How To Get

GREAT CREDIT!
Easily get the credit you need to get everything you want!

JOHN MICHAEL JANNEY
A M E R I C A ’ S #1 F I N A N C I A L A W A R E N E S S E X P E R T

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Table of Contents
Introduction Disclaimer Chapter 1: Crash Course in Credit The 5 Cs of the Credit Puzzle The 5 Components of Credit Scores The Cost of Bad Credit Credit Reporting Laws Chapter 2: Repairing Credit Beware of Credit Repair Scams Credit Repair Organizations Act 3 Steps to Repairing Credit Credit Repair Don’ts Chapter 3: Rebuilding Credit The Path to Plastic Things to Consider When Shopping Around for Credit Things to Keep in Mind after Approval A Simple Strategy for Positive Payments Credit Card Offer Comparison Websites Beyond Plastic Monitor Your Progress Other Credit-Building Tips Chapter 4: Safeguarding Your Credit Budgeting Frugality Extra Income The 5 Ps of Responsible Credit Use Stay in Control Closing Comments: You Can Do It! Links to over 200 Pages of FREE information about important credit laws 3 3 5 6 8 12 15 17 17 18 20 33 34 34 36 37 37 38 38 39 40 42 42 43 36 46 48 49 50

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Introduction
Thank you for purchasing the How to Get GREAT CREDIT! We put a lot of effort into making sure this book provides you with the information you need to understand how credit reporting and scoring works and how to repair, rebuild and safeguard your credit. We were careful not to get lost in some of the overly-technical details of the credit industry so we could keep this publication short while still providing you with valuable information.

We wrote this book with mainly one type of consumer in mind: the newly debt free. This includes those who are fresh out of a bankruptcy, debt settlement program, debt management plan (consumer credit counseling) or who struggled on their own to overcome debt. We structured the information for people who fall within this category because they are in the most need for this information. We are assuming you belong to this group of people and are at a stage in your life where you successfully resolved your debt problems and are now ready for a fresh start. However, just like you needed some guidance to resolve your debt problems, you will need some guidance to resolve credit problems.

As a member of the newly debt free, you are at a stage in your life when debt no longer hinders your ability to pay bills on time or properly manage your money in other ways. However, this does not mean that the information on the following pages does not apply to someone still in debt. Yes, sometimes you may need to sacrifice your credit to get relief from overwhelming debt. But this book will still serve as a guide for when you are able to pull yourself out of debt and are ready to start recovering from past credit mishaps.

Disclaimer
While every effort was made to ensure the accuracy of the information provided in this book, credit laws and regulations are subject to change. Therefore, the author(s) and publisher give no warranty, expressed or implied, as to quality, content, accuracy, reliability or completeness; and

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do not assume responsibility for the same. If you have any questions about information contained in this book, please consult a credit bureau or an attorney knowledgeable in credit issues.

While this book contains information on credit laws and other such information, you should not misconstrue this information as legal advice. Nothing in this book should be considered legal advice. If you require legal advice, please consult an attorney. You can find an attorney by visiting the following website: http://www.findlaw.com. This website also has a guide for finding, evaluating and hiring an attorney at the following location:

http://public.findlaw.com/library/hiring-lawyer/index.html

By providing information on credit, the author(s) and publisher are not guaranteeing specific results. Results will vary depending on numerous factors. You are solely responsible for your credit activities, spending behaviors and your other personal financial matters.

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Chapter 1:
Crash Course in Credit
Before we can delve into the important topic of repairing or rebuilding damaged credit, we need to make sure you have a firm grasp of some basic credit concepts. You probably learned a lot about credit during your struggle to get out of debt, but many misconceptions circulate the internet and are even promoted by self-described credit experts. So, we will review the basics of how the system works while not getting too bogged down in the details.

Credit is essentially the practice of merchants allowing customers to purchase products or services and then pay for the items at a later date or over time through installments. Banks grease the gears of commerce by providing merchants with the money they would otherwise have to wait for in a traditional credit scenario. With this relatively new credit model, customers owe the bank the money for purchasing products or services from merchants and banks become the creditor, not the merchant.

While this scenario may seem like a win-win situation for customers and merchants, there are some problems. First, the most prevalent form of credit in our society is currently credit cards and credit card banks have managed to structure the credit agreement (cardholder agreement) in ways that give them the ability to change interest rates, fees and other terms and conditions practically at will. At the same time, these agreements give you virtually no power to do anything about it.

You most likely experienced the effects of this practice while you were in the midst of your financial difficulties. It probably felt like the creditors were simply kicking you while you were down. One credit misstep, such as one late payment, and your creditor hiked your 9.99% APR to a 39.99% APR and slapped you with a $39 penalty fee. With the higher interest rate and finances

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getting tighter, your balances seemed to remain at a stand-still – no matter how much you struggled to keep up with your monthly payments and be a “good cardholder.”

You don’t need me to tell you about how credit card debt can quickly spiral out of control. It can become so overwhelming that it consumes your life and starts to cause all sorts of other problems. Debt stress leads to personal stress, domestic friction and the inability to afford food, new clothes or medicine because every extra penny you have is spent trying to avoid more of those expensive penalty fees. University researchers even found direct links between debt stress and depression as well as other health problems.

The second problem is that credit card companies issue credit cards to just about anyone. On the surface, this seems like an equalizing practice that enables people with little or no credit history to enjoy the benefits of credit that only well-established consumers previously enjoyed. But the dark side of this trend is that there is virtually no credit use education to help new cardholders properly manage their newfound credit. Cardholders start using credit to purchase just about anything, from a new computer to a value meal at the local fast food restaurant. The debt piles up and the monthly debt payment grows until, one day, that infamous late payment makes its way into their lives. The new penalty interest rate and fees spin that manageable monthly payment into something that overwhelms and cripples them financially.

There are many other problems with how credit card companies structure their contracts and treat their customers. You received your own crash course from the school of hard credit knocks when you fell on hard times. So, we will now turn to the issue of just how the credit industry works.

The 5 Cs of the Credit Puzzle
The credit puzzle has the following core pieces:

Consumers: These are individuals who purchase goods and services and sometimes borrow money to make these purchases. Consumers make payments to creditors based on a credit agreement. You are a consumer.

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Creditors: These are businesses that sell goods and services on credit or lend money to consumers to enable them to purchase goods and services. Creditors report credit activity (payments, late payments, credit balances, credit limits, etc.) to credit bureaus.

Credit Bureaus: These are businesses that receive reports from creditors on consumer credit activity and maintain these collections of reports in individual credit files. Credit bureaus are also called “credit reporting agencies,” but we will use the term “credit bureaus” because it is less of a mouth full and the term “agency” gives the false impression that these companies are government entities – they are not. Credit bureaus are huge for-profit corporations. The three major credit bureaus are Equifax, Experian and TransUnion. Not all creditors report activities to all three credit bureaus, which is one reason credit reports and credit scores often vary between credit bureaus.

Credit Reports: The individual credit files maintained by credit bureaus are known as credit reports. These contain all the current information on credit accounts and account activities. Credit information can remain on a credit report for up to seven years and a bankruptcy can stay on a credit report for up to ten years. A credit report is sometimes referred to as a credit file. However, you can think of the credit file as the raw information stored in the credit bureaus’ databases while the credit report as the nicely formatted and organized presentation of the information stored in your credit file.

Credit Scores: A credit score is a three-digit number between 300 and 850 that credit bureaus calculate based on the credit information stored in your credit report. It is not part of your credit report, but the items on your credit report directly affect your credit score. For example, if you make a late payment to a creditor who reports this incident to a credit bureau, then your credit score will suffer.

Each piece of the credit puzzle above was described in chronological order. First, you are a consumer who seeks credit. The creditor contacts a credit bureau to check your credit report and credit score, which will be the basis for the terms of the credit contract. The creditor reports the

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new account and subsequent account activities to the credit bureaus. The credit bureaus maintain these records in a credit file that is used to generate a credit report. The credit bureaus use a mathematical formula to calculate your credit score based on the information stored in your credit file.

The 5 Components of Credit Scores
You may have seen the term “FICO score” when reading about credit scores. FICO is short for Fair Isaacs Corporation, which is the company that developed the software for calculating credit scores. All three credit bureaus calculate credit scores based on the FICO formula, but each credit bureau calls its credit score by a different name. Equifax calls its credit score a BEACON score, Experian calls its credit score the Experian/Fair Isaac Risk Model score and TransUnion calls its credit score an EMPIRICA score.

Regardless of the name, all FICO-based credit scores follow a basic formula for weighing different aspects of a credit file to derive a credit score. Below are the five components of this FICO formula and the breakdown of how much each component affects your FICO score.

Credit Component Payment History Amounts Owed Length of Credit History New Credit Types of Credit Used

Percentage of Credit Score 35% 30% 15% 10% 10%

Payment History (35%)

Do you pay your bills on time or do you pay late? If you pay on time, do you pay more than the minimum, do you pay off the balance completely or do you pay the minimum? If you pay late, how late are you, do you completely miss payments for months or are you just a few days late?

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Creditors report payment information to credit bureaus so other creditors will know if you pay your bills on time or if you occasionally or routinely pay late. Late payments signal to creditors that a credit applicant is a higher risk of not repaying the loan or that there is a good chance the applicant will make several late payments. A spotless record of on-time payments and possibly several “paid more than the minimum” payments signals to creditors that the credit applicant is a low-risk borrower.

In addition to listing late payments and indicating how overdue the payments are or were, payment history includes the amount past due. Your payment history also includes any accounts sent to or currently in collections and if an account was “charged off” by a creditor because of non-payment beyond 120 days. The types of payments recorded on your credit report are: Pays or Paid as Agreed, 30 Days Past Due, 60 Days Past Due, 90 Days Past Due, 120 Days Past Due, Payment Plan, Repossession or Foreclosure, Charged Off or Bad Debt and Not Reported.

Payment history does not end with basic payment trends. The payment history portion of your credit score also includes credit-related public records. These public records include bankruptcies, wage garnishments, property liens and other judgments.

The FICO score calculations consider how much time has passed since a creditor reported a late payment or sent your account to collections. How much time has passed since the last date of a public record is also taken into consideration when the formula calculates your credit score. So, as time puts more distance between you and any negative items on your credit report, your credit score should improve (all other things remaining the same).

How many past due items reported by creditors and how many “pays or paid as agreed” items creditors report also have an impact on your credit score (as part of your payment history).

Payment history accounts for 35% of your credit score – the greatest share of all credit score components. Creditors, as well as the FICO scoring model, put a lot of emphasis on how consistent you are with paying on time or paying late. However, how much debt you have also weighs heavily on your FICO score.

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Amounts Owed (30%)

Just like with payment history, the label “amounts owed” doesn’t tell the full story behind this credit scoring component. Yes, how much debt is on your record is part of the FICO score calculations, but how much debt on what types of credit accounts is also a factor. The number of accounts on which you are carrying a balance also impacts your credit score.

The FICO formula considers the amount of your balances versus the amount of available credit on revolving accounts and the amount of the remaining balance versus the loan amount for installment accounts. This part of the “amounts owed” component is often referred to as the “debt-to-available-credit ratio” because it compares how much debt you are carrying on your accounts against how much of the account’s credit limit is available. For example, if you have a credit card account with a $1,000 credit limit and carry a balance of $600, your available credit remaining in your credit limit is $400. So, you now have more debt than you do available credit. Ideally, you should keep the balance on any credit card account below 30% of the account’s credit limit (for example, a $300 balance with a $1,000 credit limit).

You should also spread debt across multiple accounts rather than have all debt weighing down one account. This goes against the idea of consolidating debt onto a single, low-interest account. However, the “amounts owed” portion of the credit formula looks at the debt-to-available-credit ratio for each account. So, spreading out debt typically improves this ratio.

Before we go any further, we should address one credit myth that often arises from misunderstanding this aspect of the “amounts owed” component of credit scoring. I often hear so-called credit experts telling consumers that their debt-to-income ratio affects their FICO score. This is not true. Of the many things recorded on your credit report, your income is not one of them. So, there is no way the FICO formula could include your income in any calculation. However, some lenders may consider your debt-to-income ratio in addition to your credit report and credit score when you apply for credit to purchase certain big-ticket items, such as a home, car or large appliance. But, your debt-to-income ratio has no direct impact on your credit score.

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Length of Credit History (15%)

The length of your credit history accounts for 15% of your credit score. This includes how long ago you opened your oldest, open account and the age of the various types of accounts you have open. The amount of time since your last account activity is also a factor, which means that you must occasionally (as well as responsibly) use credit to build your credit score. If you open credit accounts and then never use them, the FICO formula has no way to calculate the probability that you will pay your bills on time. This does not mean you must carry a balance or charge large purchases to your credit card. But using credit and paying on time, paying off balances in full or paying more than the minimum will reflect positively on credit reports. Non-activity does not.

New Credit (10%)

New credit, which accounts for 10% of your credit score, includes recently opened credit accounts and their types, as well as the time since you opened those accounts. This component of your credit score also includes your reestablishment of a positive payment history following a negative payment history. So, if you have a history of late payments, there is still hope.

New credit also includes the number of recent credit inquiries and the amount of time since any credit inquiries. However, not all inquiries are created equal. Hard inquiries, which are what the FICO formula looks for, are those inquiries made by a creditor when you apply for credit. Soft inquiries, which do not affect your credit score, come in three flavors. These flavors are consumer-initiated inquiries (when you obtain your credit report), promotional inquiries (when businesses, like credit card issuers and insurance companies, look at your credit to offer preapproved credit offers) and administrative inquiries (when one of your creditors monitors your credit). You will not lower your credit score by simply obtaining your credit report (this is considered a consumer-initiated soft inquiry). In fact, you should get your credit report at least once per year to make sure all the information it contains is accurate.

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As with anything in your financial life, you should plan your credit usage. This includes opening any type of credit account. The FICO formula treats mortgage and automobile loan hard inquiries made within a 14 day period as one inquiry. This shows that you are shopping around for the best offers, which is a responsible trait. However, if you initiate hard inquires on whims (like when a checkout clerk offers you a $15 coupon in exchange for a credit application), then this will reflect poor credit planning and could negatively impact your credit score. As a general rule, you should not apply for more than one credit card account within a six month period.

Types of Credit Used (10%)

The final component of your credit history is fairly straight forward. The FICO formula measures the number of different types of accounts to determine if you have a good mix of credit accounts. You can have too many credit accounts or not enough of the right types of credit accounts. For example, if all you have are revolving accounts (like credit cards) and no installment accounts (like car loans), then your credit score may not be as high as it could be if you have some installment accounts to balance your credit mix.

Facts Not Calculated into FICO Scores

As mentioned above, your income (and therefore your debt-to-income ratio) is not part of your FICO score. Other facts not factored into your credit score include your race, religion, ethnicity, national origin, gender, marital status, age, occupation, employer, employment history, soft inquiries, child support payments and rental agreements. While the type, balance and credit limit of a credit account is part of the FICO formula, the interest rate on that account is not.

The Cost of Bad Credit
Your credit score is used by lenders to determine how much credit to issue, what interest rates to charge and other credit terms. Lenders charge higher interest rates for borrowers with low credit scores while borrowers with high credit scores typically receive lower interest rates. Credit card issuers also set credit limits based on credit scores and monthly income.

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Interest rates and credit limits are not the only terms set based on credit scores. Insurance providers are beginning to set premiums based on credit scores. Property managers set rental deposits based on credit scores. Service providers, such as residential and mobile phone companies, approve accounts and set deposits based on credit scores.

FICO scores range from 300 to 850, with 850 being the best possible score. The average credit score is 675 and the median credit score is 725. Typically, any credit score over 720 is eligible for favorable credit terms, like a low interest rate, while credit scores below 660 usually can only qualify for expensive, high-interest “subprime” credit.

The average American has about $10,000 in credit card debt and the average annual percentage rate (APR) is about 15% (1.25% monthly periodic rate). If this average American paid 2.5% of the debt each month ($250), it would take 26 years to pay off the debt and cost $9,757.71 in interest. So, this average American borrows $10,000 and pays back nearly $20,000.

Now, imagine two not-so-average Americans borrow the same amount on each cardholder’s credit card account. One, we will call him Jack, has a 780 FICO score and the other, Jill, has a 600 FICO score. Jack was able to get a 9% APR while Jill’s credit card company gave her a 24% APR. Using the same low monthly payment model as the average American with the 15% APR, we can see how much bad credit can cost you.

Jack, with a 9% APR (0.75% monthly periodic rate), will pay $250 each month for 19 years and four months to pay off the $10,000 balance and only pay $4,191.60 in interest. Jill, with her 24% APR (2% monthly periodic rate), will have to pay $298 each month because of new regulations requiring credit card companies to set minimum payments no lower than all interest and fees plus 1% of the account balance. This means that more of Jill’s monthly income ($48) is consumed with minimum monthly credit card payments, but that’s not all. It will take Jill about 33 years and five months to pay off the entire balance and she will pay $19,949.30 in interest – nearly twice what she borrowed!

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Average American Balance Credit Score APR Monthly Payment Time to Pay Off Interest Paid $10,000 675 15% $250 26 years $9,757.71

Jack $10,000 780 9% $250 19 years, 4 months $4,191.60

Jill $10,000 600 24% $298 33 years, 5 months $19,949.30

As you can see, bad credit is costly. It cost Jill an extra $15,757.70. Bad credit can cause property managers to require hefty deposits (that’s assuming they approve your rental application) and may even cost you an employment opportunity as some employers use credit reports to screen potential hires – and let’s not forget about insurance premiums. But these are only the immediate costs of bad credit. Jill also lost over 14 years and $48 of monthly cash flow that she could have used to pay other bills and buy groceries.

The cost of bad credit stretches beyond what you pay in interest, deposits and higher insurance premiums. There are the lost opportunities because so much of your hard-earned money is being sunk down the bad credit drain. Your credit card payments equate to $250 you are not investing each month into a 401k, ROTH IRA or other investment account. If Jill was able to contribute $100 to her company’s 401k plan and her employer matched her $100 each month for 35 years, she could retire with about $760,000 (assuming a 10% annual rate of return).

So, low credit scores cost us far more than interest payments and even more than the lost opportunity to earn nearly one million dollars. Debt stress seeps over into our personal lives, causing marital stress, personal stress and even health problems. But don’t let these facts get you down. Use them to motivate you in your efforts to better your situation and put the gloomy days of poor credit behind you.

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Credit Reporting Laws
Congress passed several laws protecting consumers in relation to credit transactions, including credit reporting. You should have a general understanding of these laws to best protect your credit standing from errors or abuses. Below is a summary of the key laws regulating credit.

The FCRA (Fair Credit Reporting Act) and the FACTA (Fair and Accurate Credit Transactions Act, also known as “The FACT Act”)

The Fair Credit Reporting Act provides tools to ensure you, as a consumer, have access to your credit report and can dispute errors you find on your credit report. The FCRA also gives you access to your credit score, but not free access. You will still need to pay to get your credit score.

The FCRA also includes privacy provisions that restrict access to your credit report. Only you, those you authorize and those with a valid need can access your credit report. Those with a valid need include lenders, employers and insurance providers. The other privacy feature is your ability to opt-out of prescreened offers that use the credit bureaus’ marketing lists.

There are two features of the FCRA that relate directly to repairing errors or outdated information on your credit report: access to your credit report and the dispute procedure.

1. Access to Your Credit Report

Thanks to the FCRA, you can now purchase copies of your credit report whenever you want. However, you can obtain free copies of your credit report under certain situations, namely if: •

someone took “adverse action” against you because of information in your credit report (for example, if a lender turned down your application for credit or if an insurer turned down you application for coverage);

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you are an identity theft victim and place a fraud alert on your file (a fraud alert is a note you can have attached to your credit file that alerts creditors that an identity thief may be using your identity to commit fraudulent purchases or other criminal activities);

• • •

your credit report contains inaccurate information because of fraud; you are on any form of public assistance; or you are unemployed and intend to seek employment within 60 days.

2. Dispute Procedure

Imagine that a credit card issuer denies your application for credit. They include in their rejection letter your right to a free credit report and instructions for obtaining it. You follow their instructions and several days later you receive your credit report in the mail. You review it and discover that someone else’s late payments are being reported on your credit report.

Fortunately, the FCRA gives you the right and defines the process to dispute inaccurate and untimely information on your credit report. We’ll discuss how to rid your credit report of errors in the next chapter.

The Fair and Accurate Credit Transactions Act is an amendment to the FCRA. The most wellknown provision of FACTA is that American consumers can now obtain a free credit report from each of the three major credit bureaus (Equifax, Experian and TransUnion) once per year. The reason behind this provision is to combat the epidemic of identity theft. By giving consumers free annual access to their credit reports, they can more easily and quickly catch, dispute and resolve the fraudulent credit accounts setup by identity thieves. We will explain how to obtain your free annual credit report in the next chapter.

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