It is matter of fact that life can be much unexpected. Perhaps you have been hit hard by this economic downturn or maybe an illness or even just plain old mismanagement has left you with a series of late payments on your credit. No use crying over spilt milk so to speak. This week we are going to look at what to do to repair your credit after such an event.
There are three main scenarios we most often see in conjunction with damaged credit.
1. Regular late payments. All types of credit providers report to the credit agencies about you and your repayment history. Cellphones, credit cards, student loans, vehicle or personal loans, lines of credit and of course your mortgage. You are assigned a credit rating based on if your payments are made on time, if you are at or near limit on your credit cards and a variety of other things. Often, the descent into bruised credit starts by missing a payment here and there. Of course the more late payments you have, the more leery a new lender will be to extend you additional credit. If you had a rough patch like this then the best thing to do is catch up ASAP and do not let it happen again. Lenders will want to see that you have recovered financially and you now mange yourself well. The magic number is two. They want to see two years of perfect repayment on at least two credit facilities. After the damage was done it is imperative that you not have another late payment on anything including your cell phone. It is also a good idea to save some money so they can see you have a fallback position if you lose your job. Finally, keep your credit cards at no higher than 75% of the available credit. It can be a sign of financial distress if you are maxed out.
2. Orderly payment of Debts – This program is entered into voluntarily by people who need further help. These agencies will meet with you to assess your situation and determine a repayment plan with your creditors. They make calls on your behalf and negotiate for you which will stop the collection of calls you may have been receiving. Interest rates are negotiated down and you are set up on a repayment plan to pay your creditors every cent you owe based on your income. Your credit bureau will reflect that you have opted for the OPD which means you have to do some work to be considered for lending later on. Again, the magic number is two. You need to have two credit facilities reporting pristinely for two years once the OPD reports as complete. At that point many lenders will consider you for mainstream lending. You may have to start with a secured credit card or two or a vehicle with a higher interest rate to get back on track.
3. Bankruptcy – In this scenario you have gone through the formal bankruptcy process which involve a trustee and the court system. Your debt obligations were negotiated down to a fraction of what they were and you have paid out that amount as per your agreement. Two years after you show as formally discharged with two years of established credit on two credit facilities you will once again be eligible for mainstream lending. Without those criteria you may find yourself paying a higher rate for a mortgage or other loan.
A few extras I would like to point out are these. If you have any late payments after the OPD or bankruptcy you will likely be turned down for a mortgage at best rates. The lenders will allow that life threw you sideways but it is up to you to show them it will not happen again. If there was a foreclosure in your past, you are not likely to get any financing for a mortgage unless you are willing to pay some very high interest. Finally, there are companies out there who advertise that they can fix your credit for a fee. Be very cautious in your dealings with them They can be very expensive and the credit reporting agencies are on record reporting there is no quick fix for credit issues. Do your due diligence before entering into an agreement with anyone telling you they can fix your credit.
That’s all for this week. Until next time.
Pam Pikkert is a mortgage broker with Mortgage Alliance – Regional Mortgage Group in Red Deer.