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Improving Your Credit
- 1. Trudy Wade, CPAKomen Foundation January 13, 2007 Improving Your Credit
- 2. Credit Facts Thisis what the average American's finances look like: 3/4 of older workers have < $56,000 saved for retirement. 20% of credit cards are maxed out. 42% of workers cash out their 401(k)s. One-third of young adults do not contribute a single dollar to a retirement plan. Last year, the average household paid $1,000 in interest. 1 out of every 73 U.S. households files for bankruptcy.
- 3. Areas Covered CreditReport Basics Credit report? Credit score? Correcting your credit history? Reducing Debt Strategies to attack debt Finding money sources Budgeting & Savings
- 4. What is aCredit Report ? Three major credit reporting agencies Equifax, Experian, & TransUnion Identification & employment, payment history, inquiries, and public records. Reviewed when you complete a credit application.
- 5. What is aCredit Score ? Scores typically range from 350 to 850. Quick way to determine if they will loan you money. Each lender has a different corporate policy about risk levels. Scores affect interest rate and amount of money loaned.
- 6. Reviewing Your CreditReport ? You must review your credit report on a regular basis. Annual report www.annualcreditreport.com Make sure information is correct. Let’s you know your score to shop loan options. Helps protect against identity theft.
- 7. How to CorrectCredit History Send a dispute letter with backup. May fill out an online dispute form . Can dispute information with the source. Keep a copy of all information sent. Follow-up with them to be sure items are corrected. Watch for scams!
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- 9. Add it up!Due Date Interest Rate Minimum Payment Amount Owed Account Number Account Name
- 10. Strategize & ConquerStop spending! Cancel all credit cards except for one or two with the lowest interest rates. Pay the most you can afford on your highest interest rate debt. Consolidate amounts on lower interest rate credit cards. Keep paying the same to amount towards your debts.
- 11. Conserve Use aDebit Card Reduces Impulse buying Eliminate unnecessary purchases Sell expensive autos, motorcycles, etc., Get into cheaper home / apartment Reduce internet, phone, cable, cell costs Have a garage sale Donate to Charity Use tax refunds to pay off debt
- 12. Look for MoneySources Home Equity Loan Only if you can make the payments Savings Account Cost of interest paid is more than earning 401K loan Plan to pay back in the future Get a Second Job Usually for a short period of time
- 13. Debt Example $ 2,843 $ 226,000 Total Debt 12.00% $ 10 $ 1,000 25th 6 MyCard Credit Card 10.00% $ 42 $ 5,000 23rd 5 Bank One Credit Card 18.00% $ 150 $ 10,000 5th 4 CitiCorp Credit Card 6.93% $ 692 $ 35,000 20th 3 Camry 8.00% $ 1,014 $ 50,000 15th 2 Mercedes 5.25% $ 935 $ 125,000 1st 1 House Loans & Debts Owed: Interest Rate Minimum / Monthly Payment Amount Owed Due Date Account No Account Name Mollie's Jones For: Debt Schedule
- 14. Create a budget Salary will be the limiting factor Unless you get other income / job Detail out expenses by type Discretionary – choice of spending Non-discretionary – must spend Food, clothing, shelter Check budget versus actual regularly to see how you are doing
- 15. Ask for help. Consult with a CPA Go to www.FortWorthCPA.org Click on Public Information , then Find a CPA Firm Nonprofit consumer credit counseling Consumer Credit Counseling Service (800.388.2227). Bankruptcy lawyer If you feel this is your best option
- 16. Start saving! Participatein 401K plans at work IRA – tax deductions / retirement savings Savings Accounts (Rainy Day Fund) Three to Six Months Salary College Funds / Child Savings Accounts
- 17. Keep the Faith!It may take time to get clear of debt. It is worth it in the end. Visit the Texas Society of CPAs’ consumer Web site, www.ValueYourMoney.org , for more tips on getting out of debt and staying out.
- 18.
Editor's Notes
- #2 I want to give you a little information about my Credit background. I come from a large family with 5 children. My father was an auto mechanic and my mother a house wife. He got into financial difficulty and began taking loans from loan sharks, he also went through a bankruptcy. I also experienced financial challenges when I went through a divorce and was left with a mountain of debt and only one income. Because of these experience, I want to be able to help others to get their credit on track.
- #3 Does any of this sound familiar to you? The purpose of this presentation is to help you to not be another statistic.
- #4 We will talk about the credit report basics, who looks at the credit report, how to read it and what it means. We will also discuss the credit score and how it related to your credit report. How it is used by loan makers. Then, we will talk about situations that might require disputing your credit report and how to do this. After this, we will get into reducing debt. We will talk about how to organize and attack your debt. How to find money sources, budget, and finally get to the stage of savings. We will briefly discuss the bankruptcy option as well and other sources of help.
- #5 How many of you have seen a credit report? How many of you know your credit score? Can you tell me who looks at your credit report? Potential and current employers, bonding agencies, insurance underwriters, IRS, courts (federal jury subpoena), collectors, and potential and future creditors. It is first important to know that there are 3 credit reporting agencies: Equifax, Experian, and TransUnion. They collect your credit information and distribute it to subscribers. That is what they do; nothing else. In your packet is an example of a credit report. Take it out and we will look at it. As we look at the sample credit report, we see information about the person’s identification & employment (name and any aliases or other names that might have been used for you, addresses where you have lived, employers); collection activity (any accounts sent to collection agencies); public records (tax liens, property liens, unpaid tickets, bankruptcies, foreclosures, settlements, wage garnishments, child support); detailed credit history (record of payments on mortgages, auto loans, personal loans, credit cards, department store accounts, and other revolving accounts); inquiries (public credit inquiries made to give credit; not from current creditors).
- #6 Credit scores are calculations made at the time of a credit request (application) based on your credit report information at that date. Higher scores represent lower risk for the creditor; they allow you to get lower interest rates and more types and higher amounts of credit. Credit scores can be generated by a provider or an in-house program at the creditors. Calculations are based on: 35% Payment history (how well you pay current creditors, collections, liens) 30% Amount Owed to All Creditors (Total should not be overwhelming compared with annual income) 15% Length of Credit History (advantage for older creditors or those who start earlier) 10% Amount of New Credit (need to spread out credit requests over more than one year) 10% Types of Credit In Use (you do not want too much of any one type)
- #7 It is important to look at both yourself and you spouse’s reports to be sure they both represent correct information. You can get a free annual copy of your credit report by filling out the form on page 6 of the Blue Booklet called “Building A Better Credit Report”. Look at the following information: Double-check the social security number and names (Junior versus senior) Account Status (look for missing or late payments or unknown collection accounts) Active Account Data (make sure closed account date is correct and inactive accounts are noted) Out-of-Date Information (Inquires – 2 yr, collections & foreclosure – 7 yrs, judgments – 7 yrs, bankruptcy Chp 7 – 10 yrs, Chp 13 – 7 yrs, unpaid tax liens – indefinitely or 15 yrs Experian)
- #8 Some times things show up on your credit report that are incorrect. One example is a paid ticket that was recorded incorrectly. Another is a tax payment that had been made but was recorded as unpaid. One friend of mine had a collection item for a final telephone bill they had never seen. You need to either write a letter describing the situation and how it is incorrect. You should provide all of the backup that you can. Anther way to correct the information is online with the credit agencies. You will still need to send your backup to the credit agency as well. They will give you instructions about how to do this. You can also visit the creditor and settle the matter with them. They must report any fixes to the appropriate credit agencies. Agencies / creditors have 30 days to report back to you about their investigation into the issue unless they feel the dispute is frivolous. Send copies of your backup and keep the originals for at least 7 years. Follow up with the organization that you reported the error to be sure that they received it and see what their investigation reveals. It is a great idea to correct any credit issues well before any large loans like a house or car. Watch Out for Scams: Ads Promising debt relief may really be offering bankruptcy – Bankruptcy is a last resort. It can hinder your ability to get credit, a job, insurance, or even a place to live. Advance-Fee Loan Scam – legitimate creditors offer extensions never guarantee in advance (illegal – never give your credit card, social security number, or bank account information over the internet or telephone). Credit Repair Scam – promise to clear your credit for a fee (only time, effort, and a repayment plan will improve your credit report).
- #9 Now, let’s talk about how to handle your current debt.
- #10 It might be a gruesome picture, but you can’t get out of debt if you don’t know how much you owe. Make a list of how much you owe and to whom. Write down the account name, account number, total amount you owe, minimum payment (or monthly payment), interest rate you’re being charged to get a complete picture of what you are up against.
- #11 The first thing you need to do is stop the spending spree. Can cannot possibly get ahead of your debt if you keep on spending. You also need to look at your credit cards to see which ones have the highest interest rates. Close those with the highest rates and move the amounts to the lowest interest rate cards if the fees are low. Pay more than the minimum payment each month. Did you know the minimum payment amount is usually 2 to 3% of your balance? On a $2,500 credit card balance with a 2 percent minimum payment, you would pay only $50 toward decreasing that debt and the majority would be applied towards interest and not principal. At this rate, you would never pay off your debt. Determine what you can pay towards your debts and apply it to the highest interest rates loans. Keep paying this amount toward debt until you have paid it down.
- #12 Another tact to less spending is to conserve your resources: You can use a debit card, which will make you think about future spending because the money comes straight from your bank account. You can also eliminate unnecessary spending by: Selling expensive automobiles, boars, jet skies, motorcycles (these are not necessary to your survival) Get a cheaper home or rent and apartment (keeping up with the Jones is not worth going through Bankruptcy) Reduce everyday expenses (cable bills, home phone, expensive clothes, excess utility costs, & excessive groceries) Sell unneeded items in a garage sale Donate unused items to charity & deduct them from your taxes Use tax refunds to pay off large chunks of debt.
- #13 For anyone who owns a home, a home equity loan or line of credit is likely to be the least expensive source of credit. If you fail to make payments on a home equity loan or line of credit, you can lose your home; so, use this option only if you’re sure you can meet the payments. Put your savings towards credit card debt (or other high interest rate debt) because saving 18% in interest is better than he 4% you would get on the savings account. You can take a loan from your 401K account; this must be paid back and is limited by the total amount in your plan. You can also get a second job to help get you out of serious trouble. I did this during my debt troubles.
- #14 Now we are going to look at an example and I will give you time to think about your outstanding loans. In your handouts is a sheet called Debt Schedule. Think about your debt situation and write down all of the loans or payments that you have. I will give you 5 minutes and then we will relate these to our strategies. Ok, our time is up. Think about the debts that you wrote on your sheet as we discuss Mollie Jones. When you look at Mollie’s list, we need to first concentrate on those things we can consolidate. How can we move some items together without causing ourselves to get into trouble. Mollie can certainly sell her Mercedes. She is single and doesn’t need two cars. That would get rid a high interest rate loan that she cannot afford. Another thing she can do is move some of her CitiCorp credit card to a cheaper interest rate card. Another thing we need to consider is how to attack her debt. One of the best things to do is pay on the highest rate debt. Credit cards, cash advances, rent to own payments, and pay day loans are some of the most expensive credit situations. These need to be addressed first. Next, you can look at personal loans and auto loans. As you pay off the higher interest rate debt; move that money to pay for lower interest rate debt. In other words, if you are making $500 in extra payments towards debt. Keep making that payment towards your debt until it is all gone. She could also get rid of her home phone and reduce her cable to basic and reduce her clothing shopping from the $150 monthly. She could also get a part-time job to help pay off some debt.
- #15 One way to make sure that you keep on the right track is to make a budget. This can be done on a calendar or on a piece of paper. There are also software programs like Quicken to help you with your finances. The limiting factor is your salary. You cannot spend more than you have coming in. The next factor is the control over expenses. Those that you have to make are non-discretionary. Those that are not necessary for survival are discretionary. You can also use the sheet that we used earlier for our debts to detail loans as well as monthly costs and income. It is important to include your debt repayment information in your budget and make sure that you stay in line with that plan. Check this regularly to be sure.
- #16 Other resources include: CPA’s – www.Fort Worth CPA.org (public information, find a CPA firm) Non-profit consumer credit counseling Bankruptcy lawyer – if this is your best option – last resort
- #17 Once you get to a breathing point, you need to think about savings for an emergency fund, retirement, and a college funds (for your children). The easiest way to start saving for retirement is to participate in your companies 401K plan (or 403B non-profit). One of the advantages of this is that your company adds from 2 to 6% of their money. Once you are fully vested; this is free money towards your future. They generally have many options and some good returns on investment. You can also save for retirement by creating an IRA fund with Fidelity or Vanguard online and have money diverted to it or make payments to it on a yearly basis. These are also tax deductible. Everyone runs into trouble now and then. That is the purpose of the rainy day fund. People lose jobs, companies close or restructure, others become sick. This fund helps you stay afloat while you determine a new path. You also need to think about your child’s future. Most jobs require some form of degree; your children will need this if they are to survive the future. You do not want to support them when you are planning to retire.
- #18 Just remember: It is possible It takes time and patience. It will be worth it in the end; you will be able to get loans easier and not worry about living from paycheck to paycheck. More information can be found on www.Value Your Money.org