Welcome to the first installment of our Credit Repair Basics series! The goal of this series is to introduce you to the fundamentals of credit repair, your credit report and your credit in general. By gaining an understanding of the fundamentals you will be able to confidently assess your current credit and debt situation and determine exactly what steps to take to transfrom your poor credit into good credit. So let's get started!
What Is Credit Repair?
The term "credit repair" has a very specific meaning. Unfortunately, within the past couple of years the term has been mis-used by a variety of individuals and sources to refer to a variety of other financial and legal related processes and services, some of which are very questionable. This mis-use of the term "credit repair" to describe these sometimes questionable other services has had the unfortunate effect of diminishing the actual processes and services that "credit repair" actually describes.
FACT: "More than 80% of consumer credit reports contain significant errors, resulting in a significantly lower credit score for those consumers!"
So what is "credit repair"? "Credit Repair" is the process of analyzing an individuals credit report from each of the three credit bureaus, Equifax, Experian and Trans-Union, to determine whether the information being reported meets the legal requirements as set forth by the United States Congress pursuant to 3 specific Federal Laws. That information being reported that does not fit precisely these Federal Laws, is challenged in a legal manner and if found not to conform to the law must be removed immediately by the bureau.
The result of this credit clean up, forcing the bureaus to remove the negative, damaging information that does not precisely meet the federal laws requirements, is that the credit report reflects you in a more positive position and in most cases results in a credit score increase. And when you raise credit scores and transform your poor credit to good credit there are a multitude of benefits such as, qualifying for better interest rates, having an easier time being approved for a loan or credit, and even lowering your insurance premiums.
What Credit Repair Is NOT!
Now that we have a basic understanding of what "credit repair" actually is, let's discuss the other ways that some individuals, politicians and other sources have mis-used the term to manipulate your opinion of other processes and services.
Credit Repair Is NOT Debt Settlement.
Debt settlement is a service offered by a growing number of firms and individuals that assists consumers who are not able to meet their obligations to their creditors in negotiating a settlement of the outstanding debt owed at a discount. In most instances these debt settlement firms claim to be able to settle outstanding debts for between 35-55% of the outstanding amounts owed. Generally, these firms charge the consumer between 15-25% of the outstanding debt for their "services". Therefore, in the best case scenario if your original amount owed to the creditors was $10,000 the debt settlement company would negotiate a settlement with your creditors in the amount of $3,500 and would charge you $1,500 for these services meaning you would pay a total of $5,000. In the worst case, assuming the debt settlement company is able to achieve any result at all, is that you would pay $5,500 to the creditors and $2,500 to the debt settlement company for a total of $8,000.
There are a couple of things to be aware of, first, in order to settle or even negotiate a settlement with any of your creditors it is almost universally mandated that you have the entire amount (both the negotiated settlement, and the debt settlement company's fee) available before settlement talks even begin. Secondly, even if you are able to pay the total amount in full, many of these firms ask you to stop paying the creditors in an attempt to place leverage on the creditor to accept the settlement. This action will have a significant negative impact on your credit report and credit score as these late payments and charge offs will be reported to the credit bureaus and be reflected on your credit report.
The only remedy to amassing this negative information on your credit report as a result of the debt settlement service is to engage in the credit repair process, preferrably with a qualified professional performing the credit repair services.
Credit Repair Is NOT Bankruptcy.
Bankruptcy is a specific legal action brought by a consumer in Bankruptcy Court whereby the court either relieves you of your debt entierely, or creates a re-payment plan between you and your creditors that is more manageable for you. As this is a legal proceeding in a court of law, if you determine that Bankruptcy is the best option you should consult a qualified attorney to represent you.
While bankruptcy can be of great help in many circumstances, it does have its drawbacks. One of the main drawbacks of filing bankruptcy is the significant damage it may cause to your credit report and credit scores. As a general rule, all of the accounts that you declare in your bankruptcy proceeding will create a negative notation on your credit report, resulting in a significantly lower credit score.
The good news however, is that in our experience, much of the negative informaiton that is created as a result of filing for bankruptcy does NOT meet the requirement of the Federal Laws and we have been very successful in having this negative information removed from our client's credit reports and mitigating the damage caused to their credit scores as a result of their bankruptcy.
Credit Repair is NOT Credit Counseling or Debt Consolidation.
Credit Counseling and Debt Consolidation are two services that are sometimes mistakently referred to as "credit repair" but are not. Credit Counseling, although normally advertised as being provided for by a non-profit organization are in almost 100% of the cases are financed by one of the large credit card companies. Credit counseling in most cases requires you to work out a payment plan with the original creditor (the same creditors who are financing the credit counseling company) where you pay the entire amount owed to the creditor in addition to significant amounts of interest, and to pay a fee to the credit counseling company themselves.
Debt consolidtation is another process whereby, you receive a loan, in most cases secured by your assets including your home from one lender and the proceeds are used to pay off the balances owed to your original creditors. In this case nothing has really changed except that you have one payment to one lender instead of to several creditors, and more significantly you have placed your assets in extreme jeopardy for if you default on th loan the lender will very likely attempt to take those assets from you to satisfy the debt, including your home.
Both of these services will, similar to bankruptcy, mean that significant negative items will be placed on your credit report, resulting in poor credit and a lower credit score. With diligence however, we have found that these items too in most instances, as reported by the bureaus, do not meet the letter of the law and that the items can be removed as not being compliant with the federal laws protecting consumers.
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How Much Does Your Bad Credit Cost Your?
Having bad credit can cost you more than $130,000 in increased interest expense over someone with perfect credit on a 30 year mortgage of just $100,000.