If you want to build up your credit or repair your old credit, departmental store credit cards comes in handy. This is because these cards easily get approved even with a bad or with no credit. However, you should use these cards exclusively for the purpose of building up credit profile. Some of the leading departmental stores like Macy’s and Wall Mart now offer their own credit cards which may prove to be a very useful instrument for building up your credit profile. If you want to go for a store card, you need to visit the departmental store and fill up an application form.

After your credit card application gets approved and you get a new credit card, you should make limited purchases with your card so that you can manage to repay it within the interest free due date, as these cards carry high interest charges. Moreover, paying off the debt within the due date will help you to maintain a good credit history. Not only that, since the “amounts owed” factor plays a vital role in your FICO scores, you should not spend more than 30% of your credit limit on your cards. The biggest drawback of these cards is that, these cards come with a low credit limit and you can use these cards only within the chain of the departmental store. However, quite recently, these departmental stores have tied up with banks like Citibank and American Express and started offering VISA or MasterCard co-branded cards, which will allow you to use these cards even outside these departmental stores. In addition to this, you can even take cash advances on these co-branded credit cards just like normal credit cards. You can also enjoy lower interest charges with these co-branded cards as compared to the ordinary departmental store cards.

These cards provide you with host of other facilities as well. You may earn reward points on your purchases with these cards. However, you should not engage yourself only in earning reward points, because you may end up with debts you are not able to repay. If you cannot repay your debts on time, it may get reflected in your report as delinquent account and may badly affect your score. You should only use these departmental store or co-branded cards for the purpose of building credit. Once you build up a good credit score, you may go for general credit cards.

The credit score is a three-digit number, which is the measure of your credit worthiness. The credit score is calculated by using a mathematical model. Fair Isaac Corporation (FICO) scoring model is accepted as the standard method of calculation by most creditors and financial institutions.

5 factors affecting credit score

There are 5 factors on which the FICO score depends. By monitoring all the 5 factors, you can secure a good credit score. Check out the factors that affect the credit score, and know how you can keep them under your control.

1. Payment Records - This is the most important factor and amounts to almost 35% of the credit score. It determines how regular you have been with your payments. It is always best to make timely payments. Paying before the due date could sometimes help to raise the credit score by few points.

   If you have some delinquent or “charged-off” accounts that are adversely affecting your credit score, the best option would be to pay them off. The negative remarks may remain on the credit report even after you have paid them off. But, more than often creditors are more interested in the fact that you have tried to repair your credit by paying off old debts.

2. Outstanding Debt – This factor constitutes 30% of the credit score. This is a ratio of the amounts you owe to the creditor to your credit limit. It is always best to keep the credit utilization rate between 35-50%, even if you make timely payments. The lower your credit utilization rate, the better will be your credit score.
3. Length of Credit History - It amounts to 15% of the credit score. A longer credit history has a good impact on the credit score. So, if you have multiple credit cards, you can choose to close the newer ones. You can ask a relative or family member to add you as an authorized user to any of their old credit accounts. This will give a boost to your credit score.
4. Type of Credit Account – About 10% of the credit score depends on the type of the credit accounts you have. Unsecured credit card accounts are not enough to build a good credit history. You should have a good credit mix. If you have a student loan or an auto loan that you pay off in installments, along with the revolving credit card accounts, you will have a better credit score.
5. New Credit Accounts - You should apply for a new credit card only when you need it. Each time you apply for a new line of credit, there is a hard inquiry from the creditor on your credit report. One hard inquiry lowers your score by almost 2 to 50 points, and stays on your credit report for about 2 years. Thus, applying for many new credit card accounts within a short period of time lowers your score by several points.

The credit score is the measure of how you have handled credit in the past. Your credit score would determine whether you would qualify for a loan or a new line of credit. A credit score of 700 and above is considered as a good score. You can expect to qualify for loans at the best possible interest rate with a score ranging from 700 to 750. Keeping in mind the economic slowdown, maintaining a good credit score has become compulsory.

Credit is important in our day to day life and we cannot move without it. The better is our credit; the better is the terms on which loans are offered. So we try our best to maintain a good credit score. Letters of credit are intended to help you to repair bad credit. Now, credit score depends on our credit report and so we try our best to remove negative items from our report as these items adversely affect our score. However, as per the Fair Credit Reporting Act and the FTC, we cannot remove accurate and timely information from our report. We can only remove the incorrect entries. Letters of credit helps us to remove these incorrect entries.

The most common types of letters include the pay for delete letter, dispute letters to the bureaus, debt validation letter, and the letter to remove hard inquiries. Each of these letters of credit helps us in different ways to repair our bad credit. Here we try to describe how these letters help us to repair our credit.

Pay for delete letter: This letter is generally sent to the creditor in order to remove a delinquent account from your report. However, it may be noted that certain negative accounts like charged off and judgments can never be removed even through pay for deletion agreement. In other cases, if a creditor agrees to the pay for deletion agreement, the negative delinquent account gets removed from your credit report once you pay off the debt in full to the creditor and your credit score improves. However, you should always get the pay for deletion agreement in writing before you start making payment towards the debt. Since the creditor is not bound to remove the negative account from your report as per the FCRA, he may not agree to PFD. In such cases you may ask the creditor to report it as “paid in full”. Although “paid in full” is also treated as a negative in your report, it is far better than the debt being delinquent, as it saves you from judgment.

Dispute letters: Dispute letters can be sent to the credit bureaus to dispute any incorrect listings in your report. As per the Fair Credit Reporting Act, both the creditors and the credit bureaus are required to correct any incorrect item in your report. Once you dispute the debt, the bureaus need to investigate it within 30 days with the creditor and send you updates along with a free copy of your report if any changes have been made.

Debt validation letter: If you receive a collection letter from a creditor or a collection agency, or if you find a creditor / CA listing in your credit report against a particular debt, Section 809 of the Fair debt Collection Practices Act gives you the right to ask for debt validation to be sure whether you actually owe the debt to the creditor or not. The creditor has to stop the process of debt collection till the time they validate the debt. If the creditor is not able to provide you with debt validation, he must remove the item from your credit report; else you may file a complaint against the creditor with the Federal Trade Commission.

Letter to remove hard inquiries: Hard inquiries are made whenever you apply for a new line of credit. Whenever you apply for a new credit, you automatically authorize the creditor to pull out a credit report and make a hard inquiry. Each hard inquiry reduces your credit score. More and more hard inquiry implies that you are credit hungry which may prove negative for your score. However, only authorized inquiries can stay in your credit report. So if you find any unauthorized inquiry in your report, you may send a letter to the creditor asking them either to remove the hard inquiry or to verify your authorization. In most cases the creditors get the hard inquiry removed from your report if they cannot verify your authorization.

Whenever a creditor considers a debt as a bad debt and deems it to be uncollectible, they charge off the debt. Mostly a debt is charged off by a creditor if you have not made any payment towards the debt for a continuous period of six months. However, some creditors also charges off an account if it is past due for a period of 90 days. “Charge off”, also known as “write off”, may prove costly to your credit score. Whenever, an account is charged off by a creditor, it gets reflected in your credit report and may lower your credit score by as much as 100 points.

“Charge off” is considered a black mark on your credit report and cannot be generally removed before seven years. This negative listing may not only lowers your score, but also affect you in various ways. You may be denied a new line of credit, or may not qualify for re-aging your account if you have a charge off in your report. Most creditors usually sell off the account to collection agencies after charging it off. If you have a charge-off listed on your credit report, it does not mean that you are no longer required to pay off the debt. In fact, if the debt is within the Statute of Limitation period, the creditor can sue you to the court and bring judgment against you to recover the debt either by garnishing your bank account or your wage.

Charge off can be removed from your credit file only by the original creditor in exchange of partial or full payment of the outstanding debt. If the creditor agrees to remove the charge off listing from your credit report, you should get the agreement in writing. Now, if the debt has been sold to a collection agency, it cannot be removed from your report before seven years even if you pay it off in full. However, even if the creditor does not agree to remove the charge off from your report, you should try to settle the debt for less and pay it off in order to avoid judgment which the creditor might bring to recover the debt.

Since it is difficult to remove charge off from your report, you should try to prevent is as far as possible. For this you should contact your creditor whenever you fall behind your payments, explain him of your financial situation and try to negotiate for a repayment plan and pay off the debt. Mostly the creditors will agree to work with you. However, if you are not successful in negotiating with your creditor, you may appoint a credit counselor who may help you out.

Vacating a judgment means that the party (plaintiff or defendant) against whom a judgment has been passed can reopen the case with a view to turn the judgment in their favor. A motion to vacate a judgment must be filed within 30 days from the date you received the judgment notice from the court. However, if you did not receive the judgment notice from the court, the court allows you to file the motion within 180 days from the date you realized that a judgment has been passed against you.

For filing the motion to vacate the judgment, you need to fill up the form after paying the prescribed fees with the clerk’s office in the court from where the judgment was passed. Mostly a motion to vacate a judgment is filed in case of default judgment and so you may need to mention the reason for not being present on the day the judgment was passed. Once you file the motion, the court will fix up a formal hearing date, the details of which will be notified to both parties. The judge may ask you the reason for not being present in the court the first time, if it was a default judgment. Now it depends on the court to decide whether your motion will be granted or not. If your motion is granted the judge may take a hearing right there and so you should always be prepared to present your case. If your case is not heard on that date, you will receive a new date, and both the parties will be informed about the new date.

Now, if the judgment is passed in your favor, you will be receiving a document from the court mentioning that your case has been dismissed and you may send a copy of the court document to the credit bureaus and ask them to remove the judgment from your report.

Summon is generally a legal notice which the plaintiff sends when the borrower defaults on his payments and become delinquent. When the creditor sues the debtor and files a case, the defendant receives a summon which informs him the reason of being sued by the creditor. Once the defendant receives the summon, he has only 30 days to respond to it. Now, if the defendant is not able to respond within 30 days, the case goes to default and the defendant has another 15 days grace period within which he may reopen the default and file an answer after paying court fees, but he not allowed filing an answer beyond this 15 day grace period. However, if the last date of filing the answer to the summon falls on a holiday or a week end then the defendant is allowed to file an answer on the next working day.

Once the defendant files a response to the summon, both parties to the case receive a notice from the clerks office informing them of a trial date or a court date. The defendant can bring any witness who has direct knowledge and may help the court to announce judgment in the right direction. Witness to the case (if any) must be present physically and no letters from witnesses are permitted. While filing the case, the plaintiff needs to pay all the court costs, but the defendant needs to reimburse it if the plaintiff wins the case. However, if the defendant does not file a response to the summon, the creditor or the plaintiff can bring a default judgment against the debtor and may either garnish his wage or his bank account to recover the debt.

After both the parties have presented their claims, the judge decides the case and announces judgment either in favor of the plaintiff or the defendant. Both the parties will receive copies of the judgment which will specify the money judgment that is awarded. Now, if the borrower satisfies the judgment amount, the plaintiff should file “satisfaction of judgment” with the court, so that it gets reflected on the debtor’s credit report as “judgment satisfied”. If the plaintiff fails to file “satisfaction of the judgment”, after the debtor pays off the judgment amount, then he may become liable for the damages which the debtor might face due wrong entry in the credit report.

If you are highly immersed in debt and are not able to repay it back, you can go for a debt settlement program which allows you to repay only a portion of your outstanding debt to the creditors. Under debt settlement plans, you can negotiate with your creditors to bring down your debt to 40 to 60% of your outstanding amount and the creditor agrees to forgive you the remaining part of the debt. The most common debt that is generally settled under debt settlement program is the credit card debt. You can also settle auto loans, medical bills and personal loans under the settlement program. However, certain types of loans such as alimony and child support obligations, mortgages, car loans and federal tax debts cannot be settled under debt settlement plans.

It usually takes 2 to 4 years to pay off the debts using the debt settlement program. There are debt settlement companies who negotiate with the creditors or the collection agencies on your behalf and settle the debt for much less that you actually owe. The companies normally charge an upfront fee for their service. Debt settlement has the following benefits:

1. Debt settlement can help you to avoid bankruptcy, because under such program, you not only save money by paying only a small portion of the debt, but also repay it back in monthly installments. So there is a very little chance that you cannot continue making your payments and file bankruptcy.

2. Under debt settlement program you make only a single payment to the debt settlement company for all your debts you would like to settle. The debt settlement company accumulates this money in a trust and after accruing a good amount they negotiate with your creditors and pay them off.

3. Registering for debt settlement program will help you to avoid the unfair collection practices adopted by most creditors and collection agencies. Moreover, the debt settlement company also negotiates on your behalf and helps you to eliminate the late payment fees and other finance charges associated with the debts.

4. You may also avoid judgment which can be brought against you by the creditor or the collection agency in order to recover the debt. This may save you from getting your wage garnished or placing your property on lien.

Most of us face financial crisis at the end of the month from which we cannot recover without the help urgent credit. Payday loans come in handy during these times, because these loans help us to take care of these unexpected expenses till the time we receive our next paycheck. In spite of the fact that these loans have high interest rates, most Americans usually resort to these types of loans because of it easy accessibility. Moreover, people who do not have a credit history or people with a very low credit score can avail these types of loans because the creditors do not pull out the credit report and check the creditworthiness of the borrowers while offering payday loans.

The term for which the payday loans are offered may differ from state to state and may vary form 6 days to 120 days. This means that the loans which are offered for more than 120 days cannot be considered a payday loan. These loans can be obtained even online by providing certain information like your social security number, email id, contact information and your bank account details. They sometimes even take your authorization to debit money from your bank account in case you fail to repay the debt. Some lenders even offer fax less payday day loans which do not require any paperwork to be faxed to the lender, before you can get the loan. The lenders deposit the money in your bank account, whose details you have provided in the loan application form.

Now, the state laws have also fixed the ceiling above which payday loans cannot be offered. While for most states it has been fixed at $350, for the state of Washington it is $700.Moreover, there are certain states like Washington D.C, Maryland, Massachusetts, Connecticut, Vermont and New Jersey, where payday loan are prohibited by law.

Because of the high interest rate and other finance charges, these loans may put borrowers in vicious circle of debts and may push them to debt trap. Now, once the debtors fall in debt trap and default on their payments, the creditors report it to the credit bureaus and the outstanding debt gets reflected in the credit report as delinquent and affects the credit score for seven years. So one should always try and avoid taking such types of loans.

Steps that need to follow in order to avoid payday loans:

1. You should always budget your expenditures and keep a very small portion of every paycheck, say $20, in your saving account with your bank and try to build up a contingency fund of $400 to $500, which you can use while you are in need of urgent cash either at the end of the month or during emergencies.

2. You can ask your employer, friends or any of your family members for money against a written agreement or apply for a small loan from a credit union where you hold an account. You may also think of using your credit cards to take cash advance instead of going for payday loans.

3. Try and get rid of existing payday loans. Instead of taking another payday loan to repay back an existing loan, you can work out a repayment plan with your lender and pay it off in installments.

When we apply for a new line of credit, the creditor asks for a cosigner to act as a guarantor to the loan. Mostly, the creditors need a cosigner with a good credit score to sign the loan agreement if the borrower does not have a good score to qualify for the loan. The Federal law requires the creditor to give a notice to the cosigner to inform him about his obligations towards the debt if he cosigns the loan agreement. Cosigning an agreement means that you are just letting the primary borrower use your credit history and by doing so you’re acting as a guarantor to the loan.

Just like the primary borrower, the cosigner is also fully responsible for the debt. Now if the primary borrower somehow fails to repay the debt on time, either due to loss of job or otherwise, the cosigner will be required to pay back the entire debt to the creditor. Even if the primary borrower dies, the cosigner remains responsible for the debt. Another important thing is that, this loan account will appear on the credit report of both the primary borrower and the cosigner. If the creditor does not get the money back from the primary borrower, he will notify the cosigner and will ask him to make the payment.

Now, since the cosigner credit account appears on your credit report and forms a part of your credit history, your FICO score gets affected if the account becomes delinquent. Moreover, due to non payment of the cosigned account, both your debt to income ratio and the balance to limit ratio will rise and your application for a new line of credit may get rejected.

You should therefore cosign a loan agreement only if you can afford to repay it back. Moreover, before cosigning an agreement, you should first understand the purpose of the loan and go through the terms and conditions to check whether you can afford to abide by the conditions. However, there are certain instances where cosigning the loan agreement becomes necessary. For example, you may need to cosign an education loan for your son or daughter. But even in such cases you should try to limit your obligation towards the loan only to the principle amount, by negotiating with the creditor.

Bankruptcy is a legal process which helps you to manage your debts effectively under the cover of the bankruptcy court and helps you to make a fresh start on your finances. Once you file bankruptcy, all foreclosures, repossession and garnishment orders cease to operate temporarily. Generally, there are two types of bankruptcies which are filed by individuals. They are Chapter 7 bankruptcy and Chapter 13 bankruptcy. However, if you have a discharged Chapter 7 bankruptcy within the last 8 years or a discharged Chapter 13 bankruptcy within the last 6 years you cannot file bankruptcy. Moreover, you cannot file bankruptcy if your bankruptcy petition has been dismissed within the last 180 days.

Under the new bankruptcy law of 2005, you need to go through a credit counseling program if you want to file bankruptcy and submit a certificate to the bankruptcy court in this regard within a period of 15 days of filing bankruptcy. The bankruptcy court may dismiss your bankruptcy petition if it is proved that you have illegally transferred your property to your friends and relatives and have tried to conceal your assets to qualify yourself for Chapter 7 bankruptcy. Moreover, if before filing bankruptcy if make excessive spending on your credit cards with the hope that these credit card debts will be included under Chapter 7 and you need not pay them off, then your bankruptcy petition may be dismissed.

Chapter 7 bankruptcy, also known as “straight” or “liquidation” bankruptcy is preferred by most debtors because under this bankruptcy, the Bankruptcy court discharges all the debts. A portion of your property may be sold off by the Bankruptcy Court under Chapter 7 to pay off some of your outstanding debts. Some of the properties which can be sold under Chapter 7 include expensive musical instruments, cash and other investments, a second car or home, and collection of stamps and other valuable items. Hence a debtor can file Chapter 7 bankruptcy if he has nothing to lose to the bankruptcy court. The debtor can also eliminate some of his secured debts by filing bankruptcy under Chapter 7.

Under Chapter 13 bankruptcy, you need to pay back the outstanding debts to the creditors under the cover of the bankruptcy court through a repayment plan and so Chapter 13 bankruptcy is also known as “debt adjustment” bankruptcy. Instead of handing over the assets as in the case of Chapter 7, you need to pay off the debt within 3 to 5 years.