is almost always their own fault, though it may also be due to identity theft--both these things, as well as what to do about them, will be covered in due time in the course of this article. There are things that can be done to repair a bad credit history, often (though this will have to be modified, as we shall see below) with the help of various organizations, both public and private, that make their business by doing so. Some of them will be discussed below.

!!Beware!! Predatory services

The first thing to be aware of when you look for some place to help you to overcome your credit difficulties is that not all such companies are what they appear to be. This is particularly true on the Internet, where a legitimate-looking website may be providing a false front for scoundrels to prey on their unwary victims. They typically use alarming tactics that will make the person who is already in financial trouble eager to take a course of action that runs counter to his or her best interest so that his financial situation goes from bad to worse.

You can avoid becoming the next victim of such a scam by remaining on the alert for certain warning signals. The loans that the predator offers will often come with interest rates that are so high that you ordinary would not be able to qualify for them. The brokerage fees may also be abnormally high and you may have to pay for prepaid insurance or some other unnecessary expense. To cap it all, the terms of the loan are such that you have next to no hope of ever being able to repay the loan.

In general, if the lender exacts a fee of any sort from you, either to pay for counseling services or to modify an overdue loan, or if he pressures you to do anything such as sign over the deed to your house, a warning bell should sound in your mind. Signing over your property deed, in fact, should be done only to the mortgage company in exchange for them canceling your debt. You must always be aware of whom you are dealing with and have the lender make all his promises to you in writing.

One example of a “lease back scam”—in which the perpetrator makes a promise that he will pay back any mortgage that you owe and possibly any debt on your credit card or elsewhere, and to restore your credit rating, provided you sign your deed over “temporarily” to an investing “third party,” only to find that the property is no longer yours and that you can even be evicted from it—was uncovered in September 2010 in Morgan Hill, California. Both the city police and the county district attorney issued a fraud alert to all the citizens warning them not to become involved. One and a half years later, in March 2012, the co-owners of the foreclosure consulting firm M & R Contemporary Solutions—Rene Alvarez and Mariano Ortega—pled guilty to having defrauded a total of ten Hispanic homeowners, all of whom were at some stage in their home foreclosure process, out of nearly $2 million over the period of over a year. Some of the victims had paid $10,000 despite having already lost their homes as a result foreclosure. Both of the defendants were sentenced to five years in prison plus “mandatory supervision.” The courts also seized the company’s bank assets—worth a total of $257,000—possibly to be used to make restitution to the victims. Also involved in the fraud was Cydney Sanchez, who is still awaiting trial.

Legitimate nonprofits / charities that help with credit repair

Now that we have gotten all of those horror stories about fraudulent credit repair companies out of the way, we can move on to the more pleasant subject of perfectly legitimate business entities that do exactly what they say they do—and we shall see how they do it.

Some of these entities are nonprofit charity organizations. There is one credit repair charity that focuses on all of the factors that affect a person's FICO score, and not just paying one's debts on time (for information on what a FICO score is, see below). They may also provide counseling on money management, investment and other matters of interest to their clients.

For-profit credit repair companies

There are, of course, credit repair companies that operate for a profit. Such businesses are subject to numerous regulations by the federal government. For instance, they are prohibited by the Credit Repair Organizations Act from making certain types of claims about what they can do.

What was said earlier about sham credit repair people may sound bad enough, but it must not be denied that even legitimate entities have been known to engage in activities which are downright fraudulent and illegal. There are cases of them using the SSNs and credit histories of minors and dead people in place of the files of people whose credit scores are very low. They have even advised their clients to get themselves an IRS Employment ID number and use that in the future when applying for credit in place of their SSNs—this too is a violation of federal law.

Do you really need a credit repair clinic?

Given all of the shady activities of such companies, you should stop and ask yourself, “Do I really need to enlist the aid of a credit repair clinic?” Basically, all of the things for which these clinics claim you need them, you can do for yourself. These include:

removing court decisions, outstanding debt balances and any information from your credit file that is either incorrect, or correct but negative—In the case of the latter, that can be retained in your record as long as it remains accurate. Clinics may claim to be able to challenge some or all of the data in your file, but the Fair Credit Reporting Act of 1970—of which more information will be given later—gives credit bureaus the right to disregard such challenges as frivolous. Even if they do remove such information, they are almost certain to put it back in after a month or two. Essentially, if you feel that there is incorrect information contained in your credit file, the burden of proof is on you.
getting a list of banks from which you can choose a major secured credit card—Secured means that the card has a bank account connected with it and will be charged against however much you deposit in that account. Again, you can easily find this information on your own.

These clinics may charge as high as $5,000 to do these things. As you can see, there is no reason at all to pay such exorbitant fees for things that you do not need anybody else to do for you—especially when we consider that you are already heavily in debt as it is and that the last thing that you want to do is to impoverish yourself even further.

The Fair Credit Reporting Act

The Fair Credit Reporting Act (15 U.S.C. § 1681) went into effect in 1970 and is one of a series of laws designed to protect the credit rights of the consumer. Its purpose is to provide “an elaborate mechanism” for “investigating and evaluating the credit worthiness, credit standing, credit capacity, character, and general reputation of consumers.” Amendments were made to the act on December 4, 2003 to allow the Board of Governors of the Federal Reserve System to conduct a study of various things of concern to anyone who might wish to check into the credit history of those whom they deal with, including “the effects of the use of credit scores and credit-based insurance scores on the availability and affordability of financial products and services, including credit cards, mortgages, auto loans, and property and casualty insurance.”

One of the requirements of this act is that, if any negative information is removed from a consumer’s history as a result of a dispute, then he must be given notification in writing within five days of the reinsertion thereof. The act also sets forth the periods, starting with the time they occur, during which negative information may be retained—ten years for bankruptcy and seven years for everything else (for tax liens this period is reckoned from the time they are paid). Knowing the Fair Credit Reporting Act can be very helpful in determining how to restore your good credit history. For a complete text, go to this website.

True interest costs over time

Whether your credit score is good or bad can have an effect on many of the expenses that you have to pay. Your mortgage expenses are a notable example of this. If your FICO score—a method of scoring that takes into account such factors as a person’s payment history, use of credit, how long he has been using it, what types of credit he has used and recent inquiries he has made regarding credit—is from 500 to 599, then you will have to pay an interest rate of 12.985 percent per month on a 30-year fixed mortgage. If, on the other hand, you have a score of 720 to 850, then your rate will be only 6.024 percent. Auto loans are likewise affected by your credit rating, although in this case the amount charged also depends on whether the car you are buying is old or new. So are your car insurance and cellphone rates—and even whether you get a good job or a promotion, particularly if that position entails a high degree of responsibility.

The general principle here is that when making out a loan, people use your credit score to determine how likely you are to repay the loan. That is why higher interest rates and monthly payments are exacted from those with lower FICO scores.

Which debts should be paid off first?

Debt snowball

One of the most important steps in fixing your credit score is paying off each of your debts, one by one, until you are finally in the clear. But figuring out which ones should take priority over others can be a challenging problem. In general, The debts with the highest interest rates should get the most attention.

One particularly good way of making the decision is by using a “debt snowball calculator,” a method strongly supported by talk show host Dave Ramsey. The debtor first pays off the debts whose balances are the smallest, while at the same time paying the minimum on those with larger balances. He proceeds gradually from small to larger debts until eventually all of them have been paid off in full. The term “snowball” is used because the extra amount paid into the larger debts expands rapidly, like a snowball rolling downhill gathering snow. Debt snowballing is a popular way to take care of credit card and other “revolving credit” debts (those in which there is no fixed number of payments involved, in contrast with installment payments).

To use the debt snowball method, follow the steps outlined below:

Make a list of all the debts you owe in ascending order.
Figure how much extra money can be paid towards the smallest debt.
Get the smallest debt out of the way by paying the minimum amount plus the extra until the entire amount has been paid.
After paying off each debt, add together the former minimum payment and any extra available from that debt to the next one, applying the sum towards payment of the latter.

Debt snowballing has the psychological benefit to the debtor of resulting in him receiving fewer and fewer bills as time goes on.

Debt avalanches

There are drawbacks to the debt snowball method. The biggest is that you should not use it at all unless you have enough income to meet the minimum requirements on all your debts; otherwise, it could actually lead to problems.

Another, much better method than the debt snowball is the “debt avalanche.” With this method, you again arrange your debts by decreasing interest rates, with the difference being that you pay them off more quickly, and with a lower total amount of interest. Pay the minimum amount possible each month on the debt on which you are currently working and put any cash that you have set aside for emergency purposes into paying back the individual or business entity to which you owe the most in interest. All the funds that you have after expenses should be used for this purpose. If the interest rate is different one month than it was another month, rearrange them on your debt schedule.

Another method of debt management: consolidation

In addition to snowballing and avalanching, another commonly used way of helping debtors to pay back their loans is through debt consolidation. There is also debt restructuring and DIP (debtor in possession) financing, but those are essentially for companies, not for individuals; they will not be discussed here.

Debt consolidation is when you take out one loan in order to pay off several others. Typically, some asset of the debtor is used as collateral, so that the loan can be made at a lower interest rate than it could be otherwise. The amount of the loan can sometimes be discounted. Debt consolidation is one of the best ways of paying off credit card debt. Since the interest rate is lower, the debt can be paid off more quickly.

Software and apps that you can use

Various software programs exist that can help you sort out your debt problems faster. These also include “apps” for tablets and smartphones as well as for PCs, and some of them are described below.

For PCs

Be Debt Free America

This is one of the easiest programs to use. You simply enter how much you owe and the program will create a custom method of repayment for you. All debts except the first are automatically arranged from the highest interest rate to the lowest. BDFA then gives you a debt repayment schedule that will tell you exactly how much to pay each month and how much interest and extra payment. You can accelerate the debt repayment process by adding one-time or ongoing extra payments as necessary. Similar flexibility is offered with interest rates. BDFA will also show you how much money and time you have saved by using their software.

Personal Wealth Guru

Personal Wealth Guru—which can help people solve problems with relationships as well as with money—enables you not only to formulate a debt budget, but also to use the software’s forecasting tools to see more easily how you can save thousands of dollars in credit card and mortgage payments.

Many features of Personal Wealth Guru’s software make it among the most attractive to use. The CD ROM comes with a video that shows you how use the software. A Personal Interest Ticker shows you how much you are paying in interest in “real time.” The appearance of the screen, too, is attractive, with the tab markers colored in pastel-shaded green, red and others, outlined in gold.

Rapid Debt Reducer

Rapid Debt Reducer simplifies the entire debt reduction process. It can help you to increase your credit rating so that you have to pay less in car insurance and on future purchases, and to improve your debt to income ratio. All you have to do is enter your debts in a table with the type of debt (credit card or other), creditor, principle, monthly and minimum payments, interest rates and due dates—also have the program notify you within a specified time of that date—and subsequently perform calculations in order to make an analysis of those debts, the result of which will be shown in the form of a bar graph.

To use the program for budgeting, specify the payoff priority (smallest debt first, largest debt first, &c.), when to start the payoff, how much extra payment and whether to use minimum payment. You can also learn more about “accelerated payoff.” Finally, Rapid Debt Reducer has a “Three Steps to Financial Freedom” program that you can download from the company’s website. The three steps are: Enter your debts, view and print reports and follow the plan. Each debt is given a different sheet until it is paid off.

For smartphones

The apps described in this section are all compatible with the iPhone and iPad. All are free unless otherwise indicated.

Debt Reduction Calculate

This app simply helps you to calculate the time and money saved by its methods. No reviews have been made on it yet. Debt reduction calculators are also available at various websites, including money-zine.com and Excel-1-2.

Debt End

Debt End (also called Debt HD) is an excellent program for organizing and managing one’s debts. It too uses the snowball method. The present version combines the iPhone, iPad and iCloud Sync versions. Debt End provides a simple form that helps you track all of your debts—at a single glance you can see how much you presently owe, how much you are paying off per month and by what date you should be completely free of debt given your current rate of payment. It is also very flexible: You can always add new payments of whatever amounts. Says topappreviews1.com: “Debt End is a very innovative app that lets you manage and clear all your debts in a simple and easy way. The app has really something unique that makes everyone eager to use it. I will surely like to rate 4/5 to this incredible app!!”

How to negotiate principal reductions

In some cases reductions in the amount of principle to be repaid may be negotiated. It is true that mortgage lenders are often reluctant to do so because they do not want to encourage delinquency among borrowers by rewarding them for defaulting, and because they have a legal obligation to those who have invested in the loan. However, residents of eleven states and possibly three others who have Countrywide mortgages and have paid option ARM (adjustable rate mortgage) or subprime loans can get as much as 95 percent of the value of their homes—provided that the home loan originated on any day in 2007. The amount of leverage is greater in the so-called non-recourse states, where mortgage lenders cannot sue their debtors for “deficiency judgments” (there are eleven such states, though in North Dakota this applies only with purchase mortgages). In such states, no foreclosure appears on the debtor’s credit report.

In the other 39 states, the debtor still has the option of filing for bankruptcy protection. Another path is to take advantage of the high-discount “underwater loans” that investors such as banks and hedge funds often purchase from mortgage lenders.

Tips on how to control shopping impulses / splurges and how to save

So far we have discussed how to repair a bad credit rating by figuring out ways in which to pay off your debts, often with the help of software. Still, the most effective way to get out of debt is to avoid getting into it in the first place. And that is what we shall cover in the next two sections of this article.

One of the first things that you want to do is to get a lid on your impulse to go on a shopping spree. Many people find that they have this uncontrollable urge to buy things that they really want or think they want. Oftentimes—and this is especially true for older people—they go out and buy things that they do not really need, when in actuality what they want is something to do, a way of spending their time.

If you are the kind of person who likes to take walks, as I am, then choose a route which will not take you anywhere near any store. Or if you find it helps, leave your wallet at home. The development of online shopping, however, has opened up the possible places where people can buy things for themselves thousandfold. Should it seem to you that you have been spending too much money on online shopping, then it would be a good idea to minimize the amount of time that you spend at your computer. Use it mainly to write emails, keep track of the things that need to be attended to—or to take care of business, if you have an Internet business or are an online worker.

Many people also feel like they have to “keep up with the Joneses” in order to gain the esteem of their colleagues. This is a mindset that you should get out of—certainly if it causes you to live a lifestyle that you cannot afford. Friendship, after all, is earned and cannot be bought.

For those for whom shopping is a way of spending your time, the solution is to find alternatives, of which there are plenty. You can:

go for a walk
swim
exercise
visit with your friends or family members
go to the library, the park or someplace else
take a nap

Setting up and following a budget

You also need to put together a budget that can help you to map out where your money is coming from and where it is going to. It may not sound like a pleasant activity, but everyone has to do it, from the chief of state of a nation to the CEO of a major corporation right down to the. Your financial success will depend first and foremost on your ability and willingness to budget.

The way to make a budget is as follows. First, make a list of all your fixed bills and other expenses that you know you have to pay regularly—your utilities, mortgages and any unsettled debts. While at this step, divide your accounts into as many subcategories as you can—for instance, under “food payments” you can put “groceries” and “restaurant meals.” Should you find the need, trim any excess spending—such as that on snacks, magazines, travel unrelated to your job and anything else that you do not really need or do not use (such as membership at a gym that you never go to)—to make your expenses equal to your income. If you are married, meet with your spouse once a week to discuss your financial matters. She may be able to tell you about some areas in which spending needs to be cut that you did not know about.

You might find it helpful to use a set of cash envelopes, each set aside for a specific class of expenses (e.g. “food,” “gasoline,” “personal expenses”). In each envelope put the amount of money that you have budgeted for that category per week, and do not go beyond it. Avoid putting yourself into situations where you might be tempted to spend large amounts of money.

Budgeting programs and apps

Smartphone apps that can help you to plan and stick to your budget include the following (only free or low-cost apps are given here, and all are for the iPhone):

Toshl—This app is especially useful in that it uses “the cloud,” syncing every transaction online automatically so that you do not have to worry about losing any of your data. Export options are also available for PDF, Google Drive and Microsoft Excel.
Mint-one of the best budgeting apps around. Because it is connected directly with your bank account, data stored in it will be automatically updated with no input required from the user. You can also view your spending habits in greater depth and even activate the notification feature that comes with the program so that you will never fail to pay a bill!
Pageonce Money & Bills—advertised by CNN as the “Cadillac of money management apps;” can be used to connect a variety of functions: bank account, travel rewards programs, credit cards and more; as secure as a bank

Gambling

Gambling is a definite no-no. It can be as much of an addiction as drugs or alcohol, and in a very real sense—the adrenalin rush that many gamblers experience when looking forward to their next winnings can be uncontrollable. Worse still, the bright, flashing lights that decorate gambling casinos dazzle many people into succumbing to the gambling urge—which is, precisely the reason why the owners put them up at all. They do not want people to think.

The financial ruin that gambling has brought to the lives of many people has been enormous—I know a case of child whose father committed suicide because of his gambling debts. More specifically, he knew that no bank would lend him the money to pay back his creditors, so he turned to some loan sharks—and they did lend him the money, but when he in turn fell overdue with them, they threatened to go after his wife and children. Even Gamblers Anonymous was no option for this poor fellow. Just to give you an idea of the kind of trouble that gambling can get people into.

Tips on how much people should have saved away for a rainy day and such

How much you should save for a rainy day depends largely on your financial goals and your current situation. East Carolina University Finance Professor Scott Below says that how much you invest is actually not so important as when you start investing—and if you do so in your teens, with IRAs and such, you should be financially secure when you retire. Having a savings account containing about a third of your checking is also a smart idea—but avoid touching that or your investments except in the direst emergencies.

Debt counseling

For some people, debt is so much a way of life that they need counseling. A debt counselor, like any counselor, tries to get to the root of the problem by asking his clients about their spending habits and telling them what they should change or improve. He tries to be understanding of them and to provide as much emotional support as he can. Of course, you will have to be completely honest with him, otherwise the most competent counselor will be of no help to you. As Dr. Phil repeatedly says, “You can’t change what you don’t acknowledge.”

What if my identity has been stolen?

We are all familiar by now with the way innocent, unsuspecting people often have their identities stolen by hackers who then either use the credit cards of their victims or open new accounts in their names. Either way, the perpetrator then spends hundreds or even thousands of dollars with the card, and it is his victim who is stuck with the bill. Failure to pay such bills results in a black mark on the credit history of the victim.

To avoid becoming the victim of this kind of scheme, keep close tabs on your bank activity and if you find any signs of suspicious activity—such as an unusually large purchase that you do not remember having made, to some business that you have never even heard of—then make a report of that to your credit card company. (Incidentally, with a debit card, since the amount charged is deducted immediately from your banking account, you have much less time to report the theft than you would with a credit card. Similarly, if a thief gets hold of the PIN number to your debit card, and subsequently empties out your bank account, you may have no recourse.)

As has been shown on the advertisements that feature a singer/guitarist who has been regulated to this kind of work “all because some hacker stole my identity,” you can check your credit history by going to Free Credit Report, where you can have your report delivered to you for free or get your score also for a dollar.

The root cause of all debt—and thus having a bad credit report—is spending more money than you have (and have you ever wondered why our country is in the middle of a federal budget deficit?). It simply takes some prudence and common sense to avoid falling into the traps that result in these habits. It is always better to be safe than to be sorry.