CREDIT: HOW TO CLEAN IT UP AND USE IT TO MAKE A FORTUNE BY David A. Chodack Opium is one of the most addictive substances in nature, but just as addictive, once you get used to it, is OPM, Other People's Money. Obtaining it and using it wisely is the secret behind many of the world's great fortunes. There is only so much any of us can accomplish on our own, using our own resources, but if we can tap other people's resources and put them to use for us, there is no limit to what can be done. Real estate is one of the easiest fields in which to utilize this principle for a couple of reasons. First of all, very few people pay all cash for real estate. It is common to finance it at least partially. Secondly, real estate is one of the safest things for a lender to finance, because it's not going anywhere. If you finance a car, you can dive it away and never be heard from again. If you finance a business, it can go bankrupt and cease to exist. Real estate on the other hand, is fixed in place. It's not going anywhere. Sure, it can go down in value, particularly if the area goes bad. But at least it can't disappear. This is why real estate loans can actually be among the easiest loans to get if you know what you re doing and how to apply. Therefore, the first thing to look at, is what Lenders look for when evaluating potential borrowers. INCOME AND EMPLOYMENT HISTORY One of the first things lenders look at is whether you are employed. Ideally, they want to know that you have been employed at the same job for at least two years with excellent prospects for continued employment. They also want your employer to verify your income to state that you make at least enough to qualify for the minimum payment on the loan you are applying for. If you are self employed and have your own business, then they want a Profit and Loss Statement from your accountant. This will show that you have been in business for at least two years, that your business has been profitable, and that you make at least enough to qualify for the minimum payment on the loan. CREDIT HISTORY Once your lender has verified your employment and verified your income, and they know that you are capable of making the payments on the loan, the next thing they want to know about is your credit history. They want to make sure that you are a reputable borrower who will make the payments on the loan. Just because you are capable of doing so doesn't mean that you will follow through on your obligations. The want proof of this, they want to see how you have handled your bills in the past. This is what is known as your credit history. What they want to know about you is very simple and to the point. What have you borrowed, how promptly have you paid it back, and what do you currently owe. This will tell them a lot about what type of borrower you are. Ideally, banks don't like to give mortgages to people with no credit history at all. Even if you are a reputable citizen and pay all your bills in cash, just really doesn't tell a bank how you will handle credit once you obtain it. They prefer to see history where you have borrowed money and paid it back faithfully. But even no credit is better than bad credit. If you have no credit history we will show you how to build one. We will show you easy ways to get started with credit by dealing with lenders who have a reason for giving you credit because it will help them to sell their products. Once you have built up your credit history with these lenders, department stores, gasoline companies, etc. you will have built a successful credit record and then it is easier to get credit cards, car loans, mortgages and other types of credit. Believe it or not, mortgage may be actually be the easier types of credit to apply for. There is one simple reason for this. You can move a car if you know that they are coming to repossess it, you can hide the television or the washing machine, or other appliances that you bought on credit, but what do you do with a house. It sits there and if you don't make the payments, the lender knows exactly where to come and get it and repossess it. There is no question, there is no problem about whether the house will be in a place where he can find it or not. There is no way you can hide the asset that backs the loan. Therefore, lenders are actually taking less of a risk with a mortgage then they are with a car loan for example. And minimizing risk is what it is all about. Lenders work on statistical profiles. They have profiles showing who is likely to default, why, and what effect this is likely to have on the bottom line, i.e. what percentage of people are really likely to default. This is why you have to learn to make yourself look good on paper. You have to sell yourself to the lender. Either create a credit history if you don't have one or create a new credit history if your old credit history is unsatisfactory. And that is what we are going to show you in this book. THE BIG THREE CREDIT BUREAUS Most lenders don't have the time or resources to go and track down all the information they need themselves. It wouldn't be cost efficient. They don't have the staff to go out and interview people, check with your creditors, check with your neighbors, your friends, etc. to find out whether you pay your bills. Fortunately, for them they don't have to. There are credit bureaus, credit reporting services, that perform exactly this type of service for lenders. There are many of these services scattered around the country, but in general when people talk about credit reporting, they talk about the Big 3. These three companies pretty well dominate the credit reporting industry on a national basis. What usually happens when you go for a mortgage loan is that your lender will contract with a local credit agency that receives information from one or more of the Big 3 and then combines it into their own report. The Big 3 of the credit reporting industry are TRW, Transunion and Equifax. Each of them has their own way of reporting the information that they collect but each of them collect basically the same information and sells it to basically the same sorts of client. Lenders pay a fee to get this information. They also agree to contribute information. They agree to let the credit bureaus to know about their clients. Whether their borrowers pay their bills promptly. Whether their borrowers default on their bills. This is because lending is a cooperative effort. Lenders all want to work together to minimize their risks and costs so that they can maximize their profits. It doesn't pay for one lender to pass his dead beat clients onto the competition because the competition will just do the same and everyone will wind up making less money. So credit reporting bureaus are almost cooperatives in a way. They depend upon the good will of their members, upon the dedication of their members in order to gather the information that they need. Although they do have their own staff, this would not be necessarily be adequate and they really could not function as well without the information they receive from lenders and creditors. This is something you can use to your advantage if necessary when contesting items in your credit report. You contact the lender or creditor directly and unless they have record of the item listed in your credit report, late payment or non-payment etc. and are willing to produce that record to back up their claim that you are a bad creditor, then the credit reporting bureau will take it off of your record. It's not like the credit reporting bureau has their own information which their own staff has dug up. In this case it would be a lot harder to get them to remove information from your file, but since most of their information does come second or third hand, it can make it easier for you to get the information removed if necessary. BIG CREDITORS Major creditors like banks, department stores, auto-dealers, etc. normally report to the credit bureaus on a regular basis. They give information on all their regular customers, large and small to let the credit bureaus know who pays on time and who doesn't. Generally, they will report this information every thirty to sixty days. Smaller creditors may not be quite so efficient about reporting and the credit bureaus may be more half hazard about staying in touch with them, so if you owe a payment to Sid's Jewelers, it may not turn up on your credit record as quickly owing money to Sears, or Macy's or some other major merchants, some major department store. HOW CREDIT BUREAUS DISTRIBUTE THEIR INFORMATION TO LENDERS Once credit bureaus have the information on you, once they know whether you pay your bills, and if so, which bills you pay on time and which ones you may tend to pay late, they put this in the form of a credit report which is available to lenders and available to you under one of two circumstances. Normally, if you want a copy of your credit report, you have to pay for it. You contact one of the Big 3 credit bureaus and state that you want to get a copy of your credit report, and you pay whatever fee they decide to charge. Or, you contact a local credit bureau and pay their fee which will average about $50 to $100, and you will normally get a report that will combine information from one or more of the Big 3, TRW, Equifax, and Transunion. If you are turned down for credit, they have to tell you why. Normally they will tell you that it is based on a report from one of the Big 3 credit reporting agencies. In this case, you can send a copy of this letter to the credit reporting agency and demand a copy of your credit report for free. This is your right under the Fair Credit Reporting Act, a Federal law. The credit bureau will then send you a copy of your credit report with no charge to you. You can look through there and see what negative items are listed in your credit report, see why this would have caused you to be turned down for credit, and protest it if you feel that there was an error made. Lenders can request copies of your credit report without you even knowing about it. They don't need to ask your permission. They just contact the credit bureau directly. They are not likely to do this for no reason but anytime you apply for credit, rather it is for a new credit card, or an auto loan, or a mortgage, the lender is going to request to see a copy of your credit report. In some cases, you will know about this, they will make the request to you. In other cases, they will make the request directly to the lender. If you have too many inquiries on your credit report, if too many lenders have contacted the credit reporting bureau asking for a copy of your report, this in itself can cause you to be turned down for credit. Lenders might be afraid that you are applying for two much credit and that you are getting in over your head. At best, this will normally require a letter of explanation so that lenders will understand why you have so many inquiries on your report. You want them to understand that you are not an irresponsible or potentially irresponsible borrower. What specifically are lenders looking for when they look at the credit report? First of all, they are looking for late payments, they don't care if you borrowed $10 from your uncle Sid and paid it back a couple of weeks late. They care about your relations with your major creditors. And even then they only really care about payments that are 30 days late or more. And so the credit report is divided into three categories, 30 days late, 60 days late, and 90 days late. Each creditor is asked if you have ever made payments at least 30 days late, if so, how many times? If any of your payments have ever been late 60 or 90 days, and if so how many times, and what the dates were. This is because lenders want to see a pattern. If all your late payments were three to five years old, and your credit has been clean since then, the chances are you will get your mortgage. But if you have a history of recent late payments within the last year or two, several accounts that are reporting that you have made payments 30 to 90 days or more late on a frequent basis, or even a semi-frequent basis, the chances are you might be turned down, unless you can do a very good job of explaining why you've suddenly stopped making your payments on time. Mortgage lenders particularly want to see that you've covered your housing obligations. If you live in a large apartment complex that is owned or managed by a large corporation, then it's quite possible that your rental habits are already reported to the credit bureaus, that at least one of the Big 3, TRW, Transunion or Equifax already knows whether or not you've been making your payments on time. But if you live in a smaller apartment building or a rental house owned by a small investor, the chances are that they haven't reported to the credit bureaus. This can work either for or against you depending on whether or not you're a good tenant. If you are a good tenant and you feel that your landlord probably has not reported to the credit bureaus, then you might ask them for a letter stating that you have always paid your rent on time, that you have been a good tenant, and that they will be sorry to see you go when you do buy a house. This may carry weight particularly with smaller lenders because it shows that you do take your housing obligations seriously. This is the most important thing to them. Many mortgage lenders will wink at late payments made on credit cards or department store cards as long as they know that you are going to take your mortgage obligations seriously and they will receive their payments on time. Even then, on time gives you a lot of leeway. Most mortgages have a 10 to 15 day grace period. This means that you can send in your payment 10 to 15 days late without paying any penalty. Even after the 10 to 15 day period you pay a late fee but it's still will not go on your credit report unless it's at least 30 days late. This means that even if you are a sloppy borrower and you traditionally forget to make your payments on time, you can make them up to 10 to 15 days late without even paying a financial penalty and you can make them up to 29 days late without giving yourself bad credit The same principle applies to other types of credit. You can pay your credit cards late, you can pay your department store cards late as long as you keep it within a reasonable limit. The next thing lenders want to look at is how much you owe overall. If they feel that you are to deeply in debt, they worry that this may cause you problems in the future, even if it's not causing you problems now and that in the future you may start paying your bills late, they don't want to take on future problems anymore than they want to take on current problems. So they may turn you down just because they feel you owe too much. Lenders also want to see how much you are paying each month on what you owe, or least what the minimum required payments are. This will help the lender determine whether you meet that 36% back end ratio, whether your proposed mortgage payment will come out to 36% or less of your net income after you've paid the minimum on all your outstanding bills. HOW LONG HAVE YOU HAD YOUR DEBTS? The amount of time that your accounts have been open is also of concern to your potential lenders. The longer you have had credit, the better you look assuming that you have paid your bills on time. It's a lot more impressive to know that someone has paid their bills consistently for 10 years as opposed to someone else who's paid their bills consistently but has only had an account open for 10 months. Stability is important. It's important in showing that you pay your bills just as it's important showing that you can hold a job or run a successful business and have a steady income coming in. Lenders want to know that you have a history of paying your bills that goes back for several years. Normally, the minimum if 2 or 3 years. Sometimes one year. Accounts that have been opened for less than a year normally aren't taken very seriously unless they are showing negative credit. Showing positive credit, bills paid on time on an account that has only been open for a few months doesn't impress lenders. They want to see accounts that have been opened for at least 2 years or more with no records of late payments. This qualifies you as an A borrower. Whether you will qualify for the amount of loan that you want depends on your income. But at least if you have good credit, you know that you will qualify for a loan at the best possible interest rate and terms. HOW TO EVALUATE YOUR OWN CREDIT You should know that before you ever take a look at your credit report pretty much what it is going to look like. You know whether you have paid your bills on time. It shouldn't come as a surprise to you to find out that it took you 30 to 60 days to pay off that Sears card on more than one occasion, or that they almost came to repossess your car because the payments were late three different times. The surprise normally comes when you have good credit, or think you do and then suddenly Wham! there's a notation on your credit report stating that you were late with a payment. The way to deal with this is to check the date first of all. When do they claim that you made the late payment? Who do they claim that you made the late payment to? Which one of your creditors. What is the account number, and was the payment listed as 30, 60 or 90 days late? On how many occasions? Is there just one delinquent account listed, or several? Once you have all this information, go back and check against your own records. First of all do you even have the account listed? Do you even have an account with that creditor at all? If so, is the account number correct? Once you've verified this, go through your records and verify the date. When was the closest payment to that date in your records? What do your records show? Was the payment late or was it on time? Did you pay by check or was it automatically debited from your bank account or credit card. Every item in your credit report should list the name of the creditor involved, the date account was opened, the account number, the number of late payments that were 30 days late, the number of payments, if any, that were 60 days late, and the number of payments, if any that were 90 days late or more, as well as the dates of each late payment. This way you have the precise information to check against your own records to make sure that the information is accurate. If you feel that the information is not accurate, then it's time to sit down and write letters to the credit bureaus and to the lenders involved to dispute the information. At this point, you should really write three letters, one to the creditor who turned you down, two to the credit bureau that supplied the information the lender used to turn you down, and three to the creditor who supplied the information that the credit bureau used. All three letters should say basically the same thing. " I was turned down for credit by" , and list the name of the lender or creditor that turned you down for credit on this date because of information supplied by and list the name of the credit reporting bureau. According to the credit reporting bureau, and list the name again, they received information from, and list the name of the original creditor that supplied the false information claiming that your payment was late, "Such and such creditor claimed that I made a payment more than 30 days late" and give the amount of the payment, the account number and the date. "This is an error because my records show that payments were made both before and after that date", For example, "The supposed late payment was made on April 1, 1996, which was theoretically more than 30 days past the due date, however, I made a payment on March 1, 1996, I made another payment on this account on April 1, 1996 and another payment on May 1, 1996. There is no way that the payment could have been 30 days late. There is no way that the payment was late at all. I expect the matter to be cleared up within the next 30 days and my application for credit to be reconsidered. Sincerely yours," and you sign your name. What happens after this? The original creditor, the one that claims that you made a late payment must respond. If they don't respond then the item is presumed to be an error, and it automatically must be removed from your credit report. If you do have an account with that creditor and you have always paid on time, point this out, make sure the creditor understands that they have good reason to clear this matter up, that it's not enough to not respond and let it come off of your credit report automatically. You want a positive response from the creditor admitting that it was their mistake, admitting that you have been a valued customer, a customer they would like to keep. The more positive information you have in your credit report, the better off you are. And particularly when a mistake is made, you want the creditor to admit that it was their mistake and not yours, and that you are a good borrower and you do pay your bills on time. Normally, it shouldn't go any further than this. The creditor has no reason to crash your credit, particularly if it was their mistake, so they have no reason to dispute you and go on defending their mistake. The worst that should happen is that they don't respond at all, in which case you wait out the dead line and get the item automatically removed from your credit report. But what do you do if they don't take it off your credit report. Then you have to go to an attorney and have an attorney write a letter threatening legal action if the item is not removed from your credit report. Ideally, you have the attorney write to your creditors explaining that the item is under dispute and that legal action is about to be taken to remove it from your credit report. CORRECTING YOUR OWN MISTAKES Sometimes, though, you are going to have to admit that the mistakes are yours, not the lenders, not the creditors, not the credit reporting agencies. Sometimes you are going to have to face up to the fact that you didn't live up to your responsibilities and that your payments were late. Sometimes on more than one occasion. This still doesn't mean that every thing on your credit report is right. Just because you made some mistakes doesn't mean that the lenders and creditors, or the credit reporting bureaus couldn't have added to those mistakes with mistakes of their own. So you still want to check your credit report carefully even if you know that your credit is less than perfect. Then the next step is to contact the creditors involved and see what you can do to clear up the problem. If you still haven't paid your bills, try to work out a settlement. Many creditor's will take less than they are owed just to get something and get your loan off their books. What can you offer them? Can you offer them a lump sum payment? What about a monthly payment plan? You need to do something to show your good faith, even if you are broke and don't really feel that you can pay much towards your old bills, you want to show the creditors that you are willing to do something if they will reciprocate by clearing up your bad credit. Don't just assume that paying off your overdue bills will automatically clean up your bad credit Unfortunately, it just doesn't work that way. You have to negotiate with the Lenders and get specific commitments in writing. You may even need the assistance of an attorney, just to be sure. Once you have eliminated any past credit problems, the next step is to start using credit creatively. Don't just see how many fancy vacations you can take , or what type of car(s) you can buy. Use your credit to buy assets which will produce income and/or appreciation. Again, the nature of real estate is in your favor. Nowadays, it is easier than ever to leverage your money in real estate. Lenders now make loans that they wouldn't make a few years ago. 3% down purchase loans, 100% and even 125% LTV refinance loans, easier standards for qualifying, they have all made it easier than ever to use credit to leverage your way to a fortune. The trick is very simple. Leverage all your real estate as much as possible and then use the money you obtain to buy more real estate. Just don't leverage yourself to the point where you are buried in negative cash flow. Allow yourself a comfortable cushion in case anything goes wrong, but remember that excess Equity is just sitting there useless. It's not working for you the way it should be. One way to put any excess Equity to work for you, is to use blanket mortgages. Offer that excess Equity as security for new properties you want to buy. If commercial Lenders won't accept is as security, then find Sellers who are willing and able to carry paper. This is what you should be doing anyway. Sellers are some of the easiest Lenders to deal with, because they have extra incentive to lend you money. They want to get their properties sold and they also have no one to answer to. They don't have to worry about regulators or boards of directors. They are free to make their own decisions. Even if you haven't cleaned up your credit yet, many Sellers will still deal with you if they really want to get their properties sold. Even if you have good credit, Sellers will usually give you better terms than commercial Lenders, particularly if they are in a position where they really want to sell the property and they don't necessarily need the cash. This is how you build your fortune, step by step, one property at a a time, using each one to leverage your way into the next. The key is to pick your properties right and not buy something just for the sake of saying that you own real estate. Make sure that whatever you buy will make you money, now or in the future and don't get yourself overextended. Accumulating wealth is only half the game. The other half is holding on to your wealth and not losing it. BACK TO THE CREDIT AND MORTGAGE ARTICLES PAGE CONTRACT WIZARD HOME PAGE TAX SALE RICHES HOME PAGE MORTGAGE MAGIC HOME PAGE |