Do you have a client with bad credit? Not quite sure just how bad it really is? Frustrated and confused when it comes to deciphering the mess and trying to figure out what to do about it?
Well, you're not alone.
In this article I'm going to help you figure out exactly how bad their credit is and what you need to do to help them raise their scores and retake control of your sale.
The first step to figuring out where they stand is to find out what their lenders are reporting to the credit reporting agencies. To do this you'll need to order their credit reports from all three of the major credit reporting agencies. Although there are numerous websites to order reports and scores from, they don't need to spend a dime.
Thanks to the Fair Credit Reporting Act, everyone in the U.S. is entitled to one free copy of their credit reports once a year from each of the credit reporting agencies. To claim their reports they can go to www.annualcreditreport.com or call 1-877-322-8228. If they'd rather do it the old fashioned way, they can even mail in this request form - https://www.annualcreditreport.com/cra/requestformfinal.pdf - and they'll mail their reports to them.
After you've obtained their credit reports, you'll need to assess the information and determine the following, primarily:
- Are there any negative/derogatory items in the report; and
- How much debt do they have?
Let's focus on the first question. It's safe to assume that if they have negative information in their credit reports, it's hurting (not helping) their credit rating. It's also safe to assume that if they have a lot of this information; it's likely causing their situation to be even worse.
To interpret the derogatory information in their credit reports, you can follow these general rules:
- Any information in the public records section of their credit report is considered a major delinquency, no exceptions.
- Any information that is equal to or worse than a 90-day late payment is also considered a major delinquency. This includes foreclosures, collections, short sales, collections, repossessions, settlements and severe late payments (90+ past due or more).
- If any of the above information is less than 12-24 months old then it's going to have even more of a negative impact on their credit rating.
- If you see numerous of the above items, they're being penalized for the volume as well.
Now that you have a good idea of what negative information is affecting their credit rating, the next step is to determine if their debt is exacerbating the problem. Surprisingly, most people overlook this category in this evaluation process and focus only on the negative information (or lack thereof).
What they don't realize is that the level of debt is almost as important as paying bills on time. If their debt is excessive, it can hinder their scores and drastically slow their recovery to improvement. Here are some general rules that can help you interpret if the amount of debt they're carrying is hurting them:
- Add up the total number of accounts that have a balance. The more they have, the lower their scores could be.
- Add up the total number of credit card accounts with a balance. Again, the more they have, the lower their scores could be.
- Determine the utilization percentage of the credit card accounts that are currently open and on their credit reports. Divide the credit card balances by their individual credit limits. The higher these percentages, the lower their scores will be.
- Now add together all of their credit card balances, and the associated credit limits for each of those cards. Only use open cards for this step. Now divide the total balance by the total limit. The higher this percentage, the lower their scores will be.
Now I know you're saying to yourself, "that's just great, but now what?"
You basically have two choices:
- Refer your clients to a professional credit repair expert
- Do it yourself
If there is even the slightest chance of raising their credit scores enough to close your sale, a good credit repair company should be able to do it within 30 to 60 days. In some cases much faster.
But if you decide to do it yourself, now it's time to put a plan in place to raise their scores.
If you follow the advice that I give you, their scores will have no choice but to improve. Remember, their poor credit scores are only indicative of the information being reported in their credit reports. If you can remove inaccurate items, how they manage their credit and change their credit patterns, you can positively impact their scores by changing what's being reported in their credit reports.
Here are the steps to follow:
- If there are inaccurate items on their credit report, your clients will have to dispute them. Have your clients contact the Three Major Credit Bureaus and dispute the accuracy of said items in order to force the credit bureaus and creditors to either admit or deny their accuracy.
- If their credit is beyond bad, it's going to take an epiphany on their part. You have to understand and accept that how they've managed their credit up to this point is exactly the opposite of how they should be managing it. You can't fake your way through this. It will require a significant change in their lifestyle and habits. If they're willing to take on these changes then read on...
- The only way to improve their credit standing is to address the things that they are doing wrong. There is no blanket advice that anyone can give you that will work 100% of the time. Their recovery actions will be different than those of another person in the exact same situation.
- Their recovery plan will involve an initial purging of their current credit accounts. It's highly likely that they are using creditors who are more concerned about whether or not their next payment will ever arrive and less worried about helping them recover. The goal at the end of the day is for your clients to be able to pick and choose the lenders they like and have them fall over themselves trying to get their business.
- Unlike advice given by other so-called "experts", their recovery journey should be taken head on - not by avoiding the issue. In fact, if your clients are discouraged and are planning on exiting the credit environment for more than 12-18 months, you might as well stop here. The only way to improve their standing is for them to jump right back into the credit environment. Half your battle will be to convince not only their lenders and insurance companies but also the credit scoring models that they are a new person. You can't do this if your clients try to live a credit-free life.
- Re-establish credit using any means necessary. They're not going to get the best rates for years to come, but that's okay. They should have known this was coming. They should already be used to paying very high interest rates, so this shouldn't be too hard for them to swallow. Keep in mind that it's only temporary. You have to build up their credit report with properly managed credit card and loan accounts, and this is going to be costly.
- Once they're re-established, it's time to convert. This will be the most rewarding phase of their credit journey. It's when you'll be able to look their current lenders in the eyes and tell them to take a hike because they've just been replaced with better lenders. Better, in this case, means unsecured credit cards with low interest rates and high credit limits and maybe even benefits like airline miles or cash back. It also means competitive rates and terms on car loans, mortgages, and insurance.
This recovery process should take less than 5 years. In fact, if they do it right, your clients should start enjoying credit products reserved for the elite even while they still have some nasty delinquencies on their credit reports. They don't have to be gone...but they do have to be a clear reflection of their PAST credit management skills.
Of course, if you and your clients don't have 5 years, you might want to refer them to a professional credit repair expert.
By: Edward Jamison, Esq
