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Credit can be salvaged — even in tough times

The credit card industry has a nearly century-long history of shifty fine-print practices. It’s common for many who see offers that seem too good to be true to understand they most certainly are. But even with public awareness of credit pitfalls, plastic still seems to be king. Some $1.5 trillion in U.S. annual spending is done with credit and there were more than 640 million cards in use in 2007, according to a PBS “Frontline” and New York Times collaborative report.

With the recession trimming many family budgets, paying by cash is becoming more common. Nonetheless, credit is still the foundation for many of life’s large and small purchases. Buying a car, a home or even reserving a hotel room can’t happen without a credit card and a certain level of credit worthiness.

For those who have experienced job losses, found new work, ventured out on their own after losing a job or experienced some other income-limiting situation, keeping credit intact while adjusting to new realities can be tough. Fortunately, there are plenty of ways to help those in all situations, whether it’s simply maintaining good credit while unemployed, re-establishing credit after a bankruptcy or foreclosure, or even simply fishing for the best, lowest-cost credit opportunities out there.

Anatomy of a credit score

Mark Clayborne, a certified credit counselor for the past 10 years and author of “Hidden Credit Repair Secrets,” said there is one big reason missing that first payment on a credit card bill can be a hard hit that surprises many. Payment history carries the most weight when it comes to credit scores. He further broke down the credit scoring formula this way:

n Payment history (35 percent of score): A score can drop as much as 30 points with one missed credit card payment, Clayborne explained.

n Leverage (30 percent): How maxed out is the borrower? Credit bureaus do not like to see people going over 30 percent of their credit limit, either on one line of credit or cumulatively. Ten percent is a sweet spot, Clayborne added.

n Length of credit history (15 percent): Clayborne said it’s better to make an occasional charge on an old card and pay it off right away than to let the account close after 18 months, the protocol for most credit issuers. To show a long history of on-time payment with creditors is the key.

n Inquiries (10 percent): It’s important to note the difference between a hard and soft inquiry here. The latter is an example of someone checking his or her credit score through a free online service. These reports really have minimal or no bearing on a score. A hard inquiry is done by an auto loan servicer, mortgagor or credit card company with an application for someone who is actively seeking credit. Clayborne says each hard inquiry can drop a score by five points. He advises to keep them to a minimum, two every six months tops.

n Mix of credit (10 percent): Those looking to lend or extend credit love to see on-time payment in a variety of categories: mortgages, auto loans, retails store cards, credit cards and so on, not just credit cards.

Unemployment and credit

Nevada’s unemployment rate peaked at more than 200,000 people in May 2010; the Silver State still holds one of the highest unemployment rates in the nation. As of December 2011, it was estimated that there were still more than 165,000 people unemployed in Nevada.

In many situations, employees have an idea that they may lose their job soon, Clayborne said. Buying a credit protection plan from a card provider while still employed is a good idea. This will allow for possibly skipping some payments or a lowering of the monthly minimum while looking for new work.

Michele Johnson, CEO of Financial Guidance Center (formerly Consumer Credit Counseling Service) in Las Vegas, cautioned against getting more credit to cover bills, if possible. And if one is in a new job and operating on the assumption of future income coming in, that can be dangerous too.

When looking for a job, Johnson said, creditors prefer someone who stays in their line of work, if they can. She also said many people aren’t aware that getting on the phone with their credit card company can actually be a productive affair. Now more than ever, many companies are willing to delay payments or drop an interest rate if someone can prove the hardship, she explained.

“If you don’t ask for these things, they’re not going to tell you,” Clayborne also added.

Denise Mora, regional market manager for America First Credit Union, said her company encourages members who have lost work to use its financial counselors. They can help consolidate debt and bring options for how to weather income downturns.

Repairing, rebuilding

For those who have endured financial hardship and are ready to rebuild, Mora and Clayborne recommend getting a copy of one’s credit report as a first step. Mora recommends: www.myfico.com or www.annualcreditreport.com, free online services that let creditors see where they stand.

Clayborne recommends looking for errors. He estimates almost one in four reports have errors, everything from incorrect account numbers, outdated collection accounts to understated credit limits. The author said that making these fixes by simply disputing them with the credit bureau and showing proof of the inaccuracy can boost a person’s score by 20 to 40 points.

When it comes to rebuilding credit, some financial institutions like America First offer a secured credit card. These programs are absolute linchpins in re-establishing credit after a bankruptcy, foreclosure or other financial hardship, Clayborne noted.

To apply for one, a person must deposit a certain amount of money with a bank or credit union. Mora’s group has a minimum of $200 and maximum of $15,000. A member is then given a credit limit up to the deposited amount, using the cash deposit as collateral. Once a new applicant shows a year of on-time payment and responsible use of the credit, the banking institution often gives the deposit back and extends a true line of credit to the user.

Clayborne recommended getting two cards with two different institutions. But again, he also cautioned against using more than 30 percent of the credit limit, too.

Auto loans or even small credit rebuilding loans that operate in a similar way to the secured credit cards are also good for credit rebuilding, Clayborne said. But watch out for the interest rates on car loans. After a year of on-time payment, someone can refinance for a better rate, he added.

Following these tips can help boost someone’s score by 100 points within a couple years, Clayborne said. And those currently going through a bankruptcy can start rebuilding credit with a secured card right now and don’t have to wait until the bankruptcy is completed. He encourages people to have a goal of a 720 credit score.

“I’ve found that 720 is where the world really opens up for you,” he added.

Balance transfers

For those with good credit, new credit card offerings arrive almost daily in the mail. Many also offer attractive balance transfer propositions, but not without a cost. During the economic run-up it was common to find credit card deals in the mail that would offer a zero percent interest rate for a limited time, with no other fees tied to the transfer. That is not the case anymore. Even the best credit customers will likely see at least a 3 percent transfer fee on offers, Johnson said.

Whether a balance transfer deal is worth it or not, comes down to basic math, she added. The longer the term of the zero percent or reduced rate the better; the higher the transfer fee and other charges to offset that gain, the worse the deal.

Clayborne said long periods of zero percent interest of 18 months or so are only available to people who are above a 670 credit score. People below that figure, he said, won’t see such attractive offers, making it far less likely that the “deal” before them is even worth it.

Like any credit card proposition, Johnson said, even with credit card legislation in place to keep card companies more honest with offers, there is still plenty of fine print to look for. Some offers will jump to a very high interest rate after the introductory period, and even others will go so far as applying the higher interest retroactively to the original balance once the reduced interest rate offer is over.

“Any time you get an offer in the mail, read the fine print. And there’s lots of it. … Turn over that first page where you find the eight point font on back and read,” she added. Johnson also said finding ways to opt out of mailings may also be found in the fine print areas of offers, which could help reduce the mailbox clutter.

Clayborne also cautioned against replying to credit card offers by mail. Fraud is becoming a hot topic in the credit world, and there are counterfeiters who can make copies of offers given by banks and alter a phone number or address to route one’s personal information to them.

“I’m not saying it happens all the time, but be careful,” he added.

Approaches to using credit

The long-standing notion that having many credit cards with zero balances on them is good for a person’s overall credit score has been debated through the years. Experts agree that the approach isn’t bad so long as account maintenance is not a problem.

Johnson only has one debit card and one credit card. She uses them regularly and pays them off every month. She is not of the opinion that one needs many cards to have a high rating. She also believes people are using credit less, in general; delinquencies are reducing, and savings rates are increasing, which are good measures for the consumer’s overall health.

“There’s no benefit to flipping open a wallet and having 10 credit cards,” she said. “It doesn’t make you any richer.”

She also recommends using an American Express card that requires balances to be paid off each month to help discipline a credit user.

Clayborne counters, saying leaving a small balance on a card is actually better for a person’s overall score. But he also said that those with many cards often make the mistake of closing the oldest ones they may not have used for a long time. This reduces a person’s credit history on their FICO score, and can surprise them when applying for other credit and getting denied.

“Years ago, I made that mistake myself,” he added with a laugh. “I was closing all these cards, cutting my credit history and not knowing it.”

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