Prosper Newsletter: September 2007 > Financial

You understand that the following information is educational in nature and is not intended to be legal, accounting, or tax advice. You are responsible for your own financial decisions and should consult your own legal, accounting, and tax advisors before making your financial decisions.

Credit Management

Families in the United States took on an astounding 34% more debt between 2001 and 2004 according to a recent survey of consumer finances. This survey tracked roughly 4,500 random families based on their income, assets and debt. The average debt, including mortgages, in 2001 was $41,300. Three years later that figure had climbed to $55,300-an increase of one third.

The report also suggested that there was either a reduced willingness or an inability to save money. During those same three years, only 56% of families saved any of their income. These figures indicate that nearly half the population of the United States may be financially ill-equipped for retirement. By focusing on and maintaining proper information on your credit, you can be better prepared for retirement.

It is vitally important for you to maintain a good credit record as part of your overall financial strategy. You are the one that must take control of your own credit report and history. Errors can creep into your credit and make it difficult for you to borrow at the most favorable interest rates. It can even result in you being declined for credit outright.

The three main credit-reporting agencies are Experian, Equifax, and TransUnion. These three agencies maintain as many as 200 million credit files. These reports contain information about you and the dealings you have had with your creditors. Many central databases feed information into these agencies. Because errors can easily creep in, it is essential that you review the information to ensure that it is accurate at least once annually.

Fair, Isaac and Company (FICO) is an independent firm that developed the model that defines your credit score. FICO outputs a numbered credit score that represents your level of worthiness for getting financed. It ranges from 300 to 900. A score between 700 and 850 is highly desirable, but not always easy to maintain. Five different items are taken into consideration when assigning a credit score, with each item carrying an assigned weight. They are as follows:

• 10% is based on the types of credit accounts you carry
• 30% is based on total outstanding debt
• 15% is based on the length of time you have had credit
• 10% is based on the number of credit inquiries
• 35% is based upon your credit history, and how many times you have been late on payments

The Fair Credit Reporting Act of 1970 was enacted to protect consumer rights to obtain, use and maintain credit information. It has been amended several times since then to restrict who has access to your private credit information and how that material can be used.

You have six basic rights specified under the Fair Credit Reporting Act:

1. You have the right to challenge the accuracy of the report any time you wish.
2. The credit bureaus must reinvestigate anything you challenge without charging you.
3. Generally this investigation must take place within a reasonable amount of time, usually 30 days.
4. If the credit bureau finds an error, they must delete or correct that mistake immediately.
5. If they don't confirm the challenged item within 30 days, they must remove it immediately.
6. You may submit a Consumer Statement describing the problem. Your explanation has to be included in the report if you so request. (Yet, keep it clear and concise).

Most of the time, you should not have an outside third party file a dispute for you because the credit bureaus may suspect you have paid someone to repair your credit. It is illegal for people or companies to charge for repairing your credit in advance. Many companies claim to do credit repair, but it is most effective if you file your own claims.

Improving Your Credit Score

There are a number of ways to improve and increase your all-important credit score. Here are 18 of the most common methods:

1. Generate a credit report at www.annualcreditreport.com.
   1. Only order a report from one of the three bureaus available, but not all three. In doing this, you avoid a negative credit hit. There is a small charge-usually between $8.00 and $30.00-depending on the number and service that you choose.
2. Pay your obligations when they are due. A high percentage of your credit score is calculated based on your payment history
3. If you are paying off a collection account, it is wise to talk to the creditor prior to the payoff, and negotiate with them to remove the collection report when they receive payment.
4. Remember, your payment must be over 30 days overdue in order to appear on your credit.
5. Pay off as much of the money that you owe as soon as possible.
6. The amount of debt you have in relation to your credit limits is how most credit models evaluate you. Try to keep the balances under 25% of their limit.
7. Make sure your credit limits are correct. Paid off accounts that are reported as open, need to be taken off the report.
8. Do not apply for new credit frequently. A short credit track record may adversely affect your score.
9. Do your rate shopping in a focused two week period loans on items such as cars and vehicles.
10. Having accounts open with a good credit history is a strong indication of a great track record. Avoid credit inquiries where possible.
11. Do not open accounts too rapidly, it makes your credit look risky, and lowers the average account age.
12. Suggest to be added as an approved user on someone's account who is never late with payments.
13. Old cards that may be lying around should be reactivated; not to use, but to show open accounts which use the old date and provide more experience. It may extend the line of credit.
14. Do not put all of your balances on one card.
    1. It is better to have more accounts with smaller balances to show a variety of established credit accounts.
15. Do not close the accounts that you have paid off in full. Too many closed accounts can be a negative indicator to your score.
16. Cut the associated credit cards up so you can't use them, but leave the credit limits there. It is good to have established credit accounts, but too many may have a negative effect upon your score.
17. Avoid loans from finance companies and related payday advance businesses. Their rates are for high-risk users, and often can top 400% interest.
18. A good credit mix that lends variety to your history would be four to eight loans with different kinds of companies within various industries.

Your credit report is not just used by creditors. Employers often will pull your credit file when you apply for a job. It is thought that the way you manage your finances reflect upon the way you manage your relationships and life. Credit scores can even be used to evaluate you for promotions. Nearly all insurance companies run reports to qualify you for coverage, and even more important, use it to compute your premiums. Gone are the days of simply listing references on applications and resumes.

A credit report often provides employer and financial institutes with information that may also include things such as traffic and parking tickets, your criminal history, including any DUI (driving under the influence of alcohol) violations, late insurance premium payments, auto accidents, divorce, work history and numerous other types of behavior. Many people don't realize that there is no limit as to the amount of time an item, whether accurate or not, may remain on your report. This is why an annual inspection and correction philosophy can pay great dividends.

With these impacts in mind, take a look at the three most damaging things you can do to your credit:

1. Foreclosure. This is the worst mistake you can make. When you fill out a credit application, either for an auto or a home, there is always the question that states, "Have you EVER had a foreclosure?" Most bankruptcy questions ask if you have filed within the last two years, but this is not so with foreclosures. Many creditors will continue to use foreclosures against you many years after the fact. The reason behind this is because the property will be sold at auction at a price that is often lower than fair market value. Thus, there is a deficiency between the balances of the note leaving creditors to pay the loan balance, back payments, interest penalties, attorney costs, realtor commission, repairs, and other costs associated with foreclosure. This is why foreclosures are to be avoided. Also, a Deficiency Judgment may be ordered and you may end up owing the balance of the loan plus all those costs, even though you no longer own or live in the property.
2. Judgment Liens and Garnishments. A lien is often placed on an item of value, usually real estate or vehicles, to secure a creditor position on a debt that is seriously delinquent. It remains there until you pay what is owed. An item that has a lien placed upon it may not be sold, transferred or disposed of without the debt first being satisfied. A lien literally freezes your financial position.
3. Credit Counselors. Many people think of these non-profit organizations as your best friend. Beware; credit counselors are really an enemy. Most of these agencies, often called credit-counseling companies, amount to nothing more than collection agencies for creditors. Using them will most likely affect your credit negatively. These firms are notorious for sending in your money late, skipping payments, shorting payments and not sending the agreed upon amounts. As many as 50% of the people who enroll in these programs find themselves much deeper in debt than when they first started.

These companies make millions and the money comes from you, the consumer, and your creditor gets to "write off" the debt as a fair-share contribution. Further, you are led to believe they have special negotiation power over your creditors while, in fact, they do not. Thus, why do you need a credit counselor? The answer is: you don't! You can negotiate reduced interest rates or lower balances better than they can. You have power to transfer your balance to another company, and that is much more compelling than you imagine.

Many people are terrified of the popular industry term BK, or bankruptcy. We don't advocate bankruptcy, but sometimes it is a better option than resorting to credit counseling. In some cases bankruptcy may actually improve your credit and allow you to return to acceptable credit status within 12 to 24 months. The Chapter 13 Reorganization is the most common vehicle for this process. However, a Chapter 7 has longer lasting consequences, since it is a liquidation process, rather than a reorganizing process.

You may be asking why no one has told you about all this before. Most people are unaware of the programs available. This is why it is important that you find out how credit works. Too many people listen to advertising pitches, pushy salesman, insurance salespeople, financial planners, lenders, realtors, mortgage brokers, credit card companies, car dealers, credit counselors, or credit repair companies. While they don't always give all bad advice, it is still important to investigate and get the facts about how best to handle your money and credit.

Investment Property

Now is the time to secure an equity line or investment property loan!

Record high foreclosures and uncertainty within the mortgage lending sector have many lending companies and financial institutions evaluating their current guidelines. The Labor Department has also suggested that current unemployment rates are higher than anticipated, which further fuels this reevaluation frenzy within the lending market.

Such statistics have had a negative impact on Wall Street and investors who, seeking a safer environment, have pulled money from the stock market and reallocated the funds causing this market to rally. This is usually good for mortgage rates; however, since the guidelines have been changing quickly not everyone will be able to qualify for that equity line or investment property loan.

As such, many lending institutions have already begun to buckle down. It appears they are reverting back to more conservative lending. Some recent guideline changes include higher down payment requirements for non-owner occupied investment properties, stronger FICO scores, and the elimination of many stated income/asset programs.

If you are an investor and do not have a minimum of a 10% down payment, need to acquire funding through a stated program, or if your credit is not up to par, now is the time to secure funding before all lenders jump on the conservative guideline bandwagon leaving you without any option at all.

HOME | PARTNERS | PRODUCTS | TESTIMONIALS | SUCCESS CENTER | ABOUT US | CONTACT | SITE MAP | PRIVACY POLICY | CAREERS