Every consumer who uses credit has a credit record -- and is it ever powerful.
Every time you apply for credit or a loan, creditors obtain your credit record to verify your worthiness. But, the use of these reports has broadened. Insurance companies have begun to use them to determine premiums or deny coverage. Potential employers may even want to check out your credit worthiness.
Rising interest in credit scores
Today, a credit record is more than just a dry report on how many credit cards you have and whether you made every auto payment on time. Credit recording agencies often distill consumers' reports into a three-digit number called a credit score -- and that number alone can determine whether you get easy monthly payments or loan-shark rates. It's not surprising that as credit scores become more important, consumers are taking more interest in these three-digit numbers. A high score saves you money, a low score costs you. This fascination with credit scores has led to more interest in repairing credit to increase scores.
Unfortunately, as the demand for credit repair rises, the opportunity for scams becomes more prevalent, says Marta Moakley, an assistant attorney general in Florida.
"As our economy becomes sluggish and debt levels rise, more people turn to companies that specialize in credit repair for help. Consumers need to be aware that there is potential for fraud."
The need for such a service is obvious. Practically every consumer has inaccurate or outdated information on a credit report from one of the three major credit bureaus, says Steve Rhode, president and co-founder of Myvesta.org, a nonprofit agency that counsels people in financial crisis.
These errors can be costly, and it's up to the consumer to get them corrected. The credit bureaus are not obligated to root out errors and provide accurate information. Their job is to record the information presented to them by creditors.
Call for help?
So, if your score is low or your credit report is inaccurate, what are your options? It's like hanging wallpaper -- do you call a professional paperhanger, or tackle it yourself?
The Fair Credit Reporting Act says consumers can dispute mistakes in their credit files for free. But it will take time. Correcting one error may average four hours, says Rhode. That includes applying for your credit reports, reviewing and highlighting errors, documenting the mistake, typing up your letter and mailing it.
Credit repair services offer, for a fee, to do this daunting legwork. They pull credit reports, review for errors and send out dispute letters along with documentation. They add professionalism. They save you time. Some promise to erase bad credit -- 100 percent guaranteed. Others advertise they can remove bankruptcies from your credit file forever.
These repair services, however, don't have any secret remedies for erasing bad credit. Neither you nor the credit repair service has the right to remove accurate and current information from your credit report. The bottom line is: Credit repair services can't do anything for you that you can't do for yourself, free.
The mysterious repair shops
Are credit repair clinics fulfilling their promises to improve credit scores? It's hard to say. We contacted five credit repair clinics to learn about their guarantees and success stories, but not one was willing to talk.
The consumer service agencies were more than willing to talk.
Steve Baker, Director of the Federal Trade Commission in Chicago, says a prevailing myth about credit repair is that there are loopholes in the federal law that allows poor credit to be erased. It doesn't exist.
He says that in the past four years the FTC has not seen a legitimate credit repair clinic. "It's possible that these clinics are providing legitimate services to customers, but I've not seen it yet. When the law says that bankruptcy remains on your credit report for 10 years, just how can it be legally removed?" questions Baker. "And, later when you're asked in a credit application if you've ever filed for bankruptcy, will you lie?"
He cites an example of one consumer who was told to steal his bankruptcy record from the county courthouse, so that the credit bureau could not verify its accuracy.
Dramatic? Yes. But it poses a good question -- how are credit repair services removing bad credit?
"If the credit repair service offers guarantees within the Fair Credit Reporting Act," says Steve Rhode of Myvesta.org, "then it's doing the job. Credit repair services get sleazy when they promise to do a job that's just not possible. They promise to remove accurate, but negative information."
"Scams occur," says Marta Moakley, "when consumers pay fees for services that are never performed, or the consumer is misled on the services provided. Too often the consumer can't afford to lose this money."
Worse yet, consumers have paid money upfront -- and the company disappears.
"Credit protection and credit repair" scams are one of the top consumer complaints reported to the FTC. The actual dollar amount lost by consumers to these scams is difficult to calculate, says Baker, because many people are too embarrassed to complain. But, the FTC estimates the loss to consumers is easily in the millions.
"This is an equal opportunity scam. Everyone has a credit report; anyone can suffer from a poor credit history," says Baker.
Steve Rhode knows of consumers who paid $400 to $2,000 for credit repair services. Do-it-yourselfers can expect to pay $30 for a consolidated credit report -- a report that provides your credit history from the three major credit bureaus -- plus the value of their time.
Finding a reputable company
You may still decide to go the credit repair service route. Here's how to let your fingers cautiously do the walking through the yellow pages.
Do your homework. Research the company before your first visit. Contact the Better Business Bureau to see if the firm has had any consumer complaints. Check with your state attorney general's office or other state consumer agencies to find out if there are any pending legal investigations. The FTC warns against relying on chambers of commerce or other trade associations where membership is based solely on a fee.
Know your rights. Credit repair services must follow specific guidelines from the Credit Repair Organizations Act, which are intended to protect consumers. You should receive an explanation of these rights before signing a written contract. Read them.
You should receive a contract with all of the following information:
* The payment terms for services, including their total cost
* A detailed description of the services to be performed
* How long it will take to achieve the results
* Any guarantees they offer
* The company's name and business address
Remember the grace period. The credit repair company cannot perform any services for you until you've signed a written contract and completed a three-day waiting period. You may cancel the contract without paying any fees during this period.
Danger signals
Run, don't walk away from a firm that does any of the following:
* Asks you to pay for credit repair before services are provided. This is a direct violation of the Credit Repair Organizations Act, which states that credit repair companies can't charge you fees until after they have completed the promised services.
* Advises you to dispute all negative information in your credit report. The company will flood credit bureaus with a plethora of letters disputing both inaccurate and accurate information. The theory being that many times creditors fail to respond within 30 days and that item is permanently deleted. The truth is that most credit is verifiable, very rarely are credit scores improved and the consumer has wasted time and money.
* Promises you the moon. Credit repair companies cannot remove accurate records of bankruptcies, judgments, liens or bad loans from your file. Most negative information stays on your credit report for seven years; judgments and lawsuits are reported for seven years or until the statute of limitations runs out; bankruptcy for 10 years.
* Offers to help you get a new credit identity. The company tells you to apply for an Employer Identification Number, which has the same number of digits as a Social Security number. Then they instruct you to apply for credit using this and a different address. This practice, known as file segregation, is a federal and state felony.
But perhaps your biggest safety net against credit repair scam is your expectations. Rhode explains that illegitimate credit repair services exist because consumers believe they are entitled to a different score. They want to change it, regardless of whether the negative information is an accurate reflection of their credit history. This is supply and demand.
"There are no quick fixes in credit repair," insists Moakley. "Common sense tells you that a third party doesn't know your credit history better than you. Through contacting credit bureaus, making your own corrections, consolidating your debts and budgeting, you can improve your own score. You don't need to pay someone to fix it for you. Apply that money toward your debt."
Useful phone numbers and addresses
Federal Trade Commission consumer response center
(877) 382-4357
Equifax
P.O. Box 740241
Atlanta, GA 30374-0241
(800) 685-1111
Experian (formerly TRW)
P.O. Box 2104
Allen, TX 75013-0949
(888) 397-3742
Trans Union Corp.
760 W. Sproul Rd.
Springfield, PA 19064-0390
(800) 888-4213
Tuesday, August 14, 2007
Thursday, August 9, 2007
How To Improve Your Credit Scores
by Janet Wickell
Techniques for Better Credit Reports and Scores
Lenders analyze your credit scores to determine whether or not to approve a home mortage, a car purchase and nearly all other types of loans.
Before lending you money, creditors want to determine how much of a risk you are—in other words, how likely you are to repay the money they loan you. Credit scores help them do that, and the higher your score, the less risk they feel you'll be.
Most increases to your credit scores take place over time and require an ongoing effort from you. The only true credit score quick-fixes are to pay down debt and to successfully dispute negative information on a credit report.
Credit scoring software looks at five areas of your credit reports:
* Your Payment History
* Amounts You Owe
* Length of Your Credit History
* Types of Credit Used
* Your New Credit
The article How Your Credit Score is Calculated explains what's included in each of the five categories.
You can improve your credit scores by taking a close look at your credit reports and charting a plan of action to improve them.
Improve Your Payment History
* Always pay your bills on time.
* Late payments play a major role in driving down your score.
* If you have past-due bills now, get current and stay that way.
* Contact your creditors as soon as you know you will have a problem paying bills on time. Try to work out a payment arrangement and negotiate with them to keep at least a portion of the late notations off of your credit reports.
* If your situation is serious, see a legitimate, non profit credit counselor. Avoid the scam artists who promise a quick reversal of your credit problems.
Keep Debt to a Minimum
* Keep your credit card balances low. High debt-to-credit-limit ratios drive your scores down.
* Pay off debt, don't move it around. Owing the same amounts, but having fewer open accounts, can lower your score if you max out the accounts involved.
* Don't close unused accounts, because zero balance might help your score.
* Don't open new accounts that you don't need as a quickie approach to altering your debt-to-credit-limit ratios. That can lower your score.
Length of Your Credit History
* Time is the only thing that can improve this aspect of your scores, but you can manage it wisely:
o Don't open several new accounts in a short period, especially if your credit history is less than three years. Adding accounts too rapidly sends up a red flag that you might not be able to handle your credit responsibly.
Manage New Credit Wisely
* Several credit inquiries during a short period means you are attempting to open multiple new accounts, and that lowers your credit scores.
* Credit scoring software usually recognizes when you are shopping for a single loan within a short period of time, such as a home loan. If multiple inquiries are necessary, have them pulled as closely together as possible.
* Checking your own credit report does not affect your scores.
* Do try to open a few new accounts if you've had credit problems in the past. Pay them on time and don't max out your credit limits.
The Types of Credit You Use
* A mixture of credit cards and installment loans, loans with fixed payments, can help raise your score if you manage the credit cards responsibly.
* Having many installment loans can lower your scores since payments remain the same until balances are paid in full.
* Don't open new accounts just to have several accounts or to attempt a better mix of credit.
* Closing an account doesn't remove it from your report. It may still be considered for scoring purposes.
Techniques for Better Credit Reports and Scores
Lenders analyze your credit scores to determine whether or not to approve a home mortage, a car purchase and nearly all other types of loans.
Before lending you money, creditors want to determine how much of a risk you are—in other words, how likely you are to repay the money they loan you. Credit scores help them do that, and the higher your score, the less risk they feel you'll be.
Most increases to your credit scores take place over time and require an ongoing effort from you. The only true credit score quick-fixes are to pay down debt and to successfully dispute negative information on a credit report.
Credit scoring software looks at five areas of your credit reports:
* Your Payment History
* Amounts You Owe
* Length of Your Credit History
* Types of Credit Used
* Your New Credit
The article How Your Credit Score is Calculated explains what's included in each of the five categories.
You can improve your credit scores by taking a close look at your credit reports and charting a plan of action to improve them.
Improve Your Payment History
* Always pay your bills on time.
* Late payments play a major role in driving down your score.
* If you have past-due bills now, get current and stay that way.
* Contact your creditors as soon as you know you will have a problem paying bills on time. Try to work out a payment arrangement and negotiate with them to keep at least a portion of the late notations off of your credit reports.
* If your situation is serious, see a legitimate, non profit credit counselor. Avoid the scam artists who promise a quick reversal of your credit problems.
Keep Debt to a Minimum
* Keep your credit card balances low. High debt-to-credit-limit ratios drive your scores down.
* Pay off debt, don't move it around. Owing the same amounts, but having fewer open accounts, can lower your score if you max out the accounts involved.
* Don't close unused accounts, because zero balance might help your score.
* Don't open new accounts that you don't need as a quickie approach to altering your debt-to-credit-limit ratios. That can lower your score.
Length of Your Credit History
* Time is the only thing that can improve this aspect of your scores, but you can manage it wisely:
o Don't open several new accounts in a short period, especially if your credit history is less than three years. Adding accounts too rapidly sends up a red flag that you might not be able to handle your credit responsibly.
Manage New Credit Wisely
* Several credit inquiries during a short period means you are attempting to open multiple new accounts, and that lowers your credit scores.
* Credit scoring software usually recognizes when you are shopping for a single loan within a short period of time, such as a home loan. If multiple inquiries are necessary, have them pulled as closely together as possible.
* Checking your own credit report does not affect your scores.
* Do try to open a few new accounts if you've had credit problems in the past. Pay them on time and don't max out your credit limits.
The Types of Credit You Use
* A mixture of credit cards and installment loans, loans with fixed payments, can help raise your score if you manage the credit cards responsibly.
* Having many installment loans can lower your scores since payments remain the same until balances are paid in full.
* Don't open new accounts just to have several accounts or to attempt a better mix of credit.
* Closing an account doesn't remove it from your report. It may still be considered for scoring purposes.
Beef up your credit score in 5 steps
By Liz Pulliam Weston
So you've had a few problems getting the bills paid lately, and you're wondering what you can do to repair the damage.
You've got plenty of company. There are more than 30 million people in the United States with credit blemishes severe enough (score under 620) to make obtaining loans and credit cards with reasonable terms difficult.
Or maybe your credit is OK, but you'd like to make it better. After all, the better your credit, the lower the interest rates you can score on mortgages, car loans and credit cards.
New glimpses into the once-secret process of credit scoring have made it easier than ever to improve your credit -- and reversed some of the advice we personal finance journalists once gave consumers about managing plastic.
(For the uninitiated, credit scores are three-digit numbers increasingly used by lenders when evaluating your creditworthiness. Insurers, employers and landlords also use the scores in evaluating the applications they get. Scores range from 300 to 850. Only about 11% of the surveyed population ranks above 800; 29% ranks between 750 and 799.)
Anyone who wants to improve a credit score should first do some basic housekeeping: Get a free copy of your credit report from one of the three major credit bureaus (click here), scour it for any mistakes and ask the bureau to remove incorrect information. Once that's accomplished, you can start to work on burnishing your score.
Here, then, are the five steps to credit repair:
Pay your bills on time
Payment history is the single most important factor in determining your credit score, making up 35% of the total. Since recent history carries more weight than what happened five years ago, getting in the habit of making on-time payments is an incredibly powerful way to start rebuilding your credit rating.
Likewise, delinquent payments can devastate your score. Missing even one payment can knock 50 to 100 points off a good score. Skipping payments for a single month on all your bills can lower your number from a respectable 707 to the dismal range of 562 to 632, according to the credit score estimator at Bankrate.com. The simulator lets you estimate your credit score and see the impact of various credit behaviors on your score.
Tip: I've found the best way to avoid late payments is to put as many of our bills on automatic as possible. Our mortgage lender, utilities and phone service providers are happy to take their payments directly from our checking account each month. Online bill-payment systems are another way to ease monthly check-writing chore, and many provide reminder services so you don't forget a bill. The latest versions of Quicken and Money have good reminder features, as well.
Pay down your debts -- and consider charging less
Lenders like to see plenty of breathing room between the amount of debt reported on your credit cards and your total credit limits.
The more debt you pay off, the wider that gap and the better your credit score.
What many people don't know is that credit scores don't distinguish between those who carry a balance on their cards and those who don't. So charging less can also improve your score -- even if you pay off your credit cards each month.
Your credit-card issuer takes a look at your account once every month or so and reports the outstanding balance on that day to the credit bureaus. This snapshot doesn't reflect whether you pay off that balance a few days later or whether you carry it from month to month.
Tip: If you plan to apply for a mortgage, car loan or other major credit account in the next year, start paying down those balances now. And if you're in the habit of charging everything in sight to your cards -- to gain more frequent flier miles, say -- consider switching more to cash in the months before you apply. Depending on your situation, the loss of a few miles could be more than made up for by a better score, and thus a lower interest rate.
This kind of advice, by the way, makes the folks in the credit scoring business more than a little nervous. Credit scorers and lenders don't want to see people "artificially" changing their behavior to pump up their scores. Moderation in using plastic is never a bad thing, however, and if the desire for a better score has you using credit more wisely, who's the loser? Oh, other than the fee-charging, interest-rate-boosting credit-card companies, of course.
Don't close old, paid-off accounts
We used to tell people to close accounts they weren't using. Now here's the word from direct from Craig Watts, an executive at Fair Isaac & Co., one of the leading credit scorers: "Closing accounts can never help your score, and often it can hurt."
This knowledge is frustrating to those who want to simplify their lives and reduce the opportunities for identity theft by closing unused accounts. But credit facts are credit facts.
Shutting down credit accounts lowers the total credit available to you and makes any balances you have loom larger in credit score calculations. If you close your oldest accounts, it can actually shorten the length of your reported credit history and make you seem less credit-worthy.
Of course, perhaps you can afford not to care too much about the effect of closing an account. If you don't use your cards much and your score is already high, the damage caused by shutting down more recent unused accounts will be minimal and may be well worth the peace of mind.
If you do carry balances or charge a lot, however, leave all your old accounts open, especially if you're about to apply for new credit.
Tip: Keep all this in mind the next time a department store clerk offers you a 10% discount for signing up for a new card. Each new account can put a small ding on your credit score, and offer a new opportunity for credit thieves. Since closing accounts can hurt, it's better to apply only for credit you really need.
Don't be afraid of credit counseling
If you're overloaded with high-interest debt and are in danger of falling behind on your payments -- or you already have -- consider working with a nonprofit agency such as Consumer Credit Counseling Services to set up a debt repayment plan. These services can negotiate lower interest rates and help you pay off your bills within a few years.
Contrary to what you might have heard, credit counseling probably won't hurt your credit score. It used to, but about three years ago Fair Isaac discovered that people in debt-repayment plans were no more likely to default or go bankrupt than other consumers.
"Today the FICO score ignores any and all references in a credit report to credit counseling or debt management programs," Watts said.
Those references to credit counseling, by the way, are typically removed from a credit report after a consumer has successfully completed a repayment plan. That means there's no lasting reminder on your credit history.
Watts notes that a few lenders still use the old scoring system, which punishes folks on debt repayment plans. Others, particularly mortgage lenders, simply won't work with people in credit counseling until their plans are completed, regardless of their credit scores.
Tip: Don't confuse legitimate, nonprofit credit counseling services with fly-by-night outfits or so-called debt settlement firms. Debt settlement will hurt your credit score, since you're paying less than you owe, and fly-by-night firms can disappear with your payments, making your credit even worse.
Stay out of bankruptcy if you can
Bankruptcy is the nuclear bomb of the credit world -- worse than delinquencies, loans or collections. Its impact, however, depends on how many black marks you made on your credit before you filed.
Bankruptcy can knock 200 points, or more, off the score of someone with otherwise good credit. People with multiple delinquencies or collections on their reports will see less of a decline because their scores are low to begin with. Either way, recovering from a bankruptcy can be tough. Once a score is pushed below 620, which bankruptcy inevitably does, credit becomes scarce and far more expensive.
High-interest lenders love recent bankruptcies, because they know consumers aren't allowed to file again for another six years -- plenty of time to squeeze out lots of high-rate payments.
Mainstream lenders, however, generally will reject consumers with a bankruptcy on their record -- and bankruptcies are reported for up to 10 years.
Knowing your credit score, and the potential impact of a bankruptcy, might help you steel your resolve to pay off your bills and improve your credit situation. Or you may decide you can't make matters much worse, and file anyway.
One last tip: Once you know the impact on your score, get good objective advice before filing for bankruptcy. Attorneys may be overly eager for you to file, while consumer credit counselors may be overly eager that you not. Books such as Robin Leonard's "Money Troubles: Legal Strategies to Cope with Your Debts" offers a more balanced view of the risks and benefits of bankruptcy.
So you've had a few problems getting the bills paid lately, and you're wondering what you can do to repair the damage.
You've got plenty of company. There are more than 30 million people in the United States with credit blemishes severe enough (score under 620) to make obtaining loans and credit cards with reasonable terms difficult.
Or maybe your credit is OK, but you'd like to make it better. After all, the better your credit, the lower the interest rates you can score on mortgages, car loans and credit cards.
New glimpses into the once-secret process of credit scoring have made it easier than ever to improve your credit -- and reversed some of the advice we personal finance journalists once gave consumers about managing plastic.
(For the uninitiated, credit scores are three-digit numbers increasingly used by lenders when evaluating your creditworthiness. Insurers, employers and landlords also use the scores in evaluating the applications they get. Scores range from 300 to 850. Only about 11% of the surveyed population ranks above 800; 29% ranks between 750 and 799.)
Anyone who wants to improve a credit score should first do some basic housekeeping: Get a free copy of your credit report from one of the three major credit bureaus (click here), scour it for any mistakes and ask the bureau to remove incorrect information. Once that's accomplished, you can start to work on burnishing your score.
Here, then, are the five steps to credit repair:
Pay your bills on time
Payment history is the single most important factor in determining your credit score, making up 35% of the total. Since recent history carries more weight than what happened five years ago, getting in the habit of making on-time payments is an incredibly powerful way to start rebuilding your credit rating.
Likewise, delinquent payments can devastate your score. Missing even one payment can knock 50 to 100 points off a good score. Skipping payments for a single month on all your bills can lower your number from a respectable 707 to the dismal range of 562 to 632, according to the credit score estimator at Bankrate.com. The simulator lets you estimate your credit score and see the impact of various credit behaviors on your score.
Tip: I've found the best way to avoid late payments is to put as many of our bills on automatic as possible. Our mortgage lender, utilities and phone service providers are happy to take their payments directly from our checking account each month. Online bill-payment systems are another way to ease monthly check-writing chore, and many provide reminder services so you don't forget a bill. The latest versions of Quicken and Money have good reminder features, as well.
Pay down your debts -- and consider charging less
Lenders like to see plenty of breathing room between the amount of debt reported on your credit cards and your total credit limits.
The more debt you pay off, the wider that gap and the better your credit score.
What many people don't know is that credit scores don't distinguish between those who carry a balance on their cards and those who don't. So charging less can also improve your score -- even if you pay off your credit cards each month.
Your credit-card issuer takes a look at your account once every month or so and reports the outstanding balance on that day to the credit bureaus. This snapshot doesn't reflect whether you pay off that balance a few days later or whether you carry it from month to month.
Tip: If you plan to apply for a mortgage, car loan or other major credit account in the next year, start paying down those balances now. And if you're in the habit of charging everything in sight to your cards -- to gain more frequent flier miles, say -- consider switching more to cash in the months before you apply. Depending on your situation, the loss of a few miles could be more than made up for by a better score, and thus a lower interest rate.
This kind of advice, by the way, makes the folks in the credit scoring business more than a little nervous. Credit scorers and lenders don't want to see people "artificially" changing their behavior to pump up their scores. Moderation in using plastic is never a bad thing, however, and if the desire for a better score has you using credit more wisely, who's the loser? Oh, other than the fee-charging, interest-rate-boosting credit-card companies, of course.
Don't close old, paid-off accounts
We used to tell people to close accounts they weren't using. Now here's the word from direct from Craig Watts, an executive at Fair Isaac & Co., one of the leading credit scorers: "Closing accounts can never help your score, and often it can hurt."
This knowledge is frustrating to those who want to simplify their lives and reduce the opportunities for identity theft by closing unused accounts. But credit facts are credit facts.
Shutting down credit accounts lowers the total credit available to you and makes any balances you have loom larger in credit score calculations. If you close your oldest accounts, it can actually shorten the length of your reported credit history and make you seem less credit-worthy.
Of course, perhaps you can afford not to care too much about the effect of closing an account. If you don't use your cards much and your score is already high, the damage caused by shutting down more recent unused accounts will be minimal and may be well worth the peace of mind.
If you do carry balances or charge a lot, however, leave all your old accounts open, especially if you're about to apply for new credit.
Tip: Keep all this in mind the next time a department store clerk offers you a 10% discount for signing up for a new card. Each new account can put a small ding on your credit score, and offer a new opportunity for credit thieves. Since closing accounts can hurt, it's better to apply only for credit you really need.
Don't be afraid of credit counseling
If you're overloaded with high-interest debt and are in danger of falling behind on your payments -- or you already have -- consider working with a nonprofit agency such as Consumer Credit Counseling Services to set up a debt repayment plan. These services can negotiate lower interest rates and help you pay off your bills within a few years.
Contrary to what you might have heard, credit counseling probably won't hurt your credit score. It used to, but about three years ago Fair Isaac discovered that people in debt-repayment plans were no more likely to default or go bankrupt than other consumers.
"Today the FICO score ignores any and all references in a credit report to credit counseling or debt management programs," Watts said.
Those references to credit counseling, by the way, are typically removed from a credit report after a consumer has successfully completed a repayment plan. That means there's no lasting reminder on your credit history.
Watts notes that a few lenders still use the old scoring system, which punishes folks on debt repayment plans. Others, particularly mortgage lenders, simply won't work with people in credit counseling until their plans are completed, regardless of their credit scores.
Tip: Don't confuse legitimate, nonprofit credit counseling services with fly-by-night outfits or so-called debt settlement firms. Debt settlement will hurt your credit score, since you're paying less than you owe, and fly-by-night firms can disappear with your payments, making your credit even worse.
Stay out of bankruptcy if you can
Bankruptcy is the nuclear bomb of the credit world -- worse than delinquencies, loans or collections. Its impact, however, depends on how many black marks you made on your credit before you filed.
Bankruptcy can knock 200 points, or more, off the score of someone with otherwise good credit. People with multiple delinquencies or collections on their reports will see less of a decline because their scores are low to begin with. Either way, recovering from a bankruptcy can be tough. Once a score is pushed below 620, which bankruptcy inevitably does, credit becomes scarce and far more expensive.
High-interest lenders love recent bankruptcies, because they know consumers aren't allowed to file again for another six years -- plenty of time to squeeze out lots of high-rate payments.
Mainstream lenders, however, generally will reject consumers with a bankruptcy on their record -- and bankruptcies are reported for up to 10 years.
Knowing your credit score, and the potential impact of a bankruptcy, might help you steel your resolve to pay off your bills and improve your credit situation. Or you may decide you can't make matters much worse, and file anyway.
One last tip: Once you know the impact on your score, get good objective advice before filing for bankruptcy. Attorneys may be overly eager for you to file, while consumer credit counselors may be overly eager that you not. Books such as Robin Leonard's "Money Troubles: Legal Strategies to Cope with Your Debts" offers a more balanced view of the risks and benefits of bankruptcy.
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