RM Online - Keep your credit in shape

As our world continues to automate, we find ourselves more and more subject to the omnipotent Big Brother. Like it our not, all of our lives are affected by three companies. Their perception of us has more impact on our lives than perhaps even government itself. These corporations are constantly gathering electronic data about you that directly impacts your ability to function in society. Slip up and you are on the list. And once you make this list, it could take an act of Congress to release you.

I'm speaking about Equifax, Trans Union and Experian, the three major credit-reporting agencies. If their computer model determines that you are a bad credit risk, it can hurt you in several ways. If you can get a loan, the amount will be reduced, you'll need a bigger down payment and you will pay inflated interest rates.

Many people are correctly scored as bad credit risks for the simple and unfortunate fact that they simply do not pay their bills. However, many people lower their credit score - thereby reducing their borrowing capacity - unwittingly.

Sometimes a good person, who works hard and pays his bills, is still turned down for loan. How can this happen? There are actually a number of mistakes you can make - if you don't understand how the credit companies score you.

Before computers made all the decisions, you could count on your good character and your relationship with your banker to guarantee you a loan when you needed one. Good times or bad, your banker knew you were a hard worker who respected his responsibilities. He was able to overlook the times your car payment came in a week late. He trusted you.

Well, those days are gone. Now a computer makes those decisions. The computer isn't forgiving to those who make late payments and doesn't bother to look at mitigating circumstances.

Let's take a look at a few things you can do to get your credit in good shape and maintain it.

1. Always, always pay your bills on time. Mail your payment five days ahead of time. There are some major credit card companies and department stores that report you 30 days overdue if you are only five days late on your payment! Even one 30-day delinquency mark on your credit bureau report (CBR) can keep you from securing the best rates. People in the habit of paying creditors a week or more late can find themselves unable to get additional credit. Do anything to avoid being late on a payment.

But if there is no way to avoid it, then be late with a company that does not report to the credit agencies. How do you know who does and does not report? Get in the habit of getting a copy of your reports twice a year. The agencies must supply you with at least one a year by law, usually with no charge. Your report will show which companies regularly report your payment history.

It's bad to be late on any payment, but it can be catastrophic to be delinquent on certain types of loans. Never be late on your mortgage. They may not kick you out of your home if you are 45 days late, but you better believe future creditors will want to have nothing to do with someone who doesn't bother to pay their home note on time. It's better to be late with your department store credit card than with your Visa or car note. In addition to keeping your credit clean, you will also avoid paying the high late fees most lenders are now charging.

2. Don't ever get placed for collection. Obviously, no one intends to do this, but perhaps you've known someone whose medical bills were so high that a judgment was brought against the person. Maybe this could not have been helped, but it will still have an adverse effect.

Maybe you know of someone who got in a dispute with a cellular phone service provider for $50, or someone who "forgot" to pay for their blood work at the hospital for $75. These companies will wait only so long before they will place your account for collection. Even small balances can have a tremendous impact on your credit score.

The best rule of thumb is to pay these accounts and try to resolve disputes later. It is conceivable you might wrongly be charged and lose $100, but the hassle you will incur to get the collection removed (if you can) will be worth many times more in your time, stress and heartache. These types of judgments and collections are very unpleasant, but they are nothing compared to a state or federal tax lien. Should one of these appear on your CBR, I promise you no one will lend you a dime until you can prove it has been released. A creditor who risks lending you money when you have a tax lien is subject at any time to lose his security interest - all private interests in collateral are subordinate to the government's interest. Not even high interest rates will entice lenders if they think the government might seize your assets and their collateral.

3. Bankruptcy is a thing you desperately want to avoid. Many people are under the misconception that if they take bankruptcy they will be able to get credit again. This is simply a fallacy created by the plethora of bankruptcy attorneys you find in the Yellow Pages and on late-night television.

Before anyone will again lend you money, the bankruptcy must be released. This can take many years, especially if you are under a reorganization (Chapter 11 or Chapter 13). And after a bankruptcy has been released, it still appears on your CBR for another seven years.

Many people opt for Chapter 7 bankruptcy, which allows you to absolve all debt. However, if you owe the IRS you are still obligated to pay any past-due taxes before a bankruptcy may be released. This is a horrible option, because once you've satisfied the government and gotten the bankruptcy released, the Chapter 7 bankruptcy will still appear on your credit report for another 10 years! Ten years of paying two to four times as much interest as everybody else pays on cars, mortgages, credit cards, etc. You'll be required to put 20 percent down on a house. That new truck you need will cost you 24 percent interest while everyone else is enjoying 6.5 percent. All your credit cards will be over 20 percent, and for the first two to five years, you'll have to secure them with a cash deposit. Slip up again and you will never buy anything again, ever, except with cash.

4. Carrying high loan balances can also hurt you. Everyone knows that too much debt is bad, but many people seem to think everything is OK if they make all their payments on time. This is incorrect. It is becoming more and more common for people with good credit to be denied additional funds due to high loan balances.

The solution is to plan ahead. There are times in most people's lives where they will need to carry a heavy debt load. This is especially true in the rental industry, where any money you can get is best used acquiring new equipment. It is not unusual for a rental store owner to have several platinum credit cards with $50,000 to $100,000 lines that are at their limit. This may make good business sense, but try explaining that to a computer or a young loan officer who's going strictly by the book.

The best advice is to have an adequate line of credit in place for emergencies before increasing your debt load. This also lowers your available credit-to-debt ratio.

5. Perhaps the most often overlooked and least understood way to adversely affect your credit rating is to let too many people see your credit report. If this sounds strange to you, put yourself in a prospective lender's position. It isn't unusual in the rental industry to set up a number of credit lines for equipment purchases, especially before a large buying show like the A.R.A. show. Once the show is over, you pick the lender with the best rate to handle the financing.

This is a bad idea. Every time you fill out a credit application you give the lender the right to pull CBRs on you. When a lender looks at your credit report, that lender puts a notation at the bottom; anyone who looks at your credit history can see it.

This is called an inquiry. It sounds harmless, but it scares lenders when they see too many inquiries, and it negatively affects your computer scores. Lenders are afraid you are trying to get as much credit as possible before you go broke, or that you are taking on too much debt. You may intend to add only $75,000 in equipment, but if you have set up $300,000 in credit lines and your financial statements show you can't repay that much money, you're out of luck.

The solution: determine how much credit you will need. Shop for the lender you will use, and then let that lender get you approved. It will help you immensely, and your lender will appreciate it.

If you have been approved under the above scenario and your lender finds out you are still shopping for more credit, he may decide to rescind his approval. (This advice also holds true when car-shopping.) Give credit information only to the dealer or bank with which with you plan to do business.

I've spent the last seven years looking at thousands of prospective clients and their credit. It is tragic to see how many people can't realize their needs and ambitions because they didn't take proper care of their credit or educate themselves on the ramifications of their actions.

This article is just a brief look at this subject. I urge you to take the time to call the respective credit reporting agencies and have them send you copies of your reports. They will also typically send you a guide to understanding how to read a credit report. This is valuable information. Learn how to read your report and know your rights as a consumer.

Take care of your credit and there is no limit to what you may accomplish. Abuse your credit and you will carry that millstone around your neck for a very long time. RM