Managing credit is a
challenge that cuts across all socioeconomic lines. No
matter what level of income you earn, handling credit is
a necessary skill.
This brochure offers a step-by-step approach to help you
improve your credit record. Anyone who has ever been
denied credit understands how the lack of credit affects
financial options.
Like most Americans, you probably dream of someday
owning your own home, buying a new car, or taking your
family on vacation. But poor credit can be a roadblock
to your ability to achieve these desires.
Poor
Credit Affects Your Ability to Plan
The Thomas
Family's Story
Do You Have a Credit Problem?
How to
Improve Poor Credit
How to Correct Credit
Report Errors
Steps to Improve Credit
Lee's Story
Getting Out of Debt
Credit
Counseling Services
Stay Away from Credit
Repair and Debt Companies
Financial Planning Assistance While Accumulating Assets
How to Select
a Financial Planner
Conclusion
Poor Credit Affects
Your Ability to Plan
Your credit affects many
areas of your life. For example, your credit worthiness
will affect your ability to purchase goods and services
on credit and to get a loan. If you have a good credit
record, you are likely to receive lower interest rates
than those who are considered credit risks, which means
you will pay less interest.
Some employers even review a job applicant's credit
report. Poor credit could mean that you are not offered
a job. A potential landlord also may request credit
bureau information for an applicant seeking an
apartment. Landlords do not want tenants who are late
paying rent. And, your car insurance rate may increase
if you have negative information on your report.
As you can see, poor credit can be a huge obstacle to
obtaining the good things you desire for yourself and
your family. Similarly, a poor credit history tarnishes
your ability to plan for the future.
It may take some time to repay debt and improve your
credit record. You may even need some assistance from a
nonprofit counseling service to help you start paying
off debts. After you pay off your debts, you will be in
a better position to start saving and begin to build
your assets.
Plus, your credit rating
will likely improve. Eventually, you may want to consult
a CERTIFIED FINANCIAL PLANNER™ professional who can show
you how to reach your financial goals.
The
Thomas Family's Story
Money is tight for George
Thomas and his family of four. George and his wife Angie
frequently pay their credit card bills late, which
results in finance charges and late fees. Their credit
reports note this negative information. So even though
the Thomases have not defaulted on any of their bills,
they have unknowingly developed a poor credit history.
When George's old car finally died, the couple managed
to pull together $1,000 for a down payment for a used
vehicle. But they still needed an additional $7,000.
Their bank was willing to give them a $7,000 car loan,
but because of their poor credit report, the interest
rate on the loan was a high 13 percent.
With a better credit history, the couple could qualify
for a much lower interest rate and save themselves
hundreds of dollars over the course of the loan. They
could have used that extra money to buy clothes for the
children, buy new furniture, pay for a vacation, or save
for emergencies.
Poor credit can be an obstacle to achieving financial
goals. However, a credit counselor could help the
Thomases improve their credit history and start building
a better financial future.
Do
You Have a Credit Problem?
Like the Thomases, you may be
under the impression that you have a good credit record.
After all, you have few outstanding loans and you always
pay your bills. But late payments alone can damage your
credit standing.
Loan officers study an individual's payment history to
determine whether to make loans and what kind of
interest rate to set on automobile loans, home
mortgages, and personal loans.
You may not be aware you have a credit problem or that
your credit rating is low. Check the following list to
determine if you have a credit problem. You may have a
credit problem if you:
- Worry about how much money
you owe
- Miss payments or pay your
bills late each month
- Spend more than 20 percent
of your paycheck to pay off secured debt
- Pay for groceries with
credit instead of cash
- Are refused credit by
people or stores
- Make only the minimum
payments on your credit cards
- Filed for bankruptcy within
the past 10 years
Another indication that you
may have credit problems includes nearing the limit on
your lines of credit. You also may have a credit problem
if you would face immediate financial trouble if you or
your spouse lost a job.
How
to Improve Poor Credit
If you suspect that you have
a credit problem, you can check your credit by ordering
a credit report from one or all of the three major
credit-reporting agencies. It's smart to review your
credit report once a year, just to know your credit
standing and to check for any errors.
The major credit reporting agencies are:
Equifax
800.685.1111
www.equifax.com
Experian
888.397.3742
www.experian.com
Trans Union Corp.
800.916.8800
www.transunion.com
The Fair and Accurate Credit Transaction Act (FACTA) was
enacted to ensure that you have easy access to your
credit report each year. To receive a free copy of your
report from the three major credit bureaus call
877.322.8228 or order online at
www.annualcreditreport.com. If you want to check your
report more often, you may order a report for a small
fee directly from the credit bureaus. Keep in mind that
you may be eligible for additional free reports under
other rules. Credit reports from a reporting agency also
are free if you have recently been turned down for
credit by that agency. In addition, you're entitled to
one free copy of your report a year if you certify in
writing that (1) you're unemployed and plan to look for
a job within 60 days; (2) you're on welfare; or, (3)
your report is inaccurate because of fraud.
How
to Correct Credit Report Errors
Once you receive your credit
report, check it over carefully for errors and outdated
information. Although correcting the information costs
you nothing, it may require persistence. You can try to
correct an error by taking any of the following steps:
- Follow the instructions on
the report to tell the credit-reporting agency and
the organization that provided the information to
the credit-reporting agency about the mistake.
- Telephone the agency about
the mistake.
- Explain the problem in a
brief letter.
If the agency finds that the
information in the report is wrong, then it's the
creditor's responsibility to notify other major
credit-reporting agencies of the error, so they can
correct their information, too.
Steps to Improve
Credit
Now that you are familiar
with your credit report, you can start working to
improve it. Once a creditor reports negative information
to a credit bureau, it remains in your file for seven
years. However, negative information becomes less
damaging over time.
To improve your credit, take the following steps:
- Pay your bills on time.
Remember, if you let a payment slide, you will incur
a late fee and a penalty charge.
- Pay off high-interest loans
first. By paying down these obligations, you free up
interest money that can go to other bills.
- Pay off credit cards
monthly.
- Apply only for the credit
cards you need. It's easy to run up debt when you
have a lot of credit available.
- Use your credit card to
establish good credit. By paying on time and by
paying down the debt, you will show creditors that
you are creditworthy.
When using credit, most
charges should be repaid within three months of the
purchase. Be sure you know the costs of credit including
the credit card's annual fee, the interest rate you will
pay, and any charges for overdue payments or going over
your credit limit.
Lee's
Story
After graduating from
college, Lee landed a job with a software company. With
his good salary, he treated himself to an expensive
apartment, new furniture, a DVD player, and a television
set. He used credit cards to finance some of these
purchases, figuring that his salary would more than
cover the costs over time.
Although Lee was careful to pay his credit card bills
each month, he wasn't prepared financially when the
company abruptly folded and he lost his job. His
unemployment compensation barely covered his rent, car
loan, and living expenses.
Soon, he could no longer make payments on all the
furniture and electronics he bought. Those creditors
began calling him regularly to demand payment.
It was all Lee could do just to keep up his job search.
As the weeks went by and he still did not find a job,
the debt on his unpaid credit card bills piled up
steadily, thanks to finance charges, late fees, and even
legal fees from collection agencies. Lee's credit
standing deteriorated quickly.
Fortunately, he contacted a credit counseling service
that helped him set up a plan to repay his debts and
improve his money management skills and credit over
time.
Getting Out of Debt
To get out of debt, track
your spending. For one month, record where and how much
money you spend wherever you go. By the end of the
month, you will have a clearer idea of how you spend
your money.
Be sure to monitor your debt load, too. Know how much
you owe and how long it will take you to pay it off.
Make an effort to pay more than the minimum amount due
on credit card accounts to liquidate debt.
If you find yourself already overburdened with debt,
what can you do?
First, contact your creditors directly. By explaining
the situation, you may be able to get them to reduce
your monthly payment. Generally, creditors are happy to
work with people who want to pay back the debt but are
experiencing temporary hardship.
If you owe money to several creditors and cannot pay
them all, you may want to enlist the help of a nonprofit
debt counseling service. These organizations offer free
and low cost counseling in most communities and will
work with you to setup a repayment plan that will
satisfy all your creditors.
Credit Counseling Services
If you are stressed by debt
and can't pay your bills on time, especially credit card
debt, you may want to enlist the help of a nonprofit
credit counseling agency. The National Foundation for
Credit Counseling, Inc., (NFCC) is the longest serving
and largest network of nonprofit credit counseling
agencies nationwide. NFCC members are mostly known as
Consumer Credit Counseling Services (CCCS). Some are
known by other names but all can be identified by the
NFCC member seal.
NFCC agencies offer free and low-cost services through
in-person appointment, by phone, and the Internet. Their
goal is to assist you with getting out of deep debt and
helping you understand how to avoid future debt traps.
In a confidential counseling session, a certified credit
counselor will analyze your personal financial data and
advise you on successful money-management methods. With
proper budgeting, you may be able to pay off your debt.
However, if you cannot pay off the debts as scheduled,
the counselor may propose a plan to negotiate directly
with your creditors to work out terms that you can meet.
Under this type of plan, you make consistent monthly
payments to the counseling agency, which in turn pays
the creditors.
To find an NFCC member agency near you, call
800.388.2227 or visit their Web site at
www.debtadvice.org. Spanish language services are
available at 800.682.9832.
Stay
Away from "Credit-Repair" and Debt Companies
Avoid "credit repair"
companies that charge high fees to help clean up your
credit. Don't confuse these organizations with
legitimate, nonprofit community-based counseling
organizations that provide a needed service to people
with credit problems.
Be careful to avoid "debt consolidations" and "debt
settlement" companies. Some charge high fees and will
keep your first payment or a portion of your monthly
payments, which will cause you more debt. Visit NFCC's
Web site to learn more about how to choose a credit
counseling agency that's right for you.
You can clean up your credit by repaying your debt,
paying your bills on time, and ensuring your creditors
update your accounts accurately with the credit bureaus.
Financial Planning Assistance
While Accumulating Assets
Once you establish a good
credit record and begin to set money aside in a savings
account, you're on your way to realizing your financial
goals.
Many of the things you want to accomplish in life
require money. What are your goals? Like many of us, you
probably hope to:
- Buy a home
- Save for your children's
college education
- Build a retirement fund
- Take vacations
How to Select a Financial
Planner
Financial planning is for
everyone not just the wealthy. We are all on our own
financially, without large corporations or the
government to help us. Plus, the strategies needed to
accomplish our goals have become more complex. A
professional financial planner can help guide you.
A CERTIFIED FINANCIAL PLANNERTM professional
reviews your overall financial health and makes sure
your strategies are helping you efficiently realize your
goals. The planner looks at your budgeting, insurance,
investments, and taxes. A financial planner also can
help you make decisions based on facts rather than
emotions.
To find a planner, ask friends and professionals such as
lawyers, bankers or accountants to recommend someone.
You also may want to check with financial planning
organizations. For a list of CFP® professionals in your
area, contact the Financial Planning Association (FPA)
at 1-800-647-6340 or visit FPA online at
www.fpanet.org.
When you have a few names in hand, contact their offices
or check their Web sites to obtain as much written
information about them as possible. Consider the
planner's:
- Educational background
- Licenses and credentials
- Method of compensation
- Work experience
- Specialization, if any
With this material, you can
narrow your list of prospective planners to two or three
whom you wish to interview. Generally, the first meeting
with a financial planner is free.
Meet with the planner in person so you can select the
one who makes you feel most comfortable and responds
most thoughtfully to your questions. Consider these
points in the selection process:
- Does the planner listen
carefully to the description of your personal
financial situation?
- Is the planner someone you
can trust?
- Does the planner seem
intent on providing a genuine service to you, or is
he or she intent on selling financial products?
- Is the planner's approach
steady and long-term?
It is a good idea to ask for
one or two referrals, particularly to clients with
similar needs. If the planner is not comfortable having
their client contacted due to confidentiality, ask for
professionals who refer clients to the planner. An
accountant or attorney that has sent clients to the
planner can give you feedback without divulging any
names. Working with a financial planner involves a
personal relationship. The planner should commit to
ethical behavior and high professional standards. You
want a planner who will put your needs and interests
first.
Conclusion
A poor credit record can
serve as a major roadblock to your financial goals.
Fortunately, poor credit can be repaired over time.
Take a good look at your credit history and start to
improve your credit. Be persistent. Good credit will
help you meet your long-term goals for you and your
family.
Overcoming the Credit Barrier: Clearing the Way to Your
Financial Goals was written and designed for The
National Foundation for Credit Counseling (NFCC) and The
Financial Planning Association (FPA) as a public service
by the Denver-based National Endowment for Financial
Education®, or NEFE®,
www.nefe.org
The National Foundation for Credit Counseling, Inc., (NFCCTM),
founded in 1951, is the nation's largest and longest
serving national nonprofit credit counseling
organization. NFCC, through its member agencies, sets
the national standard for quality credit counseling,
debt reduction services and education for financial
wellness. With more than 1,300 community-based offices
nationwide, NFCC members help 1.5 million households
annually. Learn more about NFCC online at
www.nfcc.org
The Financial Planning Association (FPA) is the
membership organization for the financial planning
community. FPA believes that everyone needs objective
advice to make smart financial decisions and when
seeking the advice of a financial planner, the planner
should be a CFP professional. Visit FPA online at
www.fpanet.org.
CFP®, CERTIFIED FINANCIAL PLANNERTM
and federally registered CFP (with flame
logo) are certification marks owned by Certified
Financial Planner Board of Standards. These marks are
awarded to individuals who successfully complete CFP
Board's initial and ongoing certification requirements.
The content areas in this material are believed to be
current as of this printing, but, over time, legislative
and regulatory changes, as well as new developments, may
date this material.
© 2003. National Endowment for Financial Education. All
rights reserved.
R
