Getting rid of outstanding debts with debt… Snowball Method

By: Diana Degarmo

Every financial advisor suggests that you need to pay off your debts in time following
a particular order. Otherwise, you may need to settle your debts for less or consolidate
debt
. However, it is always better that you pay off the debts within stipulated time.

Methods of debt elimination

There are different methods of debt elimination. Out of which avalanche and snowball
methods are the most popular. Some prefer avalanche for eliminating debts; while others
prefer snowball method of debt elimination. You can choose any of them, so that you
need not to settle or consolidate debt.

Snowball method for debt elimination

Debt snowball is a debt reduction method that helps to reduce debt by motivating
the debtor psychologically. Every creditor expects their debtors to pay the minimum
amount every month. Being a debtor, if you owe a single debt, you can manage it easily.
However, if you owe multiple debts, then they can be overwhelming for you. To manage
multiple debts, you can use snowball method.

Create an emergency fund – First of all, you need to set aside 1000 USD, so that
you can use it, if any emergency situation crops up. Make sure you are not going
to spend this money for paying off your debts or any other purpose, unless there is
a real need.

Make a list of existing debts – Now make a list of your outstanding debts from
lowest payoff amount to highest. Some debtors like to pay off the highest debt
first, in terms of interest rate (avalanche method); while others prefer pay off
the smallest amount, in terms of total debt amount (snowball method). The later
one is more motivating as it helps you to pay off the lowest debt first. Once you
can pay off one outstanding debt by your own, you will become confident about
paying off all outstanding loans in due course.

Start paying off the debts – After you have created your list and made your mind
about which debt you want to pay off first, start paying any extra money you
earn towards its payment. It would help you get rid of the first debt at the earliest
possible. Once you can get rid of the first one, you can start working on the next
one.

Use the excess amount for paying the next debt – After paying off the first
debt, you can free up some extra money that you can use to pay off the next one.
Repeat the process until you can pay off all outstanding debts.

Use snowfall method of debt repayment to pay off your debts without putting much
effort. However, if you fail to repay your debts, you can consolidate debt or settle your
debts through a debt settlement company.

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Deleting Credit Inquiries From Your Credit Report

I get a lot of questions from MLO’s about consumers who have pulled their own credit reports and then realize a number of “inquiries” they feel should not be listed on their reports. Sometimes these inquiries are listed by companies unfamiliar to the consumer. And many times the inquiries are listed beyond the 2 year period authorized by law.
Although credit inquiries may not necessarily have the biggest impact to a consumer’s credit score, it can still affect an underwriter’s credit decision. Many loan underwriters consider frequent inquiries to be a significant credit risk and may decline credit for such reasons.

But before you get your clients too alarmed, first explain that there are two types of inquiries:

1. Hard pull inquiries occur when a consumer applies for new credit, like a credit card and or completes a loan application for a car or home. The “hard pull inquiries” can have an affect on credit scores.

2. Soft pull inquiries occur when an existing creditor pulls a consumer’s credit for a legitimate business purpose or if the consumer pulls their own credit. Soft inquiries will not affect a consumer’s credit score. However, oftentimes soft inquiries are mis-labeled and may be inadvertently treated by the credit bureaus as a hard pull inquiry.

So if your client has credit inquiries they feel should not be listed on their credit reports, here’s what you can tell them to do:

Step 1
First, identify which credit inquiries are listed as hard credit inquiries. Do not worry about the credit inquiries listed for promotional purposes. Make sure you identify only the credit inquiries that are shown to credit grantors. You should recognize the creditors as places where you actually applied for credit. If you don’t recognize the creditors listed, or if they have been listed for more than 2 years then proceed to step 2.

Step 2
Locate the addresses for each creditor listed. Experian’s credit report will list addresses for each credit inquiry. Unfortunately, TransUnion and Equifax reports do not include addresses for credit inquiries. You should be able to use the creditor addresses listed on your Experian credit report to deal with the Equifax and Transunion inquiries as well. If some of the credit inquirers don’t show up on your Experian report, you can call TransUnion and Equifax to get the addresses for the credit inquiries listed.

Once you have collected all of the addresses for the credit inquires you believe should be removed from your credit report, proceed to step 3.

Step 3
Prepare dispute letters to send to each of the creditors asking them to remove their credit inquiry from your credit report. Again, the law is on your side. The Fair Credit Reporting Act only allows authorized inquiries to be reported on your consumer credit report. So you have to challenge whether the inquiring creditor had proper authorization from you to pull your credit file.

Step 4
If the any of the creditors provide documentation that a credit inquiry was authorized by you, read the authorization that you signed very carefully. See if there is any ambiguity. Remember, you can write them back and argue your case. If you feel the inquirer’s authorization form was too complicated or not easily understood, you threaten to contact the State Banking Commission and complain about a deceptive and unclear authorization form if they don’t remove your inquiry.

Some creditors may ignore your challenge. Make sure you send each letter by Certified Mail Return Receipt Requested and keep close track of the time that you sent the letter. If they don’t respond within thirty days, you can then call the inquiring creditor and demand they delete the inquiry because they failed to reply timely.

Some creditors may agree to delete the inquiry as a courtesy or because they cannot verify your authorization. Remember, legal credit improvement is about exercising your rights under the credit laws. So use your credit rights and require the creditors to prove their compliance with the law. If they do not comply, the non-complying credit information must be removed from your credit reports, even unauthorized or unverifiable credit inquiries!

Posted in Credit Repair, Credit Repair Tips, Credit reports, Fico Scores | 1 Comment

Deleting the wrong credit items can actually lower credit scores!

That’s right. Believe it or not, if you’re not careful you can actually cause your client’s credit scores to decrease by deleting certain negative credit items from their credit reports. I know as a mortgage loan originator you’re probably already more than familiar with the FICO credit scoring system and the typical 5 FICO Scoring categories that everyone talks about (i.e. Payment history, credit usage, average account age, credit mix, and inquiries).

However, there is much more going on behind the scenes as it relates to how FICO calculates credit scores. So stay with me as we run through the ABC’s of how the FICO credit scorecards impact credit scores. It may be difficult to stay engaged, but it’s worth it to make sure you properly counsel your clients about their credit reports to avoid accidently causing their credit scores to decrease.

Here’s how it works…

FICO separates consumers into various groups based upon the information contained in their credit reports. Those consumers with similar credit items in their credit reports are grouped together on the same credit scorecards.

FICO’s formula is programmed to start by looking for credit reports that only contain positive credit information. This is where the typical 5 categories come into play. The formula reviews the consumers’ age of accounts and the number of accounts, and the age of the youngest account. If there are any delinquencies listed on the credit profile, it then considers if there are any public records (i.e. judgments, bankruptcies, or tax liens). If there are multiple public records, the formula takes into account the worst of the public records listed. So a bankruptcy is worse than a tax lien, so credit histories with bankruptcies would be considered first.

Next, all of the data is gathered by the FICO system and assessed. The consumer is then assigned to one of the 10 FICO credit scorecards. Again, the credit scorecards represent groupings of consumers with similar credit information contained in their credit reports. For example, those with only a few late payments will be grouped with other consumers with only minimal delinquent credit histories.

FICO Credit Scorecards 1-5:

1.   Consumers with bankruptcies or other public records listed in their credit profiles.

2.   Consumers with serious credit delinquencies other than bankruptcies (e.g. 60, 90, 120 late payments, collections, judgments, charge-offs repossessions, etc.).

3.   Consmers with only 1 credit account in their credit histories (“very thin files”).

4.   Consumers with only 2 credit accounts in their credit histories (“thin files”).

5.   Consumers with only 3 credit accounts in their credit histories.

Scorecards 6-10 are for consumers without ANY serious delinquencies at all. However, FICO will not disclose exactly what they mean by “serious” delinquencies.

6.   Consumers whose oldest credit account is only 0-2 years old.

7.   Consumers whose oldest credit account is only 2-5 years old.

8.   Consumers whose oldest credit account is 5-12 years old.

9.   Consumers whose oldest credit account is 12-19 years old.

10. Consumers whose oldest credit account is 19+ years old.
Researching of the FICO credit scorecards and how FICO uses them, resulted in the discovery of these 10 scorecards, but FICO’s new FICO 08 release actually has12 scorecards.

FICO claims that grouping consumers by scorecards enhances the predictability of consumers’ following thru with timely payment of their credit obligations. They believe that by tracking the payment histories and default patterns of consumers with similar credit information will predict similar default rates by other consumers similarly situated.

Consequently, FICO uses the scorecards to assign different weight to the same information, in an attempt to make credit scoring more fair. Basically, the objective is to not score a consumer with a perfect credit history against a consumer with a poor credit history.

Why a credit score can actually decrease by deleting negative credit items

I have seen instances where consumers have attempted to improve their own credit scores by successfully getting a bankruptcy deleted from their credit score, only to see a significant drop in their credit scores. Here’s why. If the consumer is originally grouped with other consumers with bankruptcies, they could be listed at the top of that list depending upon the other credit report factors. So they may compete pretty well against that group of consumers. However, once the bankruptcy is deleted, they will be grouped with a different set of consumers and can be placed near the bottom of that scorecard. In essence, they may not be competing as well in comparison to other consumers’ credit information in the next scorecard grouping. It may take time to move up on the new scorecard.

The same thing can happen when a consumer moves from a scorecard of consumer with a “thin file” to a scorecard of consumers with older credit accounts that are more aged. The consumer may have to start at the bottom of the new scorecard group. Consequently, their credit scores can drop drastically. Here is an example that FICO provides on their website:

“You moved from one category of credit users to another as time passed. For example, you may have transitioned from the category ‘”consumers with a new credit history”‘ to the category ‘”consumers with a two- to five-year credit history.”‘ As a result, your credit report is evaluated differently, causing a slight change in your score. The good news is that moving between categories like this usually offers you the potential to reach a higher FICO score in the future.”

However, this doesn’t mean that all is lost. The good news is that as your client climbs up the rungs of the new scorecard group they have the potential to increase their credit scores beyond the maximum credit scores they could have achieved while still on the previous scorecard grouping. The key is to know how to make wise and “credit score friendly” use of their credit and add a good blend of positive credit information onto their credit reports when rebuilding their credit. I call this a credit score lifestyle by design.

FICO claims their new FICO 08 release resolves the problem of the drastic drop in credit scores for consumers that move between scorecard groupings, by increasing the number of scorecards from 10 to 12. The current FICO model uses 10 scorecards. FICO 08 adds 2 more. By now dividing the population into 12 consumer groups (i.e. 8 for consumers with good credit histories and 4 for consumers with poor credit histories), FICO hopes to level off the drastic reduction in credit scores resulting in changing consumer groups.

As I have mentioned in my previous blog article about Piggybacking, FICO has also indicated that the FICO 08 release will no longer include authorized users in the credit score calculation.

This is yet another example of why many consumers today can truly benefit from the services of a professional credit repair organization or credit repair attorney. Unfortunately, most consumers (as well as many Government Regulators) are simply not aware that credit improvement is not about simply removing inaccurate and non-compliant negative credit items from consumer credit reports. It also entails a working knowledge and consumer education regarding the credit scoring system and how to make smart credit decisions to optimize consumer credit scores as well. This is an essential part of professional credit improvement services.

Now aren’t you glad you hung in there and learned all you ever wanted to know about credit scorecards? In any event, hopefully, as an MLO, you will now be able to share this information with your clients and close the deal!

Posted in Credit Bureaus, Credit Repair Tips, Credit reports, Fico Scores | Leave a comment

Many Mortgage Loan Originators May Be Giving Bad Credit Advice!

I recently received a call from a couple regarding their delinquent mortgage history. The couple has owned their home for about ten years. Unfortunately, they fell behind in their mortgage payments and now they’re facing foreclosure.

They were trying to decide whether a foreclosure, a deed-in-lieu of foreclosure, or a shortsale would impact their credit scores differently.  This is a very common question that I am often asked.

Many Mortgage Loan Originators (MLOs) assume that a short sale will have less of a negative impact on consumer credit scores than a foreclosure or a deed-in-lieu of foreclosure. So they oftentimes counsel consumers to pursue a shortsale to protect their credit scores.  However, according to a recent study released by FICO, that may not be true!

FICO recently conducted a study where they simulated the credit score impact of various types of delinquent mortgages.  In essence, they started with a representative sample of 3 credit bureau consumer profiles. The representative consumer credit scores started at 680, 720 and 780.

FICO identified credit profiles they deemed to be typical of consumers with these sample credit scores. So they identified credit profiles with credit utilization, payment histories, and age of file, etc. for these three credit scores.

Each representative consumer profile had an active current “paid-as-agreed” mortgage account reported.

During the study they simulated increasingly late delinquent payment histories and observed the impact to each credit score as a result.

The study demonstrates that whether a delinquent mortgage account is reported as a foreclosure, a deed-in-lieu of foreclosure, or shortsale has the same negative impact on the consumer’s FICO score. However, the negative credit score impact is more severe if the mortgage account results in a deficiency.

This information is important for homeowners to be aware of in the event of a financial hardship affecting their ability to pay their mortgage. The best advice for a consumer in such a situation is to contact their lender early in the process as possible to pursue options to try and limit the impact to their credit scores.

 

Posted in Consumer Protection, Fico Scores, Foreclosures, MLOs, mortgages, Short Sales | Leave a comment

Credit Score Lifestyle Design

If you’re an MLO, let me ask you a question…How many deals did you lose last year due to poor credit scores? If the answer is “too many” you need to learn more about the concept of “Credit Score Lifestyle Design”.

You’re probably already familiar with the term “Lifestyle Design”. Many people simply design the type of lifestyle they want and live it. For example, my wife and I like the sunshine, water and warm temperatures, so we’ve designed our lifestyle as such and choose to live in Florida by the Gulf. Others want to spend more time with their family at home, so they design careers that allow them to work from home. Some train as flight attendants or pilots to a live a lifestyle of international travel. You get the picture.

But what is Credit Score Lifestyle Design? Well it’s a term that I promise will eventually become increasingly more familiar to you and most home buyers. When it does, just remember you heard it here first!

Credit Score Lifestyle Design is the concept of optimizing your credit scores by understanding how your FICO credit scores are influenced by the information contained in your credit reports. By making better informed credit choices, your clients can manage the credit information contained in their credit reports to optimize their credit scores.

It’s way beyond the concept of simple credit repair that many credit professionals provide. While its true that the application of legitimate credit repair efforts can help to legally resolve non-compliant credit information reported by the credit bureaus, there is another level of credit score help that can significantly influence your clients’ credit scores as well.

It’s sort of like bowling. Simply correcting errors on the bowler’s score card may not necessarily result in the best score possible. The bowler needs to avoid throwing gutter balls, and bowl more strikes to get the best bowling score possible. Once the bowler is taught what’s necessary to get more “X’s” on his score card, when the final tally is complete, his scores should increase!

Likewise, there are 10 FICO credit score cards with 24 variables, and 300 components that all influence your clients’ credit scores. Every change in the credit information contained in your clients’ credit report has the potential to negatively or positively influence the factors affecting their credit scores.

Purposely choosing, by design, what credit information to influence and when, can be critical to the process of optimizing your clients’ credit scores. The more they know about why it works, the better they will become at managing their credit information and developing a credit score lifestyle design. In the process, it may just help you to close more deals next year.

Just remember, you heard it here first!

 

 

Posted in Credit Repair, Fico Scores, mortgages | Tagged | Leave a comment

Is “Piggy Backing” okay?

“Piggy Backing” – A Desperate Attempt to Improve Credit Scores

Did you know that about 30 percent of the 165 million credit bureau files in America have at least one “piggy back” account? You may also know these accounts by the more common name of “authorized user” accounts. Why is this important to you as a mortgage lender? Because you should know that there is a difference between a legitimate “authorized user” account and a “piggy back” account when it comes to credit scoring.

You may have clients with credit scores that have been built by using “piggy back” accounts. If so, beware. More and more credit scoring models are contemplating eliminating the use of such accounts in their scoring algorithms. As a result, your clients’ credit scores may suddenly plummet. So you may want to give your clients some good advice and inform them of the difference between a legitimate authorized user account and piggy backing.

What is an Authorized User Account ?
Authorized user accounts refer to the practice of “renting” the credit history of someone with high credit scores to improve your own credit scores. An authorized user account was designed for situations where a spouse, a child, or even a close friend was added to a credit card holder’s account to help them establish credit.

What is Piggybacking ?
However, another form of authorized user accounts, called piggy backing has recently become prevalent. Piggybacking is a “for-profit” form of “renting” someone’s good credit rating to improve another’s credit scores. Piggy backing allows people with bad credit to pay a fee to piggyback on the good payment histories of a credit card holder by becoming an authorized user on their account.

Usually, a person with low credit scores will pay a fee to a company to locate a complete stranger willing to allow a person with poor credit to be added to their credit card account temporarily, to boost the credit scores of the person with poor credit. The person with poor credit can then qualify for a lower interest rate loan or even get approved for a loan where they would not otherwise have qualified.

There are several companies in the business of brokering such piggyback arrangements. They can charge as much as $900 to match consumers willing to “rent” their good credit accounts to others.

Unfortunately, this is yet another example of an abusive practice that some consumers resort to in a desperate attempt to improve their credit scores. So what was originally intended as a legitimate means for parents to help their kids to establish good credit, or for one spouse to assist another, has now evolved into yet another unscrupulous consumer predator device.

It’s unfortunate that uninformed consumers feel they have to resort to such measures to try and improve their credit scores, when the professional use of consumer protection laws can be enforced on their behalf to help legally improve their credit.

This is one of many reasons why it’s important to educate consumers about their options to work with professional credit repair organizations to help them navigate thru the maze of the legal credit improvement process.

It also reinforces the need to overhaul the credit repair industry and revise the Credit Repair Organizations Act to establish a legislative framework that provides for licensing of professional credit repair organizations that consumers can then rely upon for help.

The current regulatory policies of simply informing consumers they can fix their credit themselves and the practice of conducting “sting” operations to try and locate the bad apples just isn’t effective. Consumers know they have the right to repair their own credit. However, many don’t have the time or inclination to do it themselves. In this new economy consumers are in need of help, to legally improve their credit, more than ever. Left without a regulatory system for choosing from a selection of licensed credit repair organizations, many will continue to simply fall prey to quick fix schemes like “piggybacking” out of desperation.

However, in the meantime, some states are taking measures to enact laws defining “piggybacking” as fraudulent activity to help curb such practices. But I believe a better approach is to implement Federal and/or state regulatory licensing requirements to regulate credit repair organizations, similar to those enacted for mortgage lenders. This will enable consumers to more confidently seek professional help to legally improve their credit. Also, regulators can operate a more effective and efficient system of licensing of credit repair organizations up front.

I believe such a regulatory system would work better for consumers, regulators and our economy.

But I must admit, as a licensed credit attorney and the co-founder of a reputable credit repair organization myself, I have my biases for such an approach. However, if you also agree, you can “piggyback” on this approach by telling your state and federal elected officials and the new Consumer Financial Protection Bureau.

 

Posted in Consumer Protection, Credit Bureaus, credit history, Credit Repair, Credit Repair Tips, Credit reports, Fico Scores | Leave a comment

Why Can’t Consumers See Their “REAL” Credit Scores?

One of our clients recently called and asked if we felt her scores had improved enough to qualify for financing to buy a new car. I was pleased to discuss the status of her credit improvement plan. Her scores had actually improved by over 100 points. She was very excited about her credit score increase.

However, I had to caution her that when she goes to get financing for her new car, the auto financing company or bank will more than likely see a different credit score. I proceeded to explain the intricacies of the various “industry” credit scores like Auto Scores, Insurance Scores, and Mortgage Scores, much to her bewilderment.

Yet I ventured on with the complexities of the differences between the various types of credit scores. I mustered up enough stamina to dive into a treaties about why she saw a different score than the credit score the auto lender would use to make their lending decision…

I told her that the score that most consumers see is an “educational score” or a generic scoring model sold to consumers by the Big 3 Credit Bureaus or one of their many Resellers or companies like Privacy Guard. However, these are not necessarily the scores that lenders use to make credit decisions affecting consumers.

As I plowed thru the minutia of credit scoring models, I’m sure there was a glazed look on her face indicating a mass state of confusion. And I totally understand why. You would think that the credit score you see as a consumer would naturally be the same credit score your lender uses to assess your credit worthiness. Otherwise, what’s the point?

This issue is the subject of much debate in the credit reporting and credit scoring industry. As a matter of fact, the new Consumer Financial Protection Bureau just completed a report to congress last month that addresses many of the issues surrounding the various types of credit scores and their affects on consumers.

Hopefully, it will ultimately result in consumers not only having the right to know which credit scores were used in the lending decision, but also the right to know exactly which type of credit score a lender uses BEFORE the consumer applies for credit. It would also be nice if consumers had the right to see for themselves, the same credit score the lender would use in their lending decision BEFORE they apply for credit. This way consumers would have an opportunity to check their true credit scores and make informed decisions about whether to apply for credit with a particular lender and if so, when.

But just in case my own personal wish list of consumer “Credit Scoring Bill of Rights” never happens, and just in case you’re actually interested in knowing about the detailed minutia of credit scoring models, here’s a summary of the various types of credit scores as reported to Congress by the CFPB:

1. FICO scores

“FICO scores are still the most widely used generic scoring models. One industry observer estimates that FICO had over 90 percent of the market share in 2010 of scores sold to firms for use in credit-related decisions.

There are numerous FICO scoring models. Because of differences in the data at the three CRAs, FICO develops unique generic scoring models for use at each of the three CRAs.

There are also several different generations of generic FICO scores in use, and FICO develops industry models for credit cards, mortgages, and auto loans. All scoring models FICO creates are built to generate scores that fall in the range 300 to 850.

2. Consumer reporting agency scores

The CRAs each have their own proprietary generic scoring models. These scoring models were originally developed to predict performance on credit obligations, but are currently sold primarily as “educational scores” for consumers. Examples of the proprietary generic scores sold by the CRAs are the following:

• Equifax: “Equifax Credit Score.” Produces scores in the range 280-850.
• Experian: “Experian Plus Score.” Produces scores in the range 330-830.
• TransUnion: “TransRisk New Account Score.” Produces scores in the range 300-850.

This scoring model was developed to predict performance on new credit accounts, unlike the standard FICO score or the VantageScore, which were developed to predict risk on both new and existing accounts. The CRAs also build custom scores for individual clients on a contract basis.

3. VantageScore

VantageScore LLC is a score development company established as a joint venture of the three CRAs. The VantageScore models generate generic scores. A basic difference between VantageScore’s models and the FICO models is that for each generation of VantageScore, the model is the same at each of the three CRAs. VantageScore builds its models using development databases that combine data from all three CRAs. If all data about a consumer were the same at each of the three CRAs, the VantageScore for that consumer would be the same no matter which CRA’s credit report was used to provide the data.

There are currently two VantageScore models in use. The original VantageScore was released in March 2006; an update of the VantageScore model, VantageScore 2.0, became available for use in January 2011. The VantageScore models produce scores on the range 501-990.”

I warned you about the minutia. The bottom line is you may never get the right to see the same credit scores your lender actually uses to evaluate your credit worthiness. But looking on the bright side, at least my client’s driving a new car now!

 

Posted in Consumer Protection, Credit Bureaus, Credit Repair, Credit Repair Tips, Credit reports, Credit Scams, Fico Scores | Leave a comment

How Should the new Consumer Financial Protection Bureau Regulate Credit Repair Services?

A year ago, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted. It created a new Consumer Financial Protection Bureau (the CFPB). The purpose of the new law was to establish a single point of accountability to assure that markets for consumer financial products work for American consumers and for responsible providers of those products. On July 21, 2011 the CFPB officially went to work. Its self defined mission is to serve as “a cop on the beat to enforce the laws on credit cards, mortgages, student loans, prepaid cards, and other kinds of financial products and services”.

In addition, the CFPB will also supervise credit reporting agencies (including Equifax, Experian and TransUnion) as well as credit score developers such as FICO and VantageScore.” As a result, the FCPB is responsible for developing laws and regulations governing the credit reporting and credit scoring industry.

As such, this raises an interesting question- How should the new FCPB regulate credit repair services?

Considering the growing use of credit scores in today’s economy, the substantial degree of errors in credit bureau reports (i.e. over 76% of credit reports contain errors), and the complexities of the current credit disputing process, its no wonder so many frustrated consumers seek help to get results. Unfortunately, oftentimes consumers have turned to unscrupulous credit repair scammers for help. As a result, the entire credit repair industry has suffered a black eye.

However, consumers still genuinely need help from reputable credit repair organizations to successfully navigate the credit dispute process. The Credit Repair Organizations Act, although well intended, is not adequate protection for consumers.

CROA basically lists a set of compliance requirements when providing legal credit repair services. Unfortunately, in practice, it actually impedes the delivery of credit repair services for not only illegitimate credit repair organizations, but creditable service providers as well. For example, CROA doesn’t distinguish between licensed credit attorneys (who are regulated by State Bar Associations) versus the guy who simply puts up a sign on the corner and is instantly in the credit repair business.

They are all tangled up in the same web of skepticism and reproach. The assumption is all credit repair organizations are inherently opposed to the interest of consumers. So regulators tend to focus on creating consumer awareness of the list of CROA prohibitions and requirements as a means of consumer protection. Hence, consumers are repeatedly warned of the evils of scammers and informed that no one can legitimately remove accurate credit information from their credit reports and reminded that they can repair their credit themselves. Consumers know this, but for legitimate reasons, many consumers desire professional help to repair their credit anyway.

However, the Credit Repair Organizations Act fails to address the new reality of the need for legitimate professional credit repair organizations to provide a much needed and valuable service to consumers. It allows for anyone to set up shop and get into the credit repair business. As long as they simply comply with the list of CROA requirements and prohibitions they can be in business.

Well this approach to regulation may not necessarily provide adequate consumer protection against well meaning, but untrained, inexperienced, or unknowledgeable credit repair service providers. The Credit Repair Organizations Act is primarily used by Regulators as a means of policing scam operators. Oftentimes “sting operations” are conducted by the FTC to locate and identify credit repair providers that fail to comply with the requirements and prohibitions listed in CROA.

However, considering the growing significance of credit reporting and use of credit scores, why not regulate the credit repair industry like we regulate mortgage loan originators, Realtors, or appraisers? Why not require certification, registration, or even licensing to weed out the bad apples and inject more accountability into the credit repair industry? Why not impose regulatory hurtles for becoming a credit repair organization up front?

Such regulations could include background checks, a national registry, training, exams, or bonding requirements. Wouldn’t this be a more efficient means of protecting consumers than the current practice of conducting “sting operations” to identify and shut down credit repair scams that violate CROA compliance requirements?

The CFPB should completely overhaul the credit repair industry with new laws and regulations to address the present needs of consumers in the new economy. Consumers do need to be protected from credit repair scams, but the question is how? Now more than ever, consumers need help from legitimate professional credit repair organizations experienced and credible enough to provide it.

Consumers deserve consumer protection laws and regulations with more than a list of do’s and don’ts for providing credit repair services. So hopefully the new CFPB will include an overhaul of the Credit Repair Organizations Act as a part of its agenda. I guess we’ll just have to wait and see…

Posted in Consumer Protection, Credit Bureaus, Credit Repair, Credit Repair Tips, Credit reports, Credit Scams, Fico Scores | Leave a comment

Defaulted Student Loans – It’s Not the End of the World. Or is it…?

When you’re a Mortgage Loan Originator, it may seem like the end of the world to encounter loan applicants with defaulted student loans negatively affecting their credit scores. Many consumers are totally unaware of how to deal with defaulted student loans, so as an MLO it may be beneficial to provide them with some helpful tips regarding what they can do about defaulted student loans reporting on their credit reports.

Defaulted Student loans can be very difficult to deal with because they are not treated as ordinary debts when it comes to debt collection options. Most student loans are not dischargeable in bankruptcy and can remain on a consumer’s credit report indefinitely. Many consumers are surprised to learn that prior to 2005 private student loans were actually dischargeable in bankruptcy. But The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 changed all of that. Now both government and private funded loans are generally not dischargeable in bankruptcy.

Like many consumer advocates, I believe that there is absolutely no justification for private student loans to be exempted from bankruptcy discharge. With the increase in student loan defaults due to unemployment and other issues related to the economy, many consumers will need a bankruptcy solution as a final relief valve for debt overload. Sometimes there’s just no other option.

Well fortunately, last month, U.S. Senator Dick Durben (D-IL), Steve Cohen (D-IL) along with other legislators, joined together to introduce new legislation in both the Senate and the House to treat private student loans in bankruptcy the same as any other private debt.

However, I don’t feel the proposed legislation goes far enough. I believe the legislation should provide bankruptcy discharge for ALL student loans, whether private or Government funded. Given the state of the economy, the failure of Colleges and Universities to prepare students for today’s job market, and the excessive cost of college tuition when compared to students’ earning potential after graduation, many consumers find themselves in a financial dilemma with no way out.

In working with consumers to help legally improve their credit, I constantly see consumers over their head in student loan debt. Many times the amount of student loan debt is as much as 5 to 10 times their annual income.

Most of the consumers have no idea of how to navigate the trebled waters of the current student loan collections process. As a result, they often wind up in “Student Loan Default Hell”. They wrestle with threatening collection calls from Lenders, Servicers, and even Private Collection Agencies collecting on behalf of the Government. Also, if they can’t resolve their student loan problems, many of them may never be able to qualify for mortgage loans to buy homes.

So if you’re a MLO with clients attempting to finance a home mortgage, but challenged with defaulted student loans, it may be helpful to provide them with some information and/or resources to help.

First of all, you should know that generally, student loans are divided into either Government Loans or Private Loans. Private loans are student loans provided from private lenders like banks or credit unions. Government loans are either Direct Student Loans funded by Government entities directly to the students or student loans that are guaranteed by the Government. In which case a private lender will initially provide the funds to the student and the Government will guarantee the payment of the loan and/or other benefits in the event of default or deferment. The most popular type of Government guaranteed loan program is the Federal Family Education Loan Program (FFEL). However, as of June 2010 the FFEL program was completely cancelled.

The reason it’s important to know the various types of student loans, is because there are various remedies available to students depending upon which type of student loan they have. Generally, student loan remedies fall into one of these basic categories:

    • Student Loan Deferment/Forbearance
    • Student Loan Consolidation
    • Student Loan Rehabilitation
    • Student Loan Cancellation
    • Student Loan Compromise (Debt Settlement)

If a consumer is not sure of what type of Government student loans they have, they can find out at the National Student Loan Data System (NSLDS) website.

There are pros and cons to each category and type of student loan remedy afforded. All of the factors to consider are way too numerous to address in this article, However, here’s a link to probably the best resource of student loan information I have found. It provides a really great step by step guide for developing a plan for dealing with student loan problems.

It also discusses one of the little know credit improvement tips for dealing with defaulted student loans – the Student Loan Rehabilitation program. If a consumer qualifies, after, 9 to 10 months of timely payments, the negative defaulted student loan status is completely deleted from their credit reports. We have used this program to help many of our clients to legally improve their credit and qualify for home mortgage financing.

So although defaulted student loans can be very difficult to deal with, there are a few options available that may help. So it may not be the end of the world after all.

Posted in Credit Repair, Credit Repair Tips, Default student loans | Leave a comment

How to Legally Remove IRS Tax Liens from Your Credit Report

If you’re a mortgage loan originator (MLO) or Realtor, you may want to share this credit improvement tip to help your clients to legally remove IRS tax liens from their credit reports.

A couple of years ago I worked with a client regarding the reporting of an IRS tax lien on his credit report. He was unfortunately saddled with a large an unforeseen tax liability as a consequence of his divorce proceedings.


Following his divorce, the IRS filed a tax lien against him. The lien was then reported by the credit bureaus on his credit reports. So in order to pay the income tax liability, he attempted to get a personal loan from his credit union. However, his credit union wouldn’t approve the loan because of the tax lien showing on his credit reports.

He contacted the IRS and requested a withdrawal of the tax lien to allow him to get a loan to pay the tax liability. However, the IRS agent said they would temporarily withdraw the tax lien only if he could show proof that he had an approved loan. But, the credit union wouldn’t approve the loan unless the tax lien was withdrawn and removed from his credit report. So around and around he went.

Dealing with IRS tax liens can be tricky business. Typically, IRS tax liens can be legally reported on your credit report for up to 7 years from the date of last activity. So if you wait 4 years to repay the tax lien, it can be reported on your credit report for another 7 years after repayment, totaling 11 years.

In some cases, even after repaying the lien, the “release of lien” itself may be filed as a public record and can have a negative impact on your credit scores. So it’s important to take the necessary steps to get all lien information legally removed from your credit report. Prior to February 24, 2011 an IRS tax lien was very difficult to get legally removed from your credit report.

However, it seems the IRS has turned over a new leaf. On February 24, 2011 the IRS announced major changes to their tax lien process to help struggling tax payers to get a fresh start. These new changes include:

• Significantly increasing the dollar threshold when liens are generally issued, resulting in fewer tax liens.
• Making it easier for taxpayers to obtain lien withdrawals after paying a tax bill.
• Withdrawing liens in most cases where a taxpayer enters into a Direct Debit Installment Agreement.
• Creating easier access to Installment Agreements for more struggling small businesses.
• Expanding a streamlined Offer in Compromise program to cover more taxpayers.

One of the major benefits of the new changes is that many taxpayers can now get a withdrawal of their tax liens approved by simply entering into a direct debit installment agreement for the delinquent tax liability. That’s right. The tax lien can be withdrawn BEFORE the delinquent tax liability is actually paid off.

Also, the IRS is incorporating an accelerated process for getting the tax liens withdrawn. The key is you have to actually request the withdrawal of the tax lien by filing a request for withdrawal of the tax lien form after you enter into the direct debit installment agreement.

Once the withdrawal of tax lien is approved, all you have to do is draft a credit dispute letter to the credit bureaus and attach a copy of the IRS tax lien withdrawal notice to get the tax lien legally removed from your credit reports.

Posted in Credit Bureaus, Credit Repair, Tax Liens | Leave a comment