How to Establish Credit?

[organica]

I'm a former bankrupt who was living unemployed for several years, & still owes money on 2 old bills, which I'm not in a position to pay at present.
I'm also increasingly aware that it';s dangerous to live without a credit card these days.
I am wondering about ways of trying to establish credit, without having to pay the old bills in their entirety up front, which would mean I wouldn't be able to pay my rent.

[thebelovedtree]

I had to go to the bank and get a really really crappy credit card with a really low credit limit. But I've never been bankrupt, I just didn't have any credit.

[VeganForHealth]

Well, first off, you have to understand that the only real way to boost your credit score is to honor the terms of your debts over the long term. That's what credit is supposed to measure, and what it largely does. It lets other people know if you're a person who keep her word.

As for your existing debt, there is the option of the minimum payment. This will keep you within the parameters of honoring your agreements, and not only keep your credit from going down, but actually improve it. (Some of the people with the largests debts have some of the highest credit ratings. This is because they demonstrate the ability to honor their agreements, while managing large debt.)

Now if you do see a financial pitfall coming up where you won't be able to make the minimum payment, you'll have to make other arrangements. Very often, credit card companies and other lending institutions will accept what is called a "partial payment". If you call ahead, with the foresight of knowing your budget won't allow you to pay the full amount, very often the credit company will make a one time exception and give you the right to make a reduced payment, and still not have it impact your credit. (It's not something to make a habbit of.)

Now in terms of snowballing debt, there are a couple options to limit the pain. First is to be aware of the ability to refinance your debt. That is, if you owe a large sum of money at an 18% rate (like some credit cards have), you can very often find a lending institution who will give you a 12%-15% loan to pay off the credit card company and then collect payments from you on the new loan. Refinancers specialize in risky debt repayment. Usually all they require is a few good months of honoring your previous agreements before they are willing to step in and agree to give you money at a lower rate.

Long term, the ways for repairing bad credit, and building good credit are slow, but possible. To start with, you should consider getting a debit card. It has the same acceptance for most purchases, and often has a Visa or Mastercard logo. It will overcome the daily hassle of needing a card to make purchases. Once you get a little bit of money, you can get what is called a "secured" credit card. (Usually arranged by local banks where your account is.) This isn't really a credit card, but one that's linked to a bank account that holds the exact amount of cash that the credit card limit is for. So in essence the bank has the collateral of the actual cash amount waiting in case you decide not to pay. ...This may sound silly, but to Credit Companies, it looks like a regular card, and will demonstrate your ability to use credit responsibly.

There are other methods too. Taking a loan out is actually a way some people resort to. Again, the goal is to show over time that you can use credit responsibly. But that mainly works for younger people. As we get older, the best way to improve credit is to accumulate assets. A bank will always be more willing to loan you money if you have something you can put up as collateral. (A house is ideal. Property often works.)

Don't go to a credit counselor. It's largely a scam operation providing information that's freely available. No one can instantly fix your credit. Anything they say to intimate that is a flat out lie. ...And don't let credit become your "solution" to not having enough money or living above your income.

What's most important is being up front and honest with your creditors, and make a sincere effort to honor your agreements, and demonstrate that you recognize that you owe them money, and that you intend to pay it.

Hope this isn't too confusing. If anything isn't too clear, please let me know, and I'll try to better explain it.

[Tesseract]

Great post, VFH! :up:

[VeganForHealth]

:kiss:

[organica]

Thank you Vegan for Health!!
Question: is it wise for me to approach the 2 companies I owe the $$ to? Or should I arrange orderly payment of debts thru a credit counsellor? One of these companies was harrassing me very badly when I could barely afford to pay my rent, & I had to move to get rid of them. I don't want them calling me with threatening messages again, bothering me at work, etc.

[remilard]

Thank you Vegan for Health!!
Question: is it wise for me to approach the 2 companies I owe the $$ to? Or should I arrange orderly payment of debts thru a credit counsellor? One of these companies was harrassing me very badly when I could barely afford to pay my rent, & I had to move to get rid of them. I don't want them calling me with threatening messages again, bothering me at work, etc.

You should approach them and try to get them to either remove their entry on your credit report or update it as "paid as agreed". Offer them 75 cents on the dollar but pay the full amount if you have to. Set up a payment plan if you need to. Get this agreement in writing before you pay a cent and make sure your language is precise (you can find pages online that tell you exactly what to ask for, I imagine the language is somewhat different in Canada than the US).

If the debts are outside the statute of limitations for your location, don't pay them unless they do the above and don't pay more than 50 cents on the dollar (25 cents if they are more than a couple thousand dollars).

[organica]

Thanks remilard. I am a little leery of contacting them directly, as they always seem to start calling at weird hours with angry threats, as happened in the recent past even when I sent them a letter saying I would pay when I had a living wage-income.
Is there a way around this? Like a credit counsellor?
I don't want them calling me at work again- I could lose the very chance I have to ever pay them back/re-establish credit.

[Thalia]

And although assets might help you get a loan, assets don't affect your credit score. The credit bureau knows nothing of what you own or how much you make, only what accounts you've had and how well you've paid them. Also, something won't show up as a late payment unless it's at least 30 days late. It's also helpful to have a copy of your report so you can see who actually reports to the credit bureau if you have a lot of bills and will have to pay one late. Few utilities (including land line phones) report, but they may cut off your service and charge you to turn it back on. But if you don't want a bad credit mark, it may be worth it to pay the other accounts first.

[VeganForHealth]

Well, generally I would discourage a credit counselor. Because if you can't afford rent, you probably can't afford to have someone else try to do what you could do yourself, and because there are disreputable ones out there.

I'm not sure who's chasing you down, for what, and for how much, so my advice has limited value. But if you really have declared bankrupsy, that should have covered all this. (Unless the debt was incurred after the bankrupsy procedings.)

If the bills are older than 5 years, you may want to consider not paying them. Credit records usually go back around 7 years, and it may be easier to wait, than arrange new payments.

If you able to do so safely, you may want to disclose some of the details. Feel free to send a PM.

[Thalia]

Well, generally I would discourage a credit counselor. Because if you can't afford rent, you probably can't afford to have someone else try to do what you could do yourself, and because there are disreputable ones out there.

Yes, there are a lot of credit counselors, even ones who claim to be non-profit who are really out there scamming people. Also be careful taking out loans to pay off bills. Even reputable banks engage in bait and switch tactics where they give you one apr, and then the contract actually says something else, or has fine print saying there will be a later balloon payment or the rates will change at some point or if you ever miss a payment by even one day. My parents found reputable, large, national banks engaging in illegal practices when trying to refinance their house. They lied to them about the interest rate and terms they were approved for and tried to get them sign on to something different. Read and understand before you sign and have everything in writing. There are a lot of tricksters out there.

[Joe]

I'm a former bankrupt who was living unemployed for several years, & still owes money on 2 old bills, which I'm not in a position to pay at present.
I'm also increasingly aware that it';s dangerous to live without a credit card these days.
I am wondering about ways of trying to establish credit, without having to pay the old bills in their entirety up front, which would mean I wouldn't be able to pay my rent. (Emphasis added.)

I think the title to the thread is a little misleading, because what a person (like a freshman in college) would do to get credit for the first time is different from what you may have to do to re-establish credit after bankruptcy.

I also think that much of the advice you have gotten in this thread from Americans may be off-base because these kinds of situations are governed by laws, and it appears that the laws regarding credit and so forth may be very different in the US than they are in Canada. For example, I believe that in the US, creditors are prohibited by law from calling your employer, and when they may call you at home is also regulated by law. (I believe it is 9 am to 9 pm, M-Saturday, when such calls are allowed in the US.)

You write that it is "dangerous" to be without a credit card. I am not sure I understand what you mean. It would be dangerous to have to carry around a large wad of bills/paper currency, like a Mafia don, but I would think that you could pay most bills by using a check book and/or a debit card. So I am unclear, what do you really need a credit card for?

I have heard of such things as debt consolidation loans, wherein you would get a loan from Creditor C, in order to pay off Creditors A & B, and presumably the payment plan to Creditor C would be more managable, but I really don't know much about such loans and I'd have to assume that these might involve you with rip-off artists or possibly exorbitant fees. So, I am not saying that you should rule this out, but you would have to be extremely cautious before entering into one of these loans, shop around and do plenty of homework.

I think maybe the simplest thing you could do is just make up your own plan for paying off your creditors. Set aside a fixed amount each month until you can afford to pay off the lesser creditor (i.e., the one to whom you owe less money). Then just pay him off. Then keep setting aside a fixed amount each month until you have enough to pay the other creditor. Then pay him off. One variation on the plan is that when you have enough money to pay off each creditor, instead of paying immediately, you might contact him and negotiate a payment of 50 cents on the dollar or 75 cents or whatever. Just be sure to write the proper endorsement on the check, i.e., that the check constitutes "full settlement" of the debt.

Again, I don't know what the situation is in Canada, but I would imagine they must have some sort of consumer affairs office or other government office that would have information about such matters or that could direct you to appropriate places from which to get further information. Try contacting them.

[Skylark]

organica, I understand your leeriness of credit counselors, but there are some legitimate people out there who won't charge you. If it's a well-known organization, your creditors may be more willing to give you lower interest rates, etc., when they know you're working with someone reputable. That shows them you're serious about it.

My parents are financial counselors through Crown Financial Ministries (http://crowncanada.ca/). I realize you may not want to go through a religious organization--this is just the only one I have personal experience with and know it's legit. Crown has credit counselors in many areas, including Canada. Whether any are near you, you'd have to contact Crown directly. Crown does not permit any of its counselors to charge money. It's run by donations. This would be a definite benefit to you--Crown knows people in financial trouble don't have money to spend on a counselor, so they don't charge for it.

Even if you still don't want to go to someone you don't know--and that's legit--I would suggest you find someone you know well who's willing to look over your books with you. We all have our "pet ways" we spend money, when really we could cut back, and it takes another person's eye to see it. This might free up some money toward your debts. Things like cable or satellite TV are nice, but how much does it truly contribute to your quality of life? (That's just an example.)

[Dasani]

When you have done credit counseling it has the same affect as bankruptcy. I've worked in the financial industry for the last 5 years I consider myself to very knowledgable.
My advice is don't to it. Work out payments with who you owe money to, otherwise your not doing your situation any good.It doesn't matter if its a profit organization or a nonprofit it all affects your credit score and ability to get loans.
I would like to add using credit counselors also affects everyone, meaning if lots of people are going to credit counselors(which they are). What credit counselors don't tell you is that a portion of what you owe is being paid, the rest the creditors are losing, which causes high interest rates. So you are put in the catergory as high risk and not a responsible borrower. Interest rates are based on what is being paid back and how lending institutions are losing. If more people are going to credit counselors instead of paying back the money they borrowered, of course rates are going to up and the people who suffer are the people who pay back their debts.

[Skylark]

Dasani, I wasn't suggesting that organica go to a credit counselor instead of paying her bills. I suggested that she go to one so that she could find ways to pay her bills. If she successfully pays them off in a timely fashion, how does that hurt other borrowers?

[Dasani]

I wasn't tring to offend anyone. I was trying to educate on how rates are determined, info on credit.
If you go through a credit counselor, they negotiate and get the rates lowered. It's not a refinancing process, the creditor is losing thousands of dollars when loans are consoliated together because rates are dropped. Creditors see this as a last chance before a bankruptcy. If people borrower money and don't pay it back, or consoilidate this affects everyone.That is why it is important if you can't afford it then don't finance it. I hope I was some help.Also look at the affect on our Economy.

[Dasani]

Also it has nothing to do with paying back consolidated loans, once you consolidated your loans you have voided the inital contract and haven't kept you end of the deal.
When determining interest rates everything affects that how many people defaulted, filed bk, consolidated loans or credit counseling, compared to responsible borrowers.Now, I hope you see how this affects everyone. If you have to go to a credit counselor to pay your bills, it shows that you are not responsible when it comes to financial dicisions.

[prairie_girl]

I'm a Canadian banker, so I can be of some help here. First of all, Call Equifax and Transunion. You are entitled to free copies of your credit reports. If you have access to a credit card and about $50 bucks, purchase them, with your score. These sites call it a FICO. That's the American term though, it's techincally your Beacon.
Debt condolidation through a bank, not possible most likely. How long ago did you declare bankruptcy? I know my bank (starts and ends w/ a C) no longer does unsecured debt consols. Please feel free to PM me darling, this is my favourite part of my job, and if I can help you get this paid off, I'd love to be able too. Approximately how much are you owing? What's the maximun you can afford a month? You might be able to call and say look, I owe you $500, can I give you $400 right now and be done with it?

[prairie_girl]

[QUOTE=Dasani]Also it has nothing to do with paying back consolidated loans, once you consolidated your loans you have voided the inital contract and haven't kept you end of the deal.
QUOTE]


um, that's not true. you don't void anything, you borrow at a lower interest rate to pay off your existing loans. the creditors don't care where the money comes from, as long as it's paid back as agreed. Where did you get this information?

[jade193]

[QUOTE=Dasani]Also it has nothing to do with paying back consolidated loans, once you consolidated your loans you have voided the inital contract and haven't kept you end of the deal.
QUOTE]


um, that's not true. you don't void anything, you borrow at a lower interest rate to pay off your existing loans. the creditors don't care where the money comes from, as long as it's paid back as agreed. Where did you get this information?


I am going to have to agree with dasani I am studying to be a financial planner and have a background in real estate. I suggest before you say something is wrong you should be a little more educated on the topic.

You are also in Canada the laws are a little different in the states. No financial institution wil give you a good rate because consolidating shows you are not a responsible and that is what credit is based on paying the amount you agreed to.

[bstutzma]

That's weird. My husband consolidated his school loans, and about a year later, we went to buy a car and his credit score was something around 813. So it didn't seem to hurt him any.

[Thalia]

I find the ideas that loan consolidation (that it is not holding up your end of the bargain) and credit counseling both are bad for credit to be a little suspect, myself. No offense, I just want some sources. I started to look and found some counter evidence- that in the last three years new scoring does not hold it against people.
Contrary to what you might have heard, credit counseling probably won’t hurt your credit score. It used to, but about three years ago Fair Isaac discovered that people in debt-repayment plans were no more likely to default or go bankrupt than other consumers, but it could still hurt in some situations. However, if not going to credit counseling is going to hurt even more, then you have to pick the lesser of two evils.


“Today the FICO score ignores any and all references in a credit report to credit counseling or debt management programs,” Watts said.

Those references to credit counseling, by the way, are typically removed from a credit report after a consumer has successfully completed a repayment plan. That means there’s no lasting reminder on your credit history.

Watts notes that a few lenders still use the old scoring system, which punishes folks on debt repayment plans. Others, particularly mortgage lenders, simply won't work with people in credit counseling until their plans are completed, regardless of their credit scores. For more information, check out "The consumer's guide to credit counseling (http://moneycentral.msn.com/content/Savinganddebt/Managedebt/P36234.asp)."

http://moneycentral.msn.com/content/Banking/Yourcreditrating/P38052.asp

As for loan consolidation, it does not make sense. If they get their money, they get it. If there is a penalty for early repayment, they get their penalty fee as well. I do think that student loan consolidation would fall under a totally different category from say using home equity to pay off credit cards or your car. Some of these kinds of things don't effect one's score for very long anyhow.

The only thing I can think of is now one has one big account instead of several little ones which means your average account age is lower (bad) and the number of accounts is low (bad). But if consolidation is going to keep you from filing bankruptsy and possilbly save you tons of money, I have a hard time seeing why not. I would be careful though about these people who say lower your monthly bills by $200 a month through consolidation. What they don't tell you is you will be paying it off for 50 years at 20% interest.

[prairie_girl]

I am going to have to agree with dasani I am studying to be a financial planner and have a background in real estate. I suggest before you say something is wrong you should be a little more educated on the topic.

You are also in Canada the laws are a little different in the states. No financial institution wil give you a good rate because consolidating shows you are not a responsible and that is what credit is based on paying the amount you agreed to.


um....Organica IS Canadian. And I work in a bank. I deal with things like credit and debt consol 8 hours a day. Don't accuse me of being uneducated. Can you PLEASE explain to me how a debt consolidation voids the original agreement?

I'm editing this again, to say this, Jade, I found your post to be rather rude. I have a feeling Dasani and I are talking about to different things, but am incredibly offended by your comment about my being more educated on the topic. I'm not saying you and Dasani are wrong in regards to US laws, but Organica is Canadian, and what said in regards to debt consolidation HERE is 100% accurate

[bluegrrrl79]

Maybe you should focus more on trying to save money to pay off the loans. I'm sure there's things you spend money on that you could cut back.

[organica]

Thanks for all the advice, esp. the Canadian stuff.
I went to a credit counsellor last week & she said I should save up & pay the smaller bill 100% 1st, then make a few large payments on the larger bill.
She also mentioned a secured credit card I can get almost guaranteed approval on, I forget the name.
There were people in this thread who said credit cards aren't necessary for everybody, but I think they are. I've had to hitchhike, steal, embezzle, bounce cheques & the like to survive when I had no credit. The cost of living is just outpacing the wages people take home in jobs like mine, or on disability/welfare.
Bluegrrl, I refuse to buy cheap products tested on animals/with animal by-products or eat meat/dairy/etc to save money. If this means I need help, I guess I'll find that help because I'll never be complicit with animal abuse.