Managing and Rebuilding Credit
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Maintaining Good Credit is Critical
People might believe they can live without establishing favorable credit simply by paying cash for the goods and services they purchase. Buying a home, paying college tuition and buying a car might be possible without being able to borrow money, but having a good credit history and the ability to borrow makes it easier to accomplish these things. The attorneys at The Law Offices of John W. Lee, P.C., understand the importance of establishing good credit, but they also realize that unforeseen financial challenges, such as unemployment or a serious illness or injury, can overwhelm even the most conscientious individual. Our strategy for helping individuals with rebuilding credit and managing debt starts with a review of some of the basic principles about credit.
Building a Positive Credit History
Credit is the ability to borrow money based upon the borrower’s promise to repay it in the future. Methods for borrowing money include:
- Personal Loans: A personal loan is usually not secured by a lien on property or assets owned by the borrower. Money is lent at a specified rate of interest based upon the borrower’s promise to repay it.
- Secured Loans: Mortgages and car loans are examples of secured loans because the lender retains a lien on an asset owned by the borrower as a means to ensure repayment of the debt. If the borrower does not pay the loan, the lender can seize the asset.
- Credit Cards: When credit card holders use their accounts to make purchases, the credit card company is lending them the money at the rate of interest and under the repayment terms stated in a written agreement they entered into when the card was issued.
Borrowing money and repaying on time helps to establish a positive credit history for the borrower and helps to increase credit score of the individual. A good payment history, high credit score and consistent work history not only helps to persuade lenders to extend credit, but they usually result in the borrower receiving a lower interest rate than someone whose credit reports show late or missed payments.
The Important Role Played by Credit Reports
Credit reports are usually associated with applications for credit cards or loans, but they can play an even greater role in a person’s life. The reports have traditionally been used by lenders to determine the creditworthiness of borrowers, but they are now being used for other reasons, including:
- Employment: Applicants for jobs might be surprised to know that many employers use credit history as a basis for deciding whether to hire them.
- Insurance: The amount people pay in premiums for their automobile insurance could have as much to do with their credit history as with their driving record. A poor showing on their credit report could increase insurance costs for some people.
- Housing: It is now a common practice for landlords to request credit checks on people before renting houses and apartments to them. Missed payments, judgments or other signs of poor credit could result cause a property owner to refuse to rent to a prospective tenant.
- Education: Tuition costs at colleges and universities can be staggering. A poor credit report could lead to a denial of student loans and other tuition assistance to a person who might otherwise be eligible.
A credit report showing too much outstanding credit could also be problematic for a person. High balances on credit cards or loans, too many credit cards and too many credit inquiries could be viewed by lenders and others as derogatory. Individuals in this type of situation could improve their credit by reducing credit load or by using consolidation loans to eliminate some of their credit cards.
Credit Score Tips and How to Increase Credit Score
A credit score is a method lending institutions use to evaluate a person’s risk of defaulting. It is calculated by utilizing the contents of an individual’s credit report. Low credit scores indicate the person is a poor credit risk who is less likely to repay the debt than someone with a higher score.
Some individuals do not have enough information in their credit report to calculate a credit score. For instance, the credit score offered by Fair Isaac Corporation, commonly referred to as a FICO score, requires that a credit report must contain at least the following information:
- At least one credit account must be opened for a minimum of six months.
- A minimum of one account must have been reported on the credit report within the past six months.
- None of the credit information shown on the report can be linked to someone who is deceased. In other words, if two people share a credit card account and one of them dies, there must be at least one other account reported on the credit report of the survivor.
FICO scores range from a low of 300 for someone with a very poor credit history to a high of 850 for someone with excellent credit history. The score given to a person depends upon the following five factors:
- Payment history: Missed or late payments can lower a person’s credit score while consistently paying bills on time can increase credit score.
- Current debt load: High credit card balances and other debts lower credit scores, so reducing credit load is one way to increase a person’s score.
- Credit history: Payment and borrowing patterns established over long periods of time improve a credit score as opposed to patterns developed over a shorter period.
- Borrower’s recent history of new applications for credit: Applications for credit, whether they are for credit cards or loans, are reflected in a credit report even if a person does not complete the process and borrow the money. Too many inquiries by potential lenders can lower a credit score.
- Types of credit held by borrower: People with higher credit scores usually have a mix of different types of debt, such as a couple of credit cards, a mortgage and a car loan, without a concentration in one type of debt.
Individuals recovering from a financial crisis should focus their efforts on rebuilding credit. An effective method for beginning to rebuild credit is by obtaining a personal loan and repaying it without being late or missing any payments.
Practicing good credit card management is another important factor in rebuilding credit. Individuals with multiple credit cards should consider reducing the number of accounts to reduce their credit load. One method of doing this is with consolidation loans for those borrowers who qualify for them. Secured credit cards offered by many banks and credit card companies require a cash deposit from the applicant. By using secured credit cards to make purchases, borrowers can establish a favorable credit history through timely repayments.
Filing a bankruptcy does not remove negative account information from your credit report. After filing bankruptcy, the negative account information will remain on your credit report for up to seven years. Most lenders will be able to see that the negative account information was included in bankruptcy and know that you are not required to pay it back, even though it remains on your credit report. Rebuilding credit normally takes two to four years after filing a bankruptcy. As you properly pay on new credit lines and old credit lines role off the report, your credit score will gradually go up.
We Are A Hampton Roads Debt Relief Law Firm
Call The Law Offices of John W. Lee, P.C. at (757) 896-0868 to schedule a free and confidential initial consultation. Our experienced and knowledgeable attorneys provide credit score tips, credit card management advice and other guidance for rebuilding credit. We also provide advice about the bankruptcy process for those individuals who might be helped by filing a Chapter 7 bankruptcy or Chapter 13 bankruptcy.
We have four convenient Hampton Roads locations in Virginia Beach, Hampton, Chesapeake and Newport News servicing the surrounding cities of Norfolk, Portsmouth, Suffolk, Smithfield, Poquoson and Williamsburg and the York, James City and Gloucester counties.