Debt Management Plans are Better Than Settlement

Debt management plans versus settlement plans. The terminology alone can be pretty confusing. What are the differences between them? How do they work? Which one is the better option? In this article, I'll explain the key differences between debt management and settlement plans, and I'll point you toward some related resources where you can learn more about each of them.

But first, let's get to the thesis of this article. Here's the case I'm trying to make. In nearly all cases, debt management plans are a much better option than debt settlement. So keep this in mind if you find yourself swimming in debt and looking for a solution.

Debt Management vs. Settlement

Before we go any further, we need to address the terminology at use here. Here are the primary differences between the two concepts being discussed in this article:

• Debt Management Plans -- This is a program that allows you to repay your debt over time. You would start by creating a budget to identify your monthly income versus expenses, and then you would create a payment plan that allows you to pay down your debt. Under this type of plan, you would pay off the full amount of your debt.
• Debt Settlement Plans -- Through this process, you would work with your creditors to arrange some form of settlement to pay off a lesser amount of your debt.

We at the Home Buying Institute always recommend the first option over the second. A debt management plan is a better option than a settlement, and for several reasons. Now you might be asking, "Why would I pay off the full amount of my debt when I could settle for paying a lesser amount?" Here's why:

When you settle your debt instead of paying the full amount, you will also damage your credit score. Your creditors will report the settlement (and the resulting charge-off) to the credit reporting bureaus. This kind of negative entry can stay on your credit report for up to seven years, preventing you from achieving the highest credit score possible.

On top of this, only a debt management plan will address the core problems of overspending. A settlement might make some of your debt go away, but it does not address the behavior that led to the problem in the first place. The steps involved in creating a debt management plan are the steps to financial responsibility in general.

By creating such a plan, you will have to examine every aspect of your finances, and you'll be exercising some much-needed discipline that may have been lacking in the past. This is why we recommend a debt management plan over any form of settlement.

Where to Go for Help

There are thousands of companies that claim to offer debt help to consumers. Unfortunately, however, many of them actually take advantage of consumers in their moment of weakness. It's a despicable practice, for sure, but it's also a reality. If you need help creating a debt management / payment plan, there's only one place we are comfortable directing you:

The National Foundation for Credit Counseling (www.NFCC.org) is a nonprofit, community-based organization that offers a variety of debt management services for consumers in the U.S. They also have a special website for this purpose, and you can find it at DebtAdvice.org.

Free Credit Scores Online - How It Really Works

About once a week, we receive the following question from one of our readers: "I am trying to get my free credit scores online but I cannot find a website that provides it. Most of them ask me to sign up for some kind of monthly service. Where can I get my credit scores online for free these days?"

Let me start with a bit of truth that should eliminate most of the confusion. As of this publishing date, there are no websites that offer truly free credit scores for consumers. In all cases, you will have to sign up for some kind of service such as credit monitoring / ID theft protection. So while you won't necessarily pay out of pocket for the scores, you'll have to pay for something.

Credit reports are a different story. You can certainly get those online for free, because the federal government mandates it (through the Fair Credit Reporting Act). See our blog entry about yearly reports for more information on this.

But there are no laws that entitle you to free scores, so you'll have to pay for them in one way or another. You can purchase your credit scores directly through a website like MyFico.com, or by going through the three reporting bureaus. In this case, you can expect to pay somewhere in the neighborhood of $30. You can also get your credit scores online by signing up for one of the aforementioned monthly services.

Either way, you will have to pay for something in order to get access to your scores. I have yet to see a website that offered free credit scores online with no other purchase required.

How to Get Your Scores Online Safely

There are only three or four website we are comfortable recommending for this purpose. The Credit.com website is one of them. They have a variety of credit-related products you can purchase, and many of them include all three of your credit scores (from Equifax, Experian and TransUnion). You can find links to these websites on the tools page of this website.

In closing, let's talk briefly about why you need to get your credit scores online in the first place. When you apply for financing, whether it's a car loan or a mortgage loan, the lender or financing company will review several key aspects of your finances. Your credit score is one of those components, and it can make the difference between getting approved or denied for the loan.

On top of that, a good credit score can help you qualify for the best interest rates a lender has to offer, which makes your monthly payments more affordable.

I hope this article eliminates any confusion you had about free credit scores online, and I wish you all the best in your financial future. If you have additional questions about this subject, check out the FAQ section of this blog.

Being Sued for Debt Problems? Know Your Rights

We often get questions from readers who are being sued for debt, either by the original creditor or the collection agency who took on the account. The first question they usually ask is, Can I really be sued for this? So let's start by answering this common question:

Yes, you can be sued for debt in a court of law. The most common suits involve credit card debt or unpaid medical bills. Generally, one of two parties will file the lawsuit -- it will either be the original creditor (such as a credit card company or a medical clinic) or a collection agency that took over the account.

So that answers the first question people ask. Yes, this kind of thing happens all the time, and it's a perfectly legitimate type of lawsuit. Now let's move on to the real crux of this article. Let's talk about your legal rights and protections when being sued for debt issues.

The Fair Debt Collections Act

This is one of the first laws you should get acquainted with, if you are being sued by creditors or collection agencies. This federal law is enforced by the Federal Trade Commission (FTC). It regulates the actions of debt collectors and provides a number of protections for consumers. You can find an overview of this act, in the form of a fact sheet, on the FTC's website.

Among other things, this act states that debt collectors cannot threaten to sue you as a way of eliciting payment. In other words, they cannot use the threat of a lawsuit to scare you into paying a debt. That doesn't mean they can't sue you (they can), it just means they can't use it for intimidation purposes.

Collection agencies are notorious for calling debtors day and night, at work and at home. But there are laws that regulate this as well. You can submit a written request to the debt collector, asking that they no longer contact you. By law, they must honor this request. Keep in mind, however, that you could still find yourself being sued for debt even though you've told the collectors not to contact you.

What to Do If You Are Being Sued

What you should do in this situation partially depends on the amount of money involved. If you are being sued for a debt under $5,000, then your case will probably be tried in small claims court. You cannot have legal representation in small claims, but you can get legal counsel beforehand if you want.

If you are being sued for a larger amount, your case will probably be tried in a higher court. In such cases, it's usually a good idea to have a lawyer on your side. There are attorneys and law firms who specialize in this kind of case (debt, bankruptcy, etc.), so you might want to consider such an expert.

In nearly all cases, the debtor who is being sued will receive a court summons. The worst thing you can do is ignore the summons, which is something a lot of people choose to do. If you ignore the summons, you will be tried in your absence and you will lose the case.

Even though you are being sued for a certain debt, there are still ways to resolve the dispute outside of court. In many cases, this is what a debt lawyer will do for you. If he or she feels that you have no case (because the debt is legitimate), your lawyer may work with the attorney on the opposing side to come to some kind of agreement. This might include a repayment plan of some kind.

How to File for Personal Bankruptcy

Reader Question: I have a lot of medical bills and other problems, and I feel that bankruptcy is my only option. How do I file for bankruptcy?

This blog offers advice on boosting your credit score and reducing your debt. So most of the information we publish is intended to help people avoid financial hardships such as a bankruptcy filing. But I'm also a realist, so I know that in certain cases bankruptcy is the only option for people. So in this post, I'll explain how to file for personal bankruptcy when you have no other options.

Let's start with a quick definition for the benefit of all readers. Bankruptcy is actually a right given to us by the U.S. Constitution. Basically, it's a process that structures the relationship between the debtor (that's you) and the creditors. It gives the debtor certain protections under the law, such as the ability to keep certain types of "exempt" property. In most cases, bankruptcy also allows a certain amount of debt to be forgiven. This will all be decided by a bankruptcy judge, of course.

Reasons to File for Bankruptcy

We have certain rules on this blog, and one of them is that we don't tell people what to do. We only provide advice and insight so people can make their own decisions. So this article is not recommending that you file bankruptcy in certain situations. Nor does it advise against such a filing. Whether or not to file is entirely up to you. But it may help to know the most common reasons why people file for personal bankruptcy. So let's start with those.

Most of the reasons for filing bankruptcy come from the inability to pay bills. For example, some people file for Chapter 13 in order to avoid home foreclosure. It doesn't make the mortgage payments go away, but it prevents people from trying to collect those payments until you can establish a court-approved payment plan (the main stipulation of Chapter 13 bankruptcy).

The most common reason people file for personal bankruptcy is to get out from under excessive debt. Once again, I have to stress that this is typically a last resort. This type of legal filing will stay on your credit report for up to ten years, and it will make it harder to get credit and financing in the future. So consider your options carefully.

Difference Between Chapter 7 and Chapter 13

As far as personal bankruptcy goes, Chapter 7 and Chapter 13 are the two most common filing options. The primary difference between them has to do with the repayment of debt. With a Chapter 7 bankruptcy, the person filing typically does not pay back any of their debt. With a Chapter 13 filing, on the other hand, the debtor establishes a court-approved payment plan through which they repay most of their debts.

This doesn't mean that Chapter 7 is a "freebie" where your debt is magically forgiven. Many people have this misconception and think that Chapter 7 bankruptcy is an easy way out. In reality, many of your assets will be liquidated (sold off) to pay a portion of your unpaid debt.

With a Chapter 13 filing, you would propose a repayment plan to the bankruptcy court / judge. The plan would be designed to pay back your debts over a three- to five-year period. Some of the debt may be forgiven under this filing option, but it does not "wipe the slate clean" like a Chapter 7 bankruptcy filing.

We often get questions from people who have been through a bankruptcy in the past, and want to know how soon they can improve their credit and qualify for a mortgage after the bankruptcy filing. Obviously, this is a question that only a mortgage lender can answer. But you should know that a Chapter 7 filing will hurt you more in the long run than a Chapter 13.

Think about it from a creditor or lender's point of view. The last thing they want to see is that you've completely walked away from your debts in the past -- which is basically what happens under a Chapter 7 bankruptcy filing. A Chapter 13, on the other hand, shows that you were willing to pay off your debts over time. Something to consider.

Filing for Personal Bankruptcy - By the Numbers

Filing for personal bankruptcy under Chapter 7 or 13 is a legal process. So there are some very specific steps you must follow in order to file bankruptcy in the U.S. The best way for me to present these steps is by the numbers:

• Step 1 -- Before you can submit your filing, you must go through a court-approved credit counseling course. You must undergo this counseling within six months of your bankruptcy filing, and it must be given by an approved credit counselor.
• Step 2 -- When you complete the above-mentioned counseling, you will be given a certificate of completion. You must then take this certificate to a bankruptcy lawyer.
• Step 3 -- You will be given a "means test" to determine your eligibility for Chapter 7 or 13. This is part of the revised bankruptcy law that went into effect in 2005. It measures your financial ability to repay debt, and it's designed to prevent debtors from abusing the bankruptcy system.
• Step 4 -- Next, you must file a petition for bankruptcy with the courts. This is the actual "filing" process that people speak of when referring to personal bankruptcy. It's the first part of the process that officially documents your Chapter 7 or Chapter 13 bankruptcy. You'll also be paying some court admin fees at this point.
  
• Step 5 -- Your petition will be sent to the bankruptcy trustee (also referred to as the United States Trustee).
• Step 6 -- If you are filing for Chapter 13, the trustee will review the debt repayment plan you've proposed. If you're filing Chapter 7, the trustee will take charge of nonexempt property that's going to be liquidated through the bankruptcy process.
• Step 7 -- In most cases, you'll have to take a court-approved personal finance class as well. This typically happens toward the end of the bankruptcy process. The training is designed to help you mange your finances better so you can avoid future debt problems.
  

Filing for personal bankruptcy under Chapter 7 or 13 is a serious action that requires careful consideration on your part. This article explains how to file bankruptcy through the U.S. court system. You should also do some research to learn how this process will affect you down the road, in terms of your credit score and future financing. You need to understand the big picture before you decide to take the first step.

Related Q&A Sessions:

• How can I improve my credit after bankruptcy?
• Improving your FICO score after Chapter 7
• Buying a home after a bankruptcy filing
  

I hope this article helps you make an informed decision, and I wish you all the best with your financial future. Most importantly, I urge you to continue your research beyond this website. Deciding whether or not to file personal bankruptcy is a major step, so you need to do thorough research before taking that first step.

How Much Mortgage Can I Borrow from a Lender?

I want to take a break from posting credit Q&A topics to address what I feel is another important (and related) topic. By reviewing the questions sent in by readers, I know that many people want to know how much they can borrow for a mortgage loan.

This is a natural question to ask, but it's not something I can tell you. Only a mortgage lender can tell you how much you can borrow from them. Instead, I want to make a point that many home buyers seem to overlook these days. Without further ado, here's the general thesis of this blog post:

A mortgage lender can only tell you how much you qualify to borrow. They cannot tell you how much you can afford to borrow.

There's a big difference between "qualify" and "afford," when it comes to mortgages. But a lot of home buyers don't realize this. In fact, it's one of the primary factors that led to the foreclosure crisis that wrecked our economy in 2008. Here's what happened in most cases:

1. The home buyer approached a lender about a mortgage loan that was more than they could afford.
2. Instead of denying the loan (which is what they should have done), many lenders found a way to offer the unaffordable mortgage to the borrower.
3. Lenders would often make the loan more affordable -- initially -- by offering an hybrid ARM loan with a low interest rate for the first three years or so. These are called "teaser rates" for this very reason.
4. After the initial fixed-rate period, the loan would adjust. And the homeowners would see their payments increase significantly, sometimes even doubling in size.
5. The rest is history. We had record-breaking numbers of foreclosures in 2008 and 2009, largely due to this type of lending practice.
   

In these scenarios, people are inclined to place all of the blame on the mortgage lender. Not me. I put most of the blame on the borrowers who knowingly took on more than they could afford to pay back each month. But this isn't a blame session. This is an advice column. So let me get back to the point.

Asking a lender how much mortgage you can borrow is the wrong strategy. They can tell you how much they're willing to loan you, based on your credit score, your income and other factors. But they can't tell you how much you can afford to borrow.

Now you might be thinking, "Why would a lender put me into a loan they know I won't be able to afford down the road? Don't they lose out on that too?" Not necessarily. We have a thing known as the secondary mortgage market in this country, where lenders can package up their loans and sell them off to other organizations (such as Freddie Mac). These mortgage-backed securities will then be sold again through Wall Street. So a lender can make a bad loan and suffer no future repercussions at all. It's a broken system, but it's the system we have right now.

Now you can see why it's so important to look out for yourself. Before you even contact a lender for a quote, you need to determine how much mortgage you can afford to borrow by establishing a budget. You might not get approved for that amount, but at least you'll have a realistic number in mind based on affordability.

On the mortgage calculators page of our website, you'll find some tools that can help you determine your home buying budget. There are also some instructions on the same page that tell you how to handle the process.

Best Ways to Pay Off Debt

What are the best ways to pay off debt effectively? Proper planning, a healthy dose of discipline, and a consistent effort over time. That's what we will talk about in this lesson.

Excessive debt is a problem for many Americans, but there's a way out of it. There are also plenty of sharks swimming around out there trying prey upon people in high-debt situations.

Today, I'm here to tell you that you don't need to pay anyone to help you reduce your debt. After all, that's just adding to the problem, now isn't it? The best ways to pay off debt are the same techniques people have been using for decades. Create a budget to see how much money you have to work with each month, and then set up a payment plan that steadily reduces the balance of your debt.

I know I've made it sound easy. But in theory, it's really a straightforward process. In practice, however, it might not be so simple. It will require some discipline on your part. You'll have to do some planning and preparation. And you may have to make some financial sacrifices along the way (like cutting back on shopping, eating out, etc.). But if you seriously want to pay off your debt and change your life for the better, these steps will be worth the effort.

Imagine a Life Without Debt

If you're reading this article about ways to pay off debt, then I can assume you're motivated to do it. Still, I'd like to increase your motivation by painting the following picture for you. Imagine, if you will, a world without debt. Imagine the stress that would melt away if you looked at your credit card balance and saw a tiny number -- or better yet, a big fat zero.

Imagine how much better you would sleep at night, knowing that your credit score was not dropping like a rock. Imagine having extra money left over each month, money to put toward your retirement account or quality-of-life items.

Can you imagine all of that? If you can, then you've already taking the first and most important step to pay off your debt balances. Now let's talk about the remaining steps.

Step 1 - Cut Up Those Credit Cards

If you are serious about this process, you need to start with this all-important step. After all, you cannot pay off your debt until you stop adding to it. So cut up those credit cards.

You can leave the accounts open until you have paid the balances off, and in fact you should. If you close the accounts while you still have balances on the cards, it will it appear as though you've maxed out all of your cards. This will hurt your credit score. So keep the accounts open, but cut up the cards. You must remove the temptation to use those credit cards.

If you need a card to use for convenience purposes, you can use a debit card. You know ... the type of card that draws on money you already have in your bank account.

Step 2 - Create a Budget

Next, you need to establish a budget for yourself so you'll know how much money you have to work with. Some people hear the word "budget" and roll their eyes in despair, immediately assuming that it's a monumental task.

In reality, you could create a basic budget for yourself in less than a hour. And you're going to need one before you can pay off your debt effectively.

For starters, all you need to do is add up the expenses you have to pay each month. I'm not talking about optional expenses, like that daily trip to Starbucks. I'm talking about bills and other things you have to pay each month.

This list might include the following:

• Your monthly credit card payment (minimum amount due)
• Your car payment(s)
• Your monthly rent or mortgage payment
• Monthly grocery expenses
• Utilities (electricity, water, etc.)
• Insurance premiums and other monthly bills
  

So let's say I add these items up for myself, and it comes to about $2,350. That's how much I'm spending on bills each month, and it accounts for me paying the minimum balance due on my credit card each month.

But I want to pay off my credit card debt. So the best way to do that is to pay more than the minimum amount due. Why? Because the minimum payment strategy is designed to keep you paying for the rest of your life. In most cases, once the interest is factored, it's impossible to pay off your credit card debt with the minimum amount due. So the best way to pay off this particular type of debt is by doubling up on the payment each month -- or as close to doubling as possible.

Step 3 - Create Your Payment Plan

After the previous step, you should have a pretty good idea of what you're paying each month toward your bills. This doesn't include luxuries, of course, and that's the point. You have to make some sacrifices in order to pay off your debt in a reasonable amount of time, and that means scaling back on unnecessary purchases each month.

For the sake of this example, let's say that I make about $4,500 each month. This is my gross monthly income, after taxes. So this is the amount I have to work with when setting up my payment plan to pay off my debt balances.

Next, I need to subtract my monthly expenses (step 2) from my gross monthly income. If I make $4,500 after taxes each month, and I'm paying $2,350 worth of bills each month, that leaves me with $2,150 to work with. But where does this money go each month? For many people, it goes to a combination of unplanned expenses and unnecessary purchases. You can't always prevent the unexpected, but you can certainly cut out the unnecessary purchases.

But let's say I want to put some money toward savings each month, while paying off my debts at the same time. If I put $1,000 into savings each month, that leaves me with $1,150 to use for my debt payment plan. So then I would look at the minimum amount I'm paying on my credit cards each month, and I would double that amount. If the doubled amount is less than $1,000, then I can easily afford to double up on my payments.

It might not be easy, and I'll certainly have to cut back on shopping, dining out, etc. But it's the best way to pay off debt over time, so I'm willing to give it a shot. I now have a payment plan that will double the amount paid toward my credit cards each month, which will effectively reduce the balance on those cards. If I don't double up like this, and I keep making the minimum payment instead, I'll be paying the credit card companies for the rest of my life. How's that for motivation?

If You Need Help to Pay Off Debt

I've just shown you how you can do this process for yourself, by establishing a monthly budget and payment plan. But I also know that some people need additional guidance, especially when dealing with a large amount of debt. So I'd like to leave you with some reputable organizations that offer free and low-cost counseling on debt reduction.

• The National Foundation for Credit Counseling is a non-profit organization that offers a variety of financial counseling to consumers. They have several debt-related counseling programs as well, and some of them are free.
• Credit.com offers some free debt consultation programs. You might want to look into that and see if it appeals to you.

No matter how you slice it, the best ways to pay off debt all involve some level of discipline on your start. If you're serious about this process, you need to start by getting rid of those credit cards.

Use a debit card, checks and cash to pay for things. This will prevent the problem from getting any worse. Then you need to set up a basic budget to find out how much money you have to work with each month. Lastly, create a payment plan that doubles up on the credit card payments, so that you can chip away at the balance and not just the interest.

Related articles:

• Where can I find credit card debt consolidation help?
• I want to pay off my debt entirely - where do I start?

Top 10 Credit Report Questions

Credit reports are a fairly straightforward topic. But due to a combination of marketing and misinformation, many consumers find the topic confusing. We deal with credit report questions on a daily basis, so we are familiar with the level of confusion people have.

In this article, we have compiled a list of the most frequently asked questions we receive on the topic of credit reports and reporting. If you find this subject confusing, and you're looking for some straight answers, you'll probably find them below.

Common Questions About Credit Reports

This list is ranked by frequency, with the most frequently asked questions at the top.

1. How do I get a totally free credit report?
This is another topic that confuses many people, and I would put 90% of the blame on marketing and advertising. This is by far the most common question we get on the subject of credit reports, and this article eliminates the confusion once and for all.

2. Where can I get order my reports online?
This is an extension of the previous question. There are literally hundreds of websites offering "free" credit reports online, but there's only one website recommended by the Federal Trade Commission (FTC). In this question and answer, you'll learn which website to use for best results. This article is highly recommended for all consumers with credit report questions.

3. How do I fix errors on my reports?
In a perfect world, the credit reporting bureaus would never make mistakes. But they do! In this article, you'll find out how common such errors are and what you can do to fix them. This is one of the most frequently asked credit report questions we get from consumers.

4. How can I dispute duplicate entries?
A duplicate entry is an item that appears on your credit report more than once. They can also hurt your overall score. This topic generates a lot of questions and confusion among consumers. So in this tutorial, we explain what duplicate entries are and how you can dispute them.

5. How do I read my reports?
What should you look for when reading through your reports? How is the information arranged? How do you spot errors and make sense of all the data? You'll get straight answers to these credit report questions from this helpful tutorial.

6. Why don't the three credit bureaus agree?
The fact that you have three reports from three different companies really adds to the confusion. These companies maintain their own data, and they do not share it with other companies. So it's possible to have three different credit reports that don't entirely "match." This leads to a lot of confusion and questions among consumers.

7. What is a consumer credit reporting agency?
Do you have questions about the companies that maintain these data records on U.S. consumers? If so, you'll get the answers you seek from this article. It's an introduction to the world of credit reporting and the people who make money from it.

8. How long do negative entries stay on a report?
Having derogatory information on your reports will lower your overall score. But this is not a permanent problem. Over time, negative items will "expire" from your file. In this credit question, you'll learn about the federal laws that regulate this industry and how it applied to you.

9. How do I fix my credit as quickly as possible?
This is more of a scoring topic than a credit report question and answer. But the two things are directly related, and it's one of the most common inquiries we get from readers. So we've included it within out list of FAQs.

10. How can I repair my credit after bankruptcy?
By law, bankruptcies can stay on your credit report for up to ten years. But in the meantime, there are still things you can do to improve your score. You'll learn all about it in this Q&A session.

So there you have it, our top-ten list of credit report questions based on the emails we receive. If you would like to learn more about this topic, use the search tool at the top of the blog. There are hundreds of articles, tutorials and Q&A sessions on this blog, so you're bound to find the answer you seek. You may also wish to visit the FAQ page of the website.

I hope you found this lesson helpful, and I wish you all the best in 2009.

How to Fix Credit Report Errors - And Why You Should

Reader Question: How common are credit report errors and how would I go about fixing them?

For the benefit of all readers, I'd like to turn yours into a three-part question. Because there are really three things we need to address, in order to make sense of all this. So let's take a look at the following questions:

1. What are credit report errors?

There are basically two types of errors you might encounter on your credit reports -- (1) inaccurate information and (2) accurate information that should have already "expired" from your report.

Inaccurate information might include errors with your name or social security number, or it might include account information that's not yours. For example, if you look at your credit report and see a store credit card for Macy's listed in the accounts section, but you've never opened such an account, then you've got an error that needs to be fixed. It might be a data mix-up, or it could be a sign of identity theft. Either way, it needs to be corrected immediately.

Credit report errors can hurt your overall credit score, because the score is based directly on the information found within your reports. So if an error comes in the form of derogatory information (unpaid bills, collection accounts, bankruptcy, etc.), it can hurt your credit score.

2. How common are credit report errors?

This depends on whom you ask. If you were to ask the three major credit reporting agencies how common these errors were, they would probably say it's rare. But they are hardly unbiased on this subject, now are they? If you asked the folks at Consumer Reports, they would tell you that consumers find approximately 13 million errors on their credit reports. If you asked the U.S. Public Interest Research Group (who conducted a survey into this issue in 2004), you'd be told that 79% of credit reports reviewed had some form of error in them.

Statistics and arguments aside, here's the bottom line on this subject. Credit report errors are common enough that you should be concerned with them, especially if you plan to apply for a mortgage loan in the near future. I recommend that you read your reports once a year, with an eye out for errors. By law, you are entitled to a free yearly report -- so why not use it?

How do I fix errors when I find them?

Thankfully, the process of fixing errors has gotten much easier over the years. There are two reasons for this -- government regulations and the convenience of the Internet. When you dispute errors on your credit report, the reporting agencies (Experian, TransUnion and Equifax) must investigate the dispute in a timely fashion. There are federal laws to enforce this responsibility. If they find that your dispute is legitimate -- or if they are unable to verify the item one way or the other -- they must remove said item from your credit report.

In the past, you had to do this process through the mail. You can still do it that way, if you want, but you can also fix errors on your credit reports by using the online dispute process offered through the credit bureaus website. I usually recommend the online process because it's quicker than using regular mail, and you can log in through the website to check the status of your dispute. For example, here's the TransUnion disputes page where you would initiate such a process. You can easily copy the information into a Word document or a text file, and then print it out for your paper records.

If you would like to mail a letter instead of using the web-based dispute process, you can find a sample dispute letter on our website. You can also find a wealth of information on the FTC website that explains how to fix errors on your credit reports. The FTC is the federal agency that regulates this industry, so you can consider them the authority on such matters.

What you should not do is hire a credit repair company to handle this process for you. They'll charge you hundreds of dollars to do what you can easily do for yourself.

Credit Repair Companies - 5 Reasons to Avoid Them

The phrase credit repair companies is practically a synonym for "scams." In my opinion, the two terms are interchangeable. Unfortunately, many Americans don't realize the bad reputation this particular industry has, so they are easily lured in by big promises.

In this lesson, I'll explain what a credit repair company is, and why it's usually a good idea to avoid them altogether. We will also look at some better alternatives for consumers who are trying to improve their credit scores.
If you ever receive a letter or email like this ...

"Our credit repair company can help you remove derogatory information from your credit reports, thereby improving your score. We use little-known but highly effective techniques to repair your credit history. For a small up-front fee, you can have access to our in-house tools and expertise, and you can get on the path to better credit!"

... then you should delete the email (or trash the letter) and ignore the company that sent it to you. Why? I'll tell you why. In fact, I'll give you five good reasons to avoid credit repair companies entirely. But first, let's start with some of the glaring inaccuracies of this claim:

• First of all, there's no such thing as "little-known" techniques for credit repair. The most effective techniques for improving your score are public knowledge (and you can find them all over this website).
• Charging people in advance for such services is illegal in the United States. Specifically, it's a violation of Section 404 of the Credit Repair Organizations Act. So the companies who ask for up-front payment are operating beneath the radar and against the law.
  

Aside from those obvious red flags, there are many reasons to avoid credit repair companies and the services they claim to provide. But in the interest of easy reading, I've boiled it down to the five biggest reasons:

1. The FTC Warns Against Them

When the federal government has to step in to regulate an "industry," you know there's a problem. That is exactly what happened with credit repair companies in the U.S. In addition to passing laws to regulate this industry, the FTC goes so far as giving clear warnings against them:

Eileen Harrington, a deputy director with the FTC, says that these companies "charge hundreds of dollars, but don't deliver on their claims." (citation) Jodie Bernstein, a director of the FTC's Bureau of Consumer Protection, echoes the sentiment: "The FTC has never seen a legitimate credit repair company."

This does not mean that all credit help organizations are scams. On the contrary, there are many legitimate organizations that can help you reduce your debt and improve your credit score. But these are usually placed under the umbrella of "credit counseling agencies." We will talk more about these groups in a moment.

2. Most Credit Repair Companies are Scams

Why does the federal government feel this way about the credit repair industry? Why do laws have to be passed to tightly regulate them? Because most of these companies can be classified as scams. Plain and simple. In fact, their entire business model revolves around a very specific lie -- that you need to hire a company to improve your credit. This is clearly false, but many consumers don't realize it. Thus, they are enticed by the big promises and "easy fixes" offered by credit repair companies.

3. They Charge In Advance - For a Reason

Any company that charges in advance should send up a red flag in your mind, regardless of what industry we are talking about. There's a good reason why credit repair companies charge up-front fees for their "services." They know they can't deliver on their promises, and that nobody in their right mind would pay them for failing to deliver. So they charge in advance (which is also illegal, by the way).

Why can't these companies deliver what they promise? Because nobody can remove derogatory information from your credit report, if the information is accurate and timely. The credit reporting agencies will only remove derogatory information for one of two reasons:

The negative entry is a mistake, such as an account that's not even yours.
The negative entry has been on your credit report longer than the law allows (seven years for most derogatory information, and ten years for bankruptcies).

Aside from these two reasons, the reporting bureaus have no obligation to remove blemishes from your credit report. If it's a legitimate entry, and it's not beyond the maximum time frame established by the FTC, the negative entry is going to stay on your report. Credit repair companies cannot do anything to change this. And this is why they still try to charge in advance.

4. You Can Do It Yourself

All of the actions that can improve your credit score fall into one of two categories. They are either (A) changes in financial behavior or (B) corrections to a credit report. And you can do both of these things for yourself. In fact, you're the only person who can change your financial behavior for the better. And as far as correcting a credit errors on your credit report, you can do that as well -- for free.

A credit repair company cannot perform any kind of magic. Despite what these companies might tell you, they do not have access to "little-known techniques" or tricks. You can obtain a free copy of your credit reports by visiting AnnualCreditReport.com, and you can read through it for errors. They are easy to spot. When you find an error, you can dispute it through the company's website that produced the report -- Experian, TransUnion or Equifax. So why would you pay somebody hundreds of dollars for this simple task that you can do for yourself? Some credit repair companies don't even go this far, but will take your money all the same.

In truth, fixing errors on your credit reports will only improve your score by small amounts. If you really want to improve your credit score, you must pay all of your bills on time, reduce your credit card balances, and other things listed in this video tutorial. It's important to note, yet again, that you're the only one who can change your financial behavior -- and that's the key to making serious credit score improvements.

5. Legitimate Credit Counseling is a Better Option

The best option for people trying to improve their credit is to (A) educate themselves on the process and (B) change the behavior that led to bad credit in the first place. You can do these things for yourself, but if you do need help, you should seek a legitimate credit counseling agency. Remember, there's a big difference between "repair" companies and "counseling" organizations. Groups such as the National Foundation for Credit Counseling are a good place to start.