Not all loans help your scores

Dear Liz: Here’s a cautionary note you may want to share. I filed for bankruptcy almost three years ago. Many sites recommend taking a small personal loan or purchasing something small, like furniture, to pay for over time and improve your credit. So I bought a sofa from a local retailer with a no-interest loan deal. It is now almost completely paid off. When I checked my credit report recently, I noticed the installment loan wasn’t there. I called the retailer and found that they didn’t report to any credit bureaus. The lesson, of course, is to not presume that just because you can get a loan from somewhere, it will be reported on your score. I now have a sofa I didn’t really need and no benefit to my credit. And I feel stupid for not thinking to ask.

Answer: Plenty of lenders don’t report to credit bureaus. Even some credit unions, which are normally consumer-friendly, opt to report to only one credit bureau.

If you’re trying to rehabilitate battered credit scores, you want accounts to be reported to all three bureaus so that all three of your FICO credit scores (one from each bureau) can benefit. It doesn’t do your scores any good if a loan you’re paying on time isn’t reported to any bureau, and it does you only limited good if it’s reported to just one bureau because your other two scores won’t benefit.

You typically can find out simply by asking before you apply for a loan whether the creditor reports to all three bureaus.

The fastest way to improve your scores is to have both installment and revolving accounts. Revolving accounts include credit cards, but you don’t necessarily need to borrow money to improve your scores. Using a credit card and paying it in full each month also can help. If you don’t have a card, consider applying for a secured version, which gives you a credit limit equal to an amount you deposit with the issuing bank. But again, make sure the issuer reports the account to all three bureaus before you apply. You can find secured-card offers at LowCards.com, CardRatings.com, CreditCards.com and other sites.

Bad credit traps job seeker

Dear Liz: How do you recover from bankruptcy? My daughter lost a very good job and got upside down with her house, so she had to file for bankruptcy. She is working now in a very low-paying job but cannot find a good job in her field of finance. Everything goes well in the interviews, but then they check her records for bankruptcy. Once they learn that she was bankrupt, they will not hire her. How can she dig out of this predicament?

Answer: Federal law prohibits employers from using a bankruptcy filing as a reason not to hire (or to fire or decline to promote) someone. However, most states allow employers to check credit reports, and employers are allowed to use the negative marks they find there as a reason to not hire someone. Since most people who file for bankruptcy have plenty of late payments and charge-offs leading up to the filing, that gives employers the legal cover they need to refuse to hire someone with a checkered financial past.

Interestingly, there’s no research or other evidence that indicates bad credit leads to problems on the job, such as theft or even poor performance. Yet employers continue to use credit checks to screen out job applicants for a wide variety of jobs.

Only six states — California, Connecticut, Hawaii, Maryland, Oregon and Washington — restrict employers’ ability to check credit reports, and often there are exceptions for jobs in finance or those that involve access to large amounts of cash.

Unfortunately, that means your daughter’s troubled financial past may continue to haunt her for years to come unless she finds an employer willing to overlook it. Most negative marks stay on credit reports for seven years, while bankruptcies can stay on for up to 10 years.

Should she walk away from her home?

Dear Liz: I’m 59 and have been unemployed for more than three years. My retirement is gone, my unemployment insurance has expired and my family resources are maxed out. I own one rental property that I’m trying to sell because it has a negative cash flow. The comparable market is glutted now. I’ve missed the last four payments on my home of 32 years, although I’ve applied for help through the Making Homes Affordable program. I am overwhelmed and unsure how to handle this. Do I just walk away? I am actively seeking employment, working with Goodwill’s Job Connection, but don’t have much hope at this stage. I’m too young for a reverse mortgage and too old for doing physically demanding work.

Answer: Talk to a housing counselor approved by the Department of Housing and Urban Development about your situation, including the rental property. (You can get a referral to this free or low-cost help at http://www.hud.gov.)

You don’t need the financial drag of this property adding to your woes. Ideally you’d be able to slash the price for a quick sale, or if you owe more than the property is worth, to arrange for a short sale. That’s when the lender agrees to accept the proceeds of the sale in lieu of the larger amount you owe. Otherwise, you may need to let the property go into foreclosure.

You may not be able to save your primary residence either. If you don’t have any income, you’re unlikely to get a refinance or a modification, but the HUD counselor can apprise you of your options. If you have any equity in the property, it probably makes sense to sell it while you can rather than let the bank take over and lose a small fortune in foreclosure-related fees. For more information, read attorney Stephen Elias’ book, “The Foreclosure Survival Guide.”

Marriage doesn’t combine your credit reports

Dear Liz: To what extent do you inherit a spouse’s credit score for activity that occurred prior to the marriage? My fiance and I would like to get married soon. However, he has been going through a short-sale process for almost a year. The bank took a long time to review the matter and would not accept the multiple offers. My fiance has recently stopped making the mortgage payments and that has negatively impacted his credit. When we get married, does his credit score activity become incorporated into mine?

Answer: No. Your credit reports and credit scores aren’t combined when you marry.

If you apply for a loan together, both of your credit histories and scores would be taken into account. His bad scores could prevent you from getting approved. If you did get approved, you would probably have to pay a much higher interest rate.

If you do plan to get a mortgage or other loan together down the road, he should start to rehabilitate his scores as soon as his home situation is resolved. He should expect his scores to remain in the poor-to-fair category for at least three years, and it may take as many as seven years to get them into the “excellent” range.

Don’t expect mortgage lender to do the right thing

Dear Liz: We applied for a loan modification a year ago and submitted all the paperwork requested on time. Our lender claims we were denied because of missing papers. I had everything documented, so the denial was appealed, but as of now we’re still waiting to hear whether we were approved or not. What can we do? We haven’t made a payment since last March. We have the money on hand to make three trial payments, as we were originally instructed, but I’m so worried.

Answer: Unfortunately, your experience is all too common — and too often people waiting for an answer from their lender wind up losing their homes to foreclosure. Lenders’ poorly trained and poorly staffed loan modification departments have created endless nightmares for homeowners trying to avoid foreclosure.

You should immediately enlist the help of a counselor approved by the U.S. Department of Housing and Urban Development. You can get referrals from http://www.hud.gov or by calling (800) 569-4287. The advice is free or low-cost. A counselor can help assess your situation, offer alternatives and guide you through the modification process — if a modification is still an option.

You also should read attorney Stephen Elias’ excellent book “The Foreclosure Survival Guide: Keep Your House or Walk Away With Money in Your Pocket.”

What you shouldn’t do is expect the lender to do the “right” thing, including honoring any promises or commitments made to you. The people who get loan modifications have to be tenacious, persistent and savvy about the process.