Repairing Your Credit as an Individual or Sole Proprietorship

October 30^th, 2013

I will begin this piece right away by stating that if you came here looking for a quick fix or instant solution, you should stop reading, click your back button and look for snake oil elsewhere, because there is no such thing.

I will also point out that this isn't just advice that I've heard or read about and am passing on; I've lived it and am passing on my own story:

Ten years ago, I had terrible credit - I don't mean that I was late on a few payments - I had several R9s on my credit rating ( According to www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca02179.html an R9:

R9: Bad debt; placed for collection; moved without giving a new address or bankruptcy. )

I wish, for my own prides' sake, that I could say these R9s were due to some terrible, unavoidable, personal disaster that forced me to suffer, but the truth is a lot simpler: In my youth, I made several irresponsible credit decisions, bought things that I could not afford and did not pay many bills that I well and truly owed on time or at all.

Ignoring a Debt Doesn't Make it Go Away - It Makes It Worse

The old saying "Ignore something long enough and eventually, it will go away" might sound good in a book of fiction, but in real life - especially when it comes to money - that simply isn't true. Even though Canadian law (and those of many other countries) state that your credit record must be deleted after 7 years from the date of last activity, that does not prevent banks and other financial institutions from keeping their own records indefinitely. If you think old, foolish decisions will never come back to haunt you, invariably, you will learn - the hard way - just how incorrect that assumption can be.

Eventually, I got really, really tired of the constant harassment - Even though Canada has laws barring collectors from making threats, cussing or other abusive behaviour over the telephone, as many can attest, it certainly doesn't stop collection agencies - large or small - from doing exactly that.

My salvation came from my wife: She had worked many years as a very successful - and very effective - collection agent for two of the largest collection agencies in North America - My question to her was simple: What do I have to do to fix this ?

Since my credit rating is now A1 - Literally the best one can get and - according to my banker, in the top 5% of consumers, several people have asked me to share exactly what it was that I did to go from the absolute worst credit risk there is to the point of banks calling, practically begging me to take out their credit cards, so here I am, writing about it.

Once again: Nothing about this is magic, nor is it quick and, for many, it will not be easy, but it is absolutely possible, doable and reasonable.

1. Acknowledge your debts : Unless you are the victim of identity theft, admit the fact that yes, you spent money that was loaned to you and you have an obligation to repay it, or come to terms with your lender that are acceptable to both of you.
   This means getting in touch with your creditors - or the collection agencies that have acquired your debt(s) and coming to terms.
   It is important to remember a few things about dealing with collection agencies:
   1. Collection agents are often - but not always - the "bottom of the barrel" - This isn't to insult or belittle them - and some people actually do become collection agents by choice: However; for many, MANY collection agents, this is a job of absolute last resort for them: The turnover rate for collection agents is hellishly high: It is a high-stress job, massively negative and there is more conflict and rejection than could possibly be described in one article. I point this out to you, dear readers, because you will invariably come across some agents who will try to give the appearance that they are "better" people, living on high, with a lot of power and responsibility: They are not. They are in a job that they had to make a tough decision between it and a fast food worker. They are no better than you. Remember this.
   2. Collection agents often work on commission. While they would absolutely love to get the entirety of the $10,932 that you owe in one certified cheque Fedexed directly to them - the chances are because of the fact that you are in collections in the first place, you don't have ten thousand dollars lying around. Some money is better than none and they know this - It is also to their direct, personal benefit to collect some, rather than no money at all.
   3. Your debt was often (but not always) not only purchased from the institution you originally owed the money to, but frequently (again, not always), bought for far less than what you actually owed. For example, if your debt was to ABC Credit Card Corp for $10,000, DEF Collection Agencies, Inc., probably bought that debt to collect on for 40 cents on the dollar, or $4,000; Anything they collect from you above $4,000 is profit (Keep in mind that collection agencies are a for-profit business) - What this means to you is that there is often room to negotiate. Remember that this is not always true, however! Depending on what they know of you; Your financial situation, your other sources of credit, your employment and so on - If they have a strong belief that you can pay the full amount, they can and often will go after the full amount.
   If, however, you find yourself unemployed, or have so many other debts that there is no chance of paying it all back within your lifetime, then a settlement is a possibility. (more on that a little later)
   4. Collection agents are governed by federal and provincial (or state) law. While many do not act like they know this, they absolutely do: What they rely on is consumer ignorance and fear. Never, ever lose your cool or professionalism with a collection agent, no matter what their behaviour. In fact, your best tactic is this: As soon as you realize that you are speaking with a collector, say this:
      "Pardon me, just give me one second, please" - and wait for three or four seconds, saying nothing. Then:
      "Okay, I apologize for the delay; I just want to let you know that this conversation is being recorded; How can I help you ?" You don't actually have to be recording the conversation (although it's a really good idea, if you can!) - but it reminds them that anything they say may come back to haunt them - even to the point of them losing their collection license - or worse: Their employer losing their license.
2. Determine what you can afford to repay each month and start paying it back. This often means some realistic sacrifices; Be reasonable and realistic: Your children, if you have any, still have to eat and so do you, but that daily stop at Tim Hortons ? No, you don't need that. You can choose to lower your Internet package to a slower rate, drop your cellphone package options, brown-bag your lunch to work, take a bus instead of a car, cancel the movie or sports network, drop the cable package - the list can literally go on for pages with the luxuries that we often treat ourselves to - and even come to consider as "necessities" when they are, in fact, no such thing. (And it doesn't matter how big a hockey fan you are: If that 80 inch LED TV is the thing that put you in the collection agency in the first place, you can get the scores the next day, instead of paying for the NHL.com subscription)
   
   2.5 Determine which debts that can be repaid or settled right away; Technically, you are not supposed to favour one creditor over another - After all, you do owe them all the money you borrowed; HOWEVER: If you owe company A $10,000 and company B $500 and you find yourself with $600 one month: It makes a LOT more sense to eliminate the debt to company B, entirely, therefore changing that rating from an R9 to an R4 (but get that in writing first - more on that, too, later) - than making $300 payments on each and having both of them listed as R7 or still as R9.
3. KEEP YOUR PAYMENT ARRANGEMENTS! This cannot be emphasized enough: Firstly, do not agree to a monthly amount that you simply cannot afford; If you know you're going to break the agreement in the first place, which will only make things worse, don't make the agreement to begin with.
   Life does happen, though: If, for whatever reason, you find yourself unable to make next months' payment, then contact your lender and let them know in advance! It is far, far better to do this, than to suddenly find a summons to court because you reneged on an agreement to repay a legitimate debt.
4. Get a new credit card. While this may be tricky, there are two hints to do this;
   The first is the absolute safest - and smartest: Get yourself a secured credit card: This means going out and getting a card with a $300 or $500 limit which you first have to give the bank or the lender $300 or $500 to hold in trust for you (they will often pay a marginal interest rate on it, too) - They will hold this up to a year (or longer, if you insist on making more credit mistakes, which you're not going to do, right ?) - And - here's the important part: USE THE CARD RESPONSIBLY; By this, I do not mean go and max out the limit each and every month; Buy responsibly; Perhaps a single load of groceries, or a few pairs of socks and then PAY IT OFF right away - BEFORE they charge you interest. (Believe me: They are still making money from the merchants you used the card to make the purchase with!) This is the second, concrete step towards rebuilding a positive credit rating (The first, of course, as outlined above, is repaying what you owe)
   The second method - the one that I used, at the advice of my wife, was to get a store branded card - BE CAREFUL with this, however; The more inquiries on your credit report - which is what happens each time you apply for credit, where a creditor checks your credit record to see if you are worth the risk or not - the more inquiries there are, the more of a negative effect that will have on your rating. Ideally, apply for one card a month for three months: While you are making these applications, you should be saving up the money for a secured card, in case you get three rejections in a row.

Discipline and Responsibility Are Key

You have to remember, throughout all of this, that discipline and responsibility are key. The single most important thing to remember when you make a purchase with your (new or current) credit card is this: "Can I fully pay for this at the end of the month, before the CC bill is due ?" - If the answer is "No", put the item down (or close the website you were looking at) and wait until your situation changes that answer to "Yes".

There is a field of thought that carrying some balance and paying some fees are helpful, too. I will be the absolute first to admit that I am not a finance or credit expert (I am an Internet marketer, HTML/Perl/MySQL developer, for the record) - My experience, however, going from multiple R9s to a near perfect credit record has been through paying off my balances in full.

Here is another incredibly important thing to know: Your credit worthiness is based not only on your payment history, but your available versus used credit. The ideal ratio is 20% That is to say that if you have a total credit limit of $1,000, you should not owe more than $200 at any one time.

Here's a rather mind-blowing fact: If you have a credit limit of $1,000 and owe $200, you are a better credit risk than the person with a $100,000 limit that owes $60,000. Remember this.

The other important thing to remember: It takes seven years for a credit entry to be deleted from your credit rating record (this is required by law) - HOWEVER: This does NOT prevent individual lenders from keeping their own records indefinitely. The BEST advice, of course, is not to get into bad debt in the first place. When it does (hey, it happened to me), once you start fixing it, the best advice is not to let any additional bad credit entries occur.

That advice on calling a credit collector if you're going to be late on a payment ? That goes, too, for your bank on your mortgage payment and your credit card company that you are not in collections for: Just like keeping a good marriage, in keeping good credit, communication is key!

There is also a line of advice that says "Pay for everything with credit, then pay off the credit before the grace period ends" - Mathematically, this really is good advice: In practicality, however, especially when you are beginning the journey back to good credit, the smart thing to do is pay for the vast majority of your purchases with cash/debit and only use credit cards for purchases which you absolutely will be paying off within the grace period.

Me, I've been paying for the majority of purchases with cash/debit for most of the last decade: It has only been in the last two years that I have discovered that I do indeed possess the self-discipline to use credit for a larger amount of purchases, take advantage of cash-back/loyalty programs and pay off balances at the end of the month.

Getting it in Writing and Settlements

There are two things I mentioned earlier that I said I'd talk about later: Settlements and getting things in writing:

On settlements: If you owe a debt of $10,000 that has been in collections for a while, you can always offer to settle. Collectors are absolutely under no obligation to accept them, but many of them do indeed just want to get the business off the table and move forward. Given that many (again, not all) debts are purchased for far less than the face value, a settlement for 50% or less (or more) is a possibility.

When you do ask for (or are offered) a settlement, GET IT IN WRITING. An above-board collector will be willing to send you the offer on company letterhead, which binds them to the agreement; It also gives you something to rely on, in case you have the extreme misfortune of a collector going back on their word (It is infrequent, but it does happen enough to make the advice of getting the offer in writing important)

You can also ask to have the negative entry on your credit record removed: This may not always be possible, or amenable, but one can ask (and yes, I did have success with this one for at least two of my records which had - finally - been fully repaid)

I hope this has been helpful to some readers; I should point out again, for your own protection, that I am not a financial advisor, or even remotely close to one: The above have all been my own, personal, experiences.

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