You should consult with a financial advisor or lender to determine which course of action is the best for you. These are just a few suggestions that have worked for other people in a similar situation. If you have had credit problems, be prepared to discuss them honestly with a mortgage professional. Responsible mortgage lenders know there can be legitimate reasons for credit problems, such as unemployment, illness or other financial difficulties. If you had a problem that's been corrected, and your payments have been on time for a year or more, your credit may be considered satisfactory.
If you are currently in excess debt, there are four ways to control it:
- If your credit is not in terrible shape, you can reduce your expenses, even if it means making hard choices or changing your lifestyle to fit your income. Consider selling a second car, taking equity out of your home, applying for a non-secured signature loan, obtaining a loan from a relative, selling your home and paying off your debts with the proceeds and then renting, cashing out your 401K/retirement benefits or selling family heirlooms, jewelry, etc.
- If your credit is already damaged or one of the above isn't an option, go through Consumer Credit Counseling Services (CCCS). Check your yellow pages for the local number. CCCS may be able to help you pay off your debts as if you were in a Chapter 13 bankruptcy, but you don't actually file for bankruptcy.
- If CCCS won't take you, you may want to consider consultanting an attorney about filing bankruptcy. The bankruptcy laws have recently changed, but these were the guidelines previously. Claiming Chapter 13 bankruptcy takes longer than a Chapter 7, but your credit will end up in a little better standing. Chapter 13 bankruptcy gives you up to 5 years to pay off your debts. The disadvantage is that you're in bankruptcy for up to 5 years plus your credit report shows your bankruptcy for 7 more years after you have finished paying off your debts.
- If you are so far in debt that you can never repay it, then the best solution may be a Chapter 7 bankruptcy. A Chapter 7 bankruptcy is the least desirable from a credit standpoint, but you are typically out of bankruptcy in 6 months and you don't have to repay any debt. The disadvantage is that this shows on your credit report for 10 years from the date of filing your bankruptcy. Creditors have tiightened their credit requirements, and you may have a tough time getting future financing.
If your debts are under control now, but you want to improve your credit, the most important determining factor is to make your monthly payments on time. Use the pre-addressed envelopes enclosed with your statements to mail your payments so you are sure they are going to the correct address. Call the company if you don't receive your usual statement. Send your payment as early as possible if you carry a balance. Most companies calculate interest on a daily basis, so the sooner they receive your payment, the less interest you'll pay.
Don't procrastinate. It's the day your payment is received that counts, not the postmark date. Give the post office sufficient time (five business days is a good guideline) to deliver your mail. Late payments may mean late fees, higher interest, and/or a negative mark on your credit report.
Never send cash. Open a checking account if you don't have one, or pay for a money order and keep your receipt. Finally don't forget to notify your creditors in writing about your new address when you move so you don't miss important notices or letters of satisfaction of debts paid.
If you are worried about making payments, make a list of your debts and when the payments are due. Contact your creditors if you think you will have trouble meeting the monthly payments to arrange a payment schedule or to change the montly due date where possible.
Taking money from your retirement account or tapping the cash value of your life insurance policy to pay bills or living expenses may have serious implications you haven't considered, so get advice from an expert before you take any major financial actions.
Credit cards can be invaluable in a crisis, since they allow you to charge items and pay them off over time. But they can also be dangerous if you aren't careful and charge more than you can afford. If you do use credit cards, choose those with the lowest interest rates and pay them back on time and as soon as you can to cut your costs. Interest rate increases on credit cards are used as penalties for late or missed payments.
Fixing Credit Report Errors
You have the right, under the Fair Credit Reporting Act, to dispute the completeness and accuracy of information in your credit file.
When a credit reporting agency receives a dispute, it must reinvestigate and record the current status of the disputed items within a "reasonable period of time," unless it believes the dispute is "frivolous or irrelevant." If the credit reporting agency cannot verify a disputed item, it must delete it. If your report contains erroneous information, the credit reporting agency must correct it. If an item is incomplete, the credit reporting agency must complete it.
For example, if your file shows that you were late in making payments on accounts, but fails to show that you are no longer delinquent, the credit reporting agency must show that your payments are now current. If your file shows an account that actually belongs to another person, the credit reporting agency would have to delete it. Also, at your request, the credit reporting agency must send a notice of correction to any report recipient who has checked your file in the past six months.
For items in your credit profile which you feel deserve further explanation (such as an account that was paid late due to the loss of job, military call up, or unexpected medical bills), you can send a brief statement to the appropriate credit reporting agency. The information will be placed in your credit profile and will be disclosed each time it is accessed.