There are several ways and several programs that people can use to fix their credit and improve their credit score. Which one is the best? Which program will improve my credit the fastest?
Our firm’s mission is simple: debt resolution. Resolving debt quickly with legal documentation is the fastest way to improve your credit score. We offer a free consultation with a licensed Michigan attorney to:
- Review your circumstances;
- Discuss your questions and;
- Recommend the best course of action for swift debt resolution and credit improvement.
Call us today at 866-261-8282 to speak to an attorney or schedule online at any of our seven Michigan locations: Detroit, Ann Arbor, Dearborn, Flint, Southfield, Lansing or Warren.
Learn more about your credit score components and which actions will have the most dramatic effect.
Your Credit Score is Affected by 3 Major Factors
- Are your payments being made on time each month?
- How much debt are you currently carrying (i.e. your debt to income ratio)?
- How long have you had a credit history?
Each factor listed above accounts for approximately 15-35% of your credit score. Making timely payments each month will help you to maintain your credit score and affects about 35% of your overall score. If you start to miss payments, obviously your credit score will go down. Because the monthly payments only affect a portion of your credit score it make take months of missed payments to have a dramatic affect on your credit.
The amount of debt you are carrying accounts for the next 30% of your credit score. Maintaining the debt amount (i.e. not letting your debt increase) will help to maintain your credit score. As the debt continues to increase your credit score will be impacted. Again, because this is only a portion of your overall score it may take months to affect your credit.
The last factor is how long you have had credit. Someone who has had credit for 10, 20 or 30 years will be able to maintain their credit easier than someone who just started to get credit (i.e. a recent high school or college graduate). This accounts for approximately 15% of your credit score.
Understanding how your credit score is compiled will help you to understand how you can impact your score and possibly make it better. Someone who is making their regular monthly payments, on time, will help to preserve their credit score. However, if you are only making the regular minimum monthly payment, and your debt is increasing (i.e. debt to income ratio), your credit score will go down. Maintaining regular monthly payments will not prevent your credit score from going down, if your overall debt is increasing. Even though each of the factors accounts for only a portion of your overall score, they are still very much intertwined, and one variable can still have an impact on the other.
Getting Help to Improve Your Credit Score
As stated above, knowing how your score is compiled will help you to understand how to improve it. There are several programs and different companies that will promote their services to help you improve your credit score. Those companies may fall into some of these categories listed below.
- Credit Counseling
- Debt Negotiators
- Debt Restructuring/Elimination
Credit counselors are typically promoted as non-profit agencies to help people make payment arrangements with their creditors. When you contact them initially, they will go over your monthly budget and see if they can find a way to set-up a payment plan with your creditors. They will often times find a way to reduce the interest payments on your debt. The credit counselors will also find a way to extend the time period to pay back the debt, often times extending the debt to six or seven years (whatever it takes to pay the debt).
As a cautionary note, be wary of who you are dealing with. Even though they may promote themselves as a non-profit credit counseling agency, find out who is paying them. Many, if not most, of the non-profit credit counselors are paid for by Visa and MasterCard. That’s right! Visa and MasterCard pay many large credit counseling agencies to help set up payment plans with their own credit card customers.
While credit counseling agencies may not always be a bad thing, some agencies willput people into a plan that will strain their budget and cause them to fall behind on other bills (i.e. mortgage or vehicle payments). Very often we take on clients that have fallen behind on their mortgage or car payments because they are paying a credit counselor to pay their debt. The credit counselor will tell them, if they miss a payment into the plan, the interest rates on the debt will go up again and they will request larger payments. Missing a payment on your mortgage or vehicle will have a large, negative impact on your credit as well as put you at risk for a foreclosure or vehicle repossession.
Work with a company that has your best interest at heart and not someone who is being paid by your creditor to collect money from you. It may seriously impact your credit rather than help it.
Many companies will advertise they can reduce your debt, often times less than .50 cents on the dollar. How do they do this? The debt negotiator will get a list of your creditors. They will establish a monthly payment for you. The monthly payment will often times be in the hundreds of dollars, maybe as high as five or six hundred dollars. The negotiator will collect this fee for a number of years. During the time the negotiator is collecting this debt they are not paying your bills, and neither are you – you can’t pay them and your debt at the same time. They will tell you if a creditor calls to refer the creditor to them. After a couple of years of paying them, they will have built up a small war chest to make offers to your creditors. If you owe a credit card $2,000, they will call and offer .50 cents on the dollar to settle the debt, if they accept the deal now. If the deal is accepted, they will pay the creditor $1,000 from your war chest.
Here’s the problem. While the negotiator is collecting your money, they are not paying your debt. It will often times take them years to collect enough money to make settlements on your debt. The whole time they are doing this your credit is going down the tubes. The lower you allow your score to fall the longer it will take to build it back up again.
Another problem, many creditors are aware of what these agencies are doing. Most credit cards companies will not wait a number of years to be offered .50 cents on the dollar. Once the credit card company knows you are working with one of these companies, and they know who these companies are, they will sue you to collect on the debt and garnish your wages. Our firm has had hundreds of clients over the years come to me because they are behind on their mortgage because they are being garnished by a creditor who is taking 25% of their net take home pay or has emptied their bank account.
Debt Restructuring and Elimination
There is a third and perhaps better way to restructure your debt and fix your credit. The more formal term for this option is called “Bankruptcy.” Don’t let the work “Bankruptcy” scare you.
All the word “Bankruptcy” means is that you are getting court protection while you are working out your debt situation. If you file a bankruptcy, whether it is Chapter 13 reorganization or a Chapter 7 Debt Elimination, you are immediately protected from your creditors. They cannot:
- Harass you;
- Pursue legal actions against you (i.e. sue you);
- Foreclose on your home or repossess your vehicle, etc.
Once you have filed a Bankruptcy, your creditor can no longer report missed or late payments to the credit bureau. That’s right; a bankruptcy will actually begin the process to improve your credit. No more late or missed payments, affecting 30-35% of your credit score.
Under a Chapter 13 Reorganization plan, once it is filed you are protected from your creditors. No more late payments are reported to your credit bureau. All unsecured debt (i.e. credit cards, medical bills, etc.) are paid at zero percent interest, and in many cases – may be eliminated altogether. As you are making payments into the plan and reducing your debt, you are improving your credit score. As your debt to income ratio goes down, your credit score goes up. This is the second factor affecting 30-35% of your credit score.
As you are going through the Chapter 13 program and making your payments your credit score will improve. Most times, your credit score will improve within the first 12 months of the program. Below are some summaries from previous clients credit scores showing what the net effect of filing a bankruptcy will do for their credit. As you can see filing a bankruptcy can have a tremendous, positive impact on your credit within 12 months of filing bankruptcy.
This is a sample of ACTUAL projected results for clients we recently filed Chapter 7 and Chapter 13 cases for:
For those who may be looking to buy a home or a car, filing a bankruptcy may be the quickest way to help them make that next purchase. Under Fannie Mae, Freddie Mac or Federal Home Assistance (FHA) programs, you must be 24-36 months away from a Chapter 7 Bankruptcy filing, or 24-36 months into a Chapter 13 Bankruptcy. Yes, you may be able to purchase or refinance a home under a Chapter 13 Bankruptcy program and the creditor will use your plan payment history as a new source of credit verification.
The third factor affecting 30-35% of your credit score depends on your length of credit history. Those who have had a credit history in the past will rebuild their credit faster then someone with a shorter credit history. There is a big difference from someone who has paid their bills on time for 20 years and suffers a temporary setback than some who files a bankruptcy fresh out of college or who has only been working a couple of years and defaulted on their first car payment. But always remember, taking care of the problem and getting resolution will improve your credit fast regardless of length of credit history. It’s better to take pro-active steps to fix your credit than do nothing at all.
Work with the Debt Resolution Specialists
Our firm offers free consultations to discuss your options for filing Chapter 7 Bankruptcy or retaining counsel if you are experiencing an issue in getting case closure for your existing case.
Call us today at 866-261-8282 to speak to one of our licensed Michigan Bankruptcy Attorneys or schedule a time online. With over 50 years of combined legal experience promoting debt resolution, we have the knowledge and professionalism to help you find debt relief and long term financial freedom.