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IMPROVING YOUR CREDIT

What can I do to improve my credit?

Improving your credit is a worthy goal, but what does “improving” truly mean?

Improving credit doesn’t necessarily equate to an increase in your credit score. Lenders evaluate numerous factors when deciding to approve a loan. Credit reports and scores are part of the equation, but so are other considerations like:

  • income
  • debt-to-income ratio
  • length of time at a job
  • length of time at a current residence
  • whether you rent or own your home
  • whether you’ve borrowed from the lender before
  • your payment history
  • whether you’re pledging collateral and what its current and expected future value is

Your capacity to repay the loan and your work and housing stability can be as important as your credit history and score. That’s why it’s crucial to maintain conservative levels of borrowing and payments within monthly incomes, usually below a 40% debt-to-income ratio. It’s also wise to maintain sufficient emergency savings of at least six months to cover monthly expenses.

When improving credit reports and scores, your options usually fall into two categories. First, pay down any outstanding debt reported to the three main credit reporting agencies, Equifax, Experian and TransUnion. Second, correct any errors on your credit report that are negatively impacting your credit score.

How can I pay off debt?

To begin with, you need to create a monthly budget by spending category. Typical categories include:

  • housing
  • transportation
  • food
  • automobile insurance
  • childcare
  • utilities
  • healthcare
  • clothing
  • entertainment
  • health and beauty
  • savings

Once that is in place, begin tracking household spending for at least four weeks to get an idea of which expenses are truly necessary and which are discretionary. Once you’ve made that determination, look for ways to reduce expenses by shopping for less expensive alternatives. This should free up additional money to pay off debts. At the same time, make sure you make all monthly payments on time and in full. If you have any money left over at the end of the month, consider paying extra on loans with the highest interest rates and monthly payments first. Then work your way down the list once the higher-priced loans are paid off.

Are there companies that can help me pay off debt and improve my credit?

There are companies that may be able to help you pay off your debt faster, improve your credit and, in some cases, do it more cost effectively. These include not-for-profit credit counseling agencies, debt settlement companies and credit repair companies.

What is a credit counseling agency?

Credit counseling agencies can help you create a monthly budget, negotiate extended terms and lower rates on both your past due and current loans and accounts They can also collect the money necessary to make monthly payments on your behalf. Not-for-profit credit counseling agencies (versus for-profit) are funded by lenders and help borrowers who are behind on payments and need assistance. There is usually no fee charged to the consumer for this service when it is provided by not-for-profit agencies.

What is a debt settlement company and how do they work?

If you get in over your head and can’t pay your loans, you might consider working with a debt settlement company. But before you do, you need to understand how they work and what the risks are. Debt settlement companies negotiate with creditors on your behalf to come up with a mutually agreed upon lump sum that you can pay to pay off your loan balance. This lump sum will be less than the actual outstanding balance. Unknown to most borrowers is that your creditors utilize sophisticated algorithms or formulas to determine the actual value of your loan balance every month, especially for loans that are past due or have been written off. These algorithms assess the likelihood you won’t make your payments and the corresponding discounted value of your outstanding balance. The higher your risk of default, the lower the value of your debt. While debt settlement companies don’t have access to your lenders’ algorithms, they will have an idea of the value of your debt based upon how long it’s been past due, the length of time since your last payment, the type of debt it is (i.e., credit card, healthcare, unsecured installment) and other factors.

If you decide to work with a debt settlement company, they may ask you to stop making payments to your creditors. After which, they will contact the creditor on your behalf and begin the negotiation process. If a lower amount is agreed upon, you will begin paying the debt settlement company a lower monthly payment amount every month instead of the creditor until the set lump sum amount is met. In the meantime, penalties and fees may be adding up from your creditor, so make sure to ask the debt settlement company specifically about this. Also, if you stop paying on your debt, your creditor will likely report this to the credit reporting agencies.

When you make your last payment to the debt settlement company, it makes the mutually agreed upon lump sum payment to the creditor on your behalf. If your account has been reported to the credit reporting agencies as charged-off, your creditor may then report your account as “settled for less than agreed” or “settlement accepted.” These are phrases that do not necessarily reflect your ability to pay future creditors. While these statements may hold you back from receiving the best credit options for up to 7 years after you made your last payment, they are better than charge-off’s being reported that aren’t paid at all.

“Debt settlement” may sound like a genie granting you three wishes, but there are some risks to having a debt settlement company negotiate a lump sum payment, instead of you making your regular monthly payments. Primarily, creditors are not obligated to settle with you. If you are looking to make a negotiated payment for a credit card, cell phone bills, personal loans, or apartment leases, you might be able to negotiate a settlement on your own. However, mortgage lenders, automobile lenders and student loan lenders are less likely to budge.

If the debt settlement company offers free consultations, ask as many questions as possible—specifically, what is the service fee? You don’t want to pay your creditor $100 on a $500 account and the debt settlement company $400. It should be the other way around. You may also want to inquire how long they’ve been in business and what type of training their employees have. Always read the fine print of your agreement before signing anything.

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