Part 1: The Basics of Chapter 7 Bankruptcy
Part 2: The Basics of Money Management
Part 3: The Basics of Credit Management
Part 4: Additional Resources
Personal Financial Choices
PART 3: THE BASICS OF CREDIT MANAGEMENT
At the conclusion of this lesson you should be able to:
This lesson will help you identify critical documents from your Chapter 7 Bankruptcy, especially documents which you must keep for your records. You will also be able to identify critical elements of your past credit history and understand how they affect your current credit status. Finally you will learn the steps you need to take to re-establish your credit.
You’re probably wondering if you will ever get credit once you’ve been discharged in your Chapter 7 Bankruptcy. Perhaps you worry how you can get a car loan or buy a home. Remember, you won’t necessarily be rejected for new credit by a lender just because your credit report shows that you filed a Chapter 7 Bankruptcy.
Creditors use their own underwriting guidelines to decide whether or not to give you credit, and they all differ. The loan officer uses these guidelines and your credit report when reviewing your credit application. Your credit file is a record of your past payment history. Suits, collections, attachments, and bankruptcies all show up on your credit report and are all indications — in one degree or another — of credit problems.
Because you have filed Chapter 7, you need to take an active role in managing your personal credit record for the next few years. Even if you don’t believe that you want credit now or in the future, you may find that you need to finance a large purchase, take a long trip, rent a car or travel to another country, rent a hotel room on credit, or finance a small business. If you are like most people, you will probably need credit for one of these or some other reason in the future. Therefore, it is important to be sure that your credit history is reflected accurately on your credit report, and that you do as much as you can now to start rebuilding your credit-worthiness.
Do you have these important Chapter 7 documents?
If not, get copies now and keep them in your permanent files for a long time, maybe forever! It is important that you keep your Discharge Order.
HOW TO GET YOUR CREDIT REPORT
Your credit report is a very important document which influences many different parts of your life — now and in the future. It shows how you have paid your debts in the past as well as other information that is reviewed by a lender in deciding whether or not to grant you credit. Your credit report is also reviewed by potential employers in deciding whether or not to offer you a job, by utility companies in deciding how much to charge you for service, and even by landlords in deciding whether to allow you to rent a home or apartment. It is additionally used by some insurance companies in deciding whether or not to extend coverage to you.
You may have more than one credit report. Lenders who you have borrowed money from in the past usually report your repayment history to more than one credit bureau. This means that your records might be on file with several credit bureaus. A good deal of other information about you besides your borrowing and repayment history is shown in your credit report — like your social security number, your past and present addresses, employers, and even information about your spouse.
There are three major credit reporting agencies in the United States called “credit repositories.” Each of the “Big Three” repositories has an 800 number so that you can call to get information about ordering your own credit report. The “Big Three” credit bureaus cover the entire country. There may also be smaller credit bureaus in your area who maintain credit files of information about you as well. These are the “Big Three” credit repositories:
Under the Fair Credit Reporting Act (“FCRA”) you have the right to know what is in your credit file. If you have been denied credit within the past sixty days, you can find out what is in your credit file for free. If a creditor declines your application for credit based on the information obtained from your credit bureau file, they are required to tell you the name and location of the credit bureau from which they obtained your file. If you are turned down for a loan, for insurance, by an employer, or if you suffer any other adverse circumstances, call each credit repository. Tell them you have been denied credit and ask for a copy of your credit report.
You may also qualify for a free copy of your credit report if you are receiving welfare, if you are unemployed and plan to seek employment within the next 60 days, or if your credit report is inaccurate due to fraud.
If you have not been denied credit recently or do not qualify for a free report for one of the above reasons, you should still order a copy of your credit report so that you can review all of the information it contains about you and correct any inaccuracies as quickly as possible.
WHAT CREDIT REPORTS SAY ABOUT YOU AND YOUR PAYMENT HABITS
Credit reports from different credit repositories do not look the same because each credit reporting agency designs its own report. Therefore, they are often difficult to read and understand. However, the FCRA requires that each repository provide instructions at the beginning of the report about how to interpret the information.
There are some credit reporting characteristics that you will find in each repository’s reports. For example, all credit reports contain the following information:
Personal information about you
Courthouse and Public Records
Credit Report Inquiries
WHY GET A CREDIT REPORT?
It is a good idea to order a copy of your credit report and review it before you actually apply for a loan, for insurance, to rent a home, to set up utility service, or to seek employment. If you wait until a loan officer orders one for a loan application for instance, it may be too late to dispute any inaccurate information contained in the report.
Here’s why you should review your credit report before you apply for credit, for a job, or for insurance:
• It may contain someone else’s information.
WHAT TO LOOK FOR ON YOUR CREDIT REPORT
After you request your credit report — and be sure to request your reports from each of the Big Three repositories — allow 7 to 21 days to receive it. After you receive all of your reports, it is a good idea to follow these steps:
1. Determine the date all account information was reported.
WHAT IS DEROGATORY (NEGATIVE) INFORMATION?
Lenders, employers, insurers, and others may deny your application if derogatory information appears on your credit report. Derogatory information may be any one or more of the following statements:
• Paid, collection
HOW WILL DEROGATORY INFORMATION AFFECT YOU?
Negative information on a credit report is any information that may cause you to be turned down for credit or reduce your chances for loan approval.
HOW TO DISPUTE INFORMATION ON YOUR REPORT
Your credit report is the history of your past performance with creditors. Therefore, if the information reported in your report is inaccurate or out of date, the information must be corrected or removed.
It is important for you to report any inaccurate information that you find on your credit report right away. Credit bureaus are required to investigate and correct inaccurate information within 30 to 45 days from receipt of the dispute. If they cannot verify the information you are disputing, they must remove it from your file and upon your request, notify anyone you specify who has received the inaccurate file within the last 24 months for employment and 6 months for any other
Any credit bureau that willfully fails to comply with these and other FCRA provisions with respect to any consumer is generally liable to that consumer in an amount equal to the sum of:
• Actual damage sustained by the consumer as a result of the failure or damages of not less than $100 and not more than $1,000
HOW TO DISPUTE INACCURACIES ON YOUR REPORT
1. Know your rights under the FCRA, the Consumer Credit Protection Act, and the Fair Debt Collection Practices Act. For free information explaining these laws and to receive pamphlets such as Building a Better Credit Record, Women and Credit Histories, and Credit Billing Blues, write to:
Federal Trade Commission
2. After examining your credit report, write a letter to each of the credit repositories requesting that disputed information in the report be investigated.
3. Keep a record of all letters requesting updates and keep any other correspondence related to your credit report.
4. Follow up if corrected reports are not received after the bureau reinvestigates and determines that the information you disputed is incorrect or cannot be verified. If the reinvestigation by the bureau does not resolve your dispute, you may contact one of the following federal agencies which have the authority to enforce the FCRA:
• Credit Reporting Agencies
• National Banks, federal branches/agencies of foreign banks, (the word “National” or initials “N.A.” appear in or after bank’s name)
• Federal Reserve System member banks (except national banks, and federal branches/agencies of foreign banks)
Office of Thrift Supervision
• Federal Credit Unions (words “Federal Credit Union” appear in institution’s name)
• State-chartered banks that are not members of the Federal Reserve System
• Air, surface, or rail common carriers regulated by former Civil Aeronautics
A SPECIAL NOTE ABOUT “CREDIT REPAIR”
There are businesses that advertise that they can “remove unfavorable remarks” and “clean up your credit report” based on loopholes in federal law. These businesses or “clinics” often tie up your file at the bureaus by flooding them with requests for verification of derogatory information even if it’s true. What they don’t tell you is that the information they removed from your report can be replaced at a later date if the creditor who is reporting that information can verify that it was accurate.
Remember that only the creditor or credit reporting agency can legally remove that information from your file before the seven-to-ten year reporting period expires. And they will only remove information reported in error.
THE LENDER’S POINT OF VIEW
Lenders often evaluate you to determine how much credit to grant you — if any — based on the “three C’s: character, capacity, and capital.”
• Character — Will you repay? Lenders may consider factors such as the length of time you have been at your present and previous address, time at your present/
• Capacity — Can you repay? The lender may consider income from all verifiable sources and the reliability of your job, debt to income ratio, or how your monthly income compares to your monthly debts.
Some creditors prefer that no more than 28% of your gross income if employed or of your net income if self-employed pays for housing debt. In addition, the maximum overall “fixed” debt (including housing) is 36% of your gross income if employed or of your net income if self-employed
• Capital —What collateral do you own? Lenders will ask you to disclose all real estate you own, the amount of cash you have in checking and savings accounts, other investments, and any other personal property you own.
WHAT IS CREDIT SCORING?
Credit scoring is another method that some lenders use to determine whether you meet their lending criteria. Credit scoring is done by computer. It is a statistical method used to evaluate your payment history and other factors.
The lender’s underwriting guidelines assign a specific score to various elements of your loan application, such as your ratios, the down payment you put to the loan, number of credit cards you have, your payment history to other creditors, etc. They then calculate an overall score based on all of the above. If your score is high enough, they will grant you credit. If not, then they may not grant you credit.
WHAT STEPS SHOULD YOU TAKE TO UPDATE YOUR CREDIT HISTORY?
After you have gone through the process of ordering your credit report and correcting any incorrect information, you will need to focus on rebuilding your credit history. You’ll need to update your existing file and start working toward establishing a strong, new credit history that proves you have changed poor repayment habits, if those were in fact part of your old history.
• Supply the credit bureau with any positive information which may not appear on your report.
WHAT YOU CAN DO TO REBUILD YOUR CREDIT AND IMPROVE YOUR SCORE
• Open a checking and savings account and begin making regular deposits even if they are small.
Going forward, make a commitment to yourself to pay your bills on time. Late payments not only cost you money you could be spending on other things, they also ruin your credit report. If you must use credit, limit it to what you can pay back in a short period of time. Know what you can really, comfortably afford to pay for purchases with the income you have, and limit your borrowing to that amount.
Keep your borrowing to just a few lines of credit. If you can’t resist temptation, cut up all the cards and close down all lines of credit. Most of all, take advantage of this fresh start. Save money. When you need credit, learn how to shop for it. Make a spending plan and follow it. Don’t be distracted by someone else’s plan for your money.
Take control of your own future.
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