Will Co-signer's good credit help you?

A co-signer on any loan application can either be a blessing or a financial nightmare. This can be anyone from a friend to family member who agrees to share responsibility for repaying a loan if for some reason the primary individual is somehow unable to. Most often a parent will be a co-signer so that their child, who currently has no credit rating at all, can begin building good credit. In other instances, the co-signer's good credit may help someone with a poor credit score obtain a loan when they would immediately be denied otherwise.

Everyone starts out with a credit rating of 0. Unfortunately, having no credit score is almost as negative as having a bad one. There is no record of your credibility, which is inconvenient if you are a young adult trying to obtain a loan for a home, car, or tuition. Parents or guardians who understand the value of having credit may put the young person's name on a low utility bill and either let them make payments from a job or take care of it themselves. As long as the bill is paid in full and on time, it will reflect positively on that person's credibility. It will be much easier to move into the adult world of making large purchases, such as a first home, with good credit on your record.

For the unfortunate individual who has somehow managed to place him or herself into a bad credit score and is in need of a loan, a reliable co-signer could be just the thing to get you back on your feet again. No one plans to put him or herself into debt, and a helpful friend or family member will be more understanding than the institution from which you wish to borrow. A co-signer must have a good credit score and they must also be willing and able to take over the remaining money owed if for any reason the primary borrower cannot make the payments on their own.

If you are in debt and can't seem to catch a break at rebuilding your credit, a co-signer could be the answer to your prayers. Despite your reason for bad credit, it is up to the lender to approve or deny you based on the facts of your credit report. As long as you know someone who has good credit history and enough faith in your ability to repay the loan that you need, you may have a chance to get back on your feet for good. Co-signers are a great way to establish or re-build good credit.

Reestablish Credit - How To

So you screwed up somehow and are looking for ways to reestablish good credit. You can do it but it takes time - sometimes over 18 months and you have to work hard. You need to prove that you become a financially sane person and get a lot of positive things on your credit report. It is a slow and painful process to reestablish your credit and you have to be persistent.


Reestablish credit - things to do

* pay off your debts - start with bankruptcy, liens or judgments against you, that is anything that is under public records section of your credit report
* become cheap - the best way manage your money and start reestablishing your credit is to save as much as you can
* pay with cash - if you still have credit cards, pay off outstanding balances and close all but one or maximum two
* establish a savings account so it serves as evidence that you can handle money and if necessary, use as collateral
* establish a personal contact with the branch manager or loan officer of the bank where you keep your account
* contact creditors whose accounts you have paid off earlier to help you reestablish some credit - they may consider it and will look at how regular your payments were before problems arose and how long it took to resolve those problems
* if you have to, ask someone who still believes in you, to cosign for you - make sure this unfortunate person reads about cosigning loan first
* get secured credit card - it is an excellent way for someone with bad credit to quickly reestablish a good rating
* apply for a retail card offered by gas stations, appliance and furniture stores - Shell, Mobil, Best Buy, Wicks Furniture and the likes are usually easy going and may extend you a credit even if you have credit problems - if denied, try to purchase an item on a layaway plan, the store will be more inclined to provide you with a charge card if you prove reliable
* pay your bills on time - that is needless to say and explain, the most vital part when someone tries to reestablish credit

If credit is denied - do the following

* ask the creditor to provide a written explanation why you were turned down
* check with the credit-reporting agency listed as the source of the adverse information to see if it is accurate
* do not apply for credit elsewhere until the reason for the denial has been established and resolved
* beware the creditor looks at length of time on the job, length of time at one address, and the percentage of income owed out of "take home" pay excluding housing cost - this should not exceed 20% excluding mortgage and car payments for most folks

Crucial Strategies

The only thing you legally need to supply the credit bureaus for a copy of your report is your name, your social security number and a legal mailing address (P.O. Box is a legal address). If you don't want to chance harassment by creditors at this time, it may benefit you to acquire a P.O. Box. Did you know that many of the collection agencies are owned by the credit bureaus?

NEVER give credit bureaus more information than they need!

The bureaus also have a right to request a copy of your social security card, but only give a copy of the front. They also may request a copy of something showing your address if it is different than what is showing on the report. Send them a billing statement that has your address. Do not send them a copy of your driver’s license as they request. Remember these bureaus are information-gathering companies who sell your information, not only for credit, but also for promotional reasons.

Before going any further, you should have copies of your current credit reports. If you don't, you can use the sample letter on the following page as a guideline for requesting your credit reports from the 3 major bureaus.

The Credit Bureaus must send you copies of your credit file, free of charge if you were recently denied credit. They will also provide you with one free copy each year. We advise against having anyone you know get your credit file for you because this creates an "Inquiry" on your credit report, and makes it appear as if you are trying to borrow money from somewhere.

If you are in a hurry and cannot wait 5 to 10 days to receive your credit report, simply look in your local Yellow Pages under Credit Bureaus. If the Credit Bureaus have a local office or affiliates in your area, you may go there directly and obtain your credit file without delay.

When you get the reports, there will be an information page telling you how to read your report. And all three agencies use different formats. The first step is to find all the derogatory items.

Look for collection accounts. Equifax lists them at the end of the report, Trans Union mixes them throughout the report. Experian gives a brief paragraph explanation of all accounts. The collections may have a collector’s name or account number you do not recognize.

If you don't recognize the account as being one of yours, please don't assume that it is!

Dealing with Credit Bureaus

It is essential to understand that Credit Bureaus are nothing more than record keepers.

Simply put, they keep a record of who has given you credit, when they gave you credit, how much credit you are given and whether or not you paid it back on time. When you want to obtain credit cards, loans, financing for a car or home, leases, apartments and sometimes even employment, the lender or bank will check your credit to see your financial history.

Credit Bureaus are paid by the people who request your credit file.
Credit Bureaus have no legal power over you. Banks, police or the government does not run them; so don't be intimidated by them. They are the Credit Bureaus because they own large computer systems capable of storing credit information on everyone in the United States. However, because of the tremendous amounts of information on their computers, their method of storing information is very basic and ridden with many errors. Since the bureaus have made so many errors in the past, all Federal Laws regarding credit information are very much in your favor.

The Major Credit Bureaus

EXPERIAN
P.O. Box 2002
Allen, TX 75013
(888) 397-3742

experian.com


Trans Union Corporation
P.O. Box 1000
Chester, PA 19022
(800) 888-4213

transunion.com


Equifax, Inc.
P.O. Box 740241
Atlanta, GA 30374
(800) 685-1111

equifax.com

Credit Scoring and the Lending Industry

When you apply for a mortgage, your lender will request a credit report from a credit reporting company. This is usually a local or regional company. This company pulls together a credit report electronically. It usually comes from one or more of the major repositories, but it can come from several sources.

Along with the information, the local credit reporting company receives a numerical score. The score represents a composite of the borrower's credit history, employment, ability to save, and so on. The most famous of these scores is known as the FICO score, which was a model developed by the Fair-Isaacs Company a number of years ago. It is believed that the Beacon and TransUnion scores are really scoring information provided by the Fair-Isaacs Company, but have been tweaked somewhat by the other bureaus. That is partly true, but what most people don't know is that, with information streaming into their credit file almost everyday, the scores can change daily. That is why someone can apply for a mortgage with one company today and have a FICO score of, say, 717, and apply with another lender a week later and that score can be higher or lower, depending on the information received at the repositories in the interim.

The truth is that the Fair-Isaacs Company and the major credit repositories do not divulge how the scoring model works. Due to the level of erroneous reporting to peoples' credit files, there has been pressure on Congress lately to make the credit repositories more accountable for the accuracy of the information they report AND to divulge what goes into the scoring models, so that people can know what to do to improve their scores.

Why is this important? The lending industry is moving toward "risk-based" pricing. In plain English, this means that the higher one's credit scores, the less paper they will have to provide to prove that they are creditworthy AND the interest rate and/or fees a borrower pays will be based on the level of their scores.

This system, while perhaps unfair to some, will be great for those who maintain impeccable credit. It's one way that good credit risks can be rewarded. In the past year, we in the industry have already seen a dramatic reduction in paperwork requirements and "risk-based" pricing (rates and fees) has become commonplace.

If you have recently obtained your credit report and you are not happy with what was reported, you can take steps to correct the erroneous information on it. There are also proactive things you can do to improve your scores, if you are anticipating applying for a mortgage anytime soon. While I intend to go into the details of correcting erroneous credit information in Part II, I can give you a few hints now as to how to be proactive in improving your scores from where you are today.

The first is the most obvious. Pay all your payments on time. The second is, don't apply for any new credit unnecessarily. Every time you sign and return a new credit card offering, or open that second account at a department store because you get a 15% discount, an inquiry will be generated and that will reduce your score. The third is that if you must maintain credit card balances, try to keep them at a level that is 35% - 40% of the maximum credit limit. In other words, if the credit limit is $1,000, try to keep your running balance below $400. Believe it or not, consolidating all your credit cards onto one can hurt you, if the balance is at the credit limit. The fourth is, if you get into a dispute with the phone company and it isn't a huge amount, pay it and move on. Having one or more collections, even if they are small amounts, can really hurt your score.