Low credit scores lead to higher borrowing costs, and in higher insurance rates. Low credit scores can also mean being denied affordable housing, a car, or worse yet, an employment opportunity.
The term “rebound buyer” is becoming more familiar in today’s difficult economy. It usually applies to someone who obtains financing for a home when they previously defaulted on a mortgage, had a foreclosure, a bankruptcy, or even a short sale. But what about those people who aren’t buying a home, yet have poor credit due to a divorce, a foreclosure, a lawsuit, a failed business, or a job loss? Can they improve on their credit scores? The answer is “yes.” Here are several tips for getting your credit to “rebound.”
1. Know your credit score
You have the right to pull one free report annually at no cost to you. You can order it via the Internet. Or you can go to a mortgage or finance company and ask a loan officer to pull your report for you. Review the report. Make sure the creditors listed on the report are your creditors. If so, have they reported your payment history accurately? Review any delinquent payments and collection accounts for accuracy.
2. Know your rights
If there is an item on your credit report that’s incorrect, you can write to the credit reporting agency and “dispute” the information. The creditor either has to verify the validity of the item reported or it has to be removed from your report.
3. Handle old accounts with caution
Very old outstanding accounts have little, if any, value to the creditor. And creditors are barred from taking legal action against you once a specific period of time has passed (known as the Statue of Limitations, the time frame of which varies from state to state, but averages six years).Your original creditor may have written off the account on their balance sheet. However, the creditor’s right to sue reactivates (called ‘zombie’ debt) once you begin to pay on old debt. Besides resetting the time bar to the beginning, new payments on an old account may actually report negatively on the credit report!
It’s also possible that a new party actually purchased the account from the original creditor and now has the right to pursue the debt. According the Fair Debt Collections Practices Act, it’s your right to have the collecting agent verify how they own the debt, and verify the accuracy of the amount. If they can’t provide such verification, they are legally obligated to remove it from your credit report and cease any collection activity against you. But if they can legitimize their involvement and the debt owed, then it’s time to cut a deal. Therefore, when considering how to pay off old accounts, collections or otherwise, it’s best to seek an attorney experienced with negotiating settlements and payment plans.
4. Be wary of cosigning a loan
Some lawyers refer to cosigners as “idiots with pens.” With certain exceptions, you should never cosign a loan for anyone. You become liable on the debt when the person you cosigned for, defaults. Their late payments may reflect poorly on your credit as well. If you are a cosigner, then contact the creditor and confirm that all payments on the obligation are paid current to date. If not, then you need to immediately speak with your co-obligor. If you must be a cosigner, then reduce your exposure by limiting the amount of the balance you owe. For instance, you could negotiate with the lender that your obligation as a cosigner ceases once a loan balance is reduced by 50%. There is also a positive side to being a cosigner: If your main obligor has a good payment history, it should reflect well on your credit and help improve your credit score.
5. Consider the alternatives if you have “no credit”
The above tips assume someone has poor credit. But what if you have no credit? Well, actually you do. But your credit is verified through a less traditional means of verification, called alternative credit. Here are some examples:
* 12 months of utility bill payment history
* Cancelled checks from rental payments (cash receipts from a receipt book are useless)
* Any payments that have an installment payment history exceeding 12 months
* Being a cosigner on a small credit card obligation with a family member who makes timely payments
* A secured credit card on which you’ve made small monthly purchases and have paid off the balance each month
* A letter of recommendation from a company that usually does not report to the credit bureaus, or having that company submit your payment history at your request
Life is not static; financial aspects of life ebb and flow. Your financial past does not affect your future. It only has far-reaching consequences when you fail to be your own agent of change. Take the time to work on some of the above pointers and you will well be on your way to a “credit rebound.”