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Collections Account on Credit Report: Option #3

The best way to handle a collections account on credit report is to negotiate for a letter of deletion. But the truth of the matter is this: Sometimes you will be unsuccessful. Here is your third option for dealing with those pesky collection accounts.
Collections Account on Credit Report: Option #3
You could always make payments on the collection item. This is one of my least favorite options. Most of the time, I think you are far better off saving the money and making one payment. However, if you have a problem saving money, and you feel obliged to satisfy your agreement with the creditor, this might be the best option for you. Keep in mind that your score will drop each time you make a payment.
The pros of this option follow:

  • Eventually, you will satisfy your agreement with the lender.
  • If you are able to negotiate a payment plan, the collector will stop calling you and probably will not sue you, so long as you pay on time.
  • You can always call back and try to negotiate for a letter of deletion while you are making payments.
  • You might be able to negotiate for cents on the dollar.
  • If the debt is more than two years old, you might be able to convince the creditor to stop reporting payments to the credit bureaus so that your credit score can be preserved.

Like I said, making payments on a collections account on credit report is one of my least favorite options. Here are the cons:

  • If you are unable to negotiate for a payment plan, you might be sued, and the collectors will definitely keep calling you.
  • If you do not negotiate to have the creditor stop reporting to the bureaus, your credit will keep being dinged, and you will not be able to make significant improvements to your credit score until you have paid the debt in full.

If you choose this option, be sure you know how to fix credit! And be sure to read about the other options for dealing with collections account on credit report.

Collections Account on Credit Report: Option #2

In my last post, we talked about the first option for dealing with a collections account on credit report. This week, let’s talk about the second option.
Collections Account on Credit Report: Option #2
You could always wait for the right time to pay the collections account on credit report. If you are planning on making a purchase in the near future, paying a collections account might not be wise as it could hurt your credit score. In this case, just wait until you have made the purchase, then pay the account. The pros of this option:

  • First, you will eventually satisfy your agreement with the creditor. There is a certain amount of peace of mind in fulfilling an obligation. The phone calls will end, the worries will end.
  • You might be able to negotiate for a letter of deletion when you do make the payment.
  • This will allow you to delay the damage to your credit score until after you have made your purchase and secured decent interest rates. This is particularly true if you have not made a payment on the account in more than two years. If this is the case, your score probably isn’t suffering much from the past mistake, so paying it could cause an okay score to turn into a bad credit score.

The cons: You will prolong the suffering. if you wait to pay the debt, your credit score will likely drop in the future. And in the meantime, creditors and collection companies will continue to hound you about the payment. And let’s not forget that you can always be sued for failing to pay a debt.
Still, this might be the smartest strategy if you are unable to secure a letter of deletion now, and you plan on making a large purchase in the future. Keep in mind that some banks will insist you pay a collections account on credit report before giving you a home loan. As you know, paying your collection could damage your credit score, so this is risky business. The last thing you want to do is hurt your credit and have the lender pull your credit report again! To avoid this sort of repercussion, pay your collection at the close of escrow. This way, you will preserve your credit score until the last possible minute.

Collections Account on Credit Report: Option #1

If you have a collections account on credit report, the first thing you should do is read our article about addressing credit collections head on and attempting to negotiate for a letter of deletion.
The truth of the matter, though, is that sometimes you will be unable to negotiate for a letter of deletion. If this is the case, you have four options:
Collections Account on Credit Report: Option #1
You could immediately pay the collections account. The pros of this are pretty straightforward:

  • As long as you take all the necessary steps and learn how to fix credit, your credit score will be only minimally affected after just two years.
  • If the collections account appeared on your credit report in the past few months, your credit score is suffering regardless, so this option will not significantly lengthen the amount of time your score suffers from the slip-up.
  • You won’t be sued for failing to pay the debt.
  • Your agreement with the creditor will be satisfied in full, so those harassing phone calls will stop!

Now let’s take a look at the cons:

  • Your credit score will probably take a hit. Remember that paying a bill in collections often causes a person’s score to drop.
  • The item will remain on your credit report for seven years. You will have no leverage to negotiate for a letter of deletion.

If the collections account on credit report is relatively new, and you don’t plan on making a large purchase in the next two years, this might be your best option. Be sure to pay the debt instead of making payments. Remember that each time you make a payment on a collections account, your score will take a hit.
If you choose this option, try to negotiate a smaller payment. A lot of creditors will settle for cents on the dollar, especially if you have a bad credit score and they think you might enter bankruptcy. After all, they would rather receive something than nothing!
Here’s another tip you might want to consider: In some cases, you might be better served by asking the creditor not to report the payment to the credit bureaus. I know this seems counter-intuitive, so be sure to read Chapter 6 of 7 Steps to a 720 Credit Score before taking action. If the collections account on credit report is old and you have not made payments for the past two years, the payment might hurt your score. Asking the creditor not to report the payment could preserve your existing score.

How Does Foreclosure Work?

Question: How does foreclosure work?
Answer: If you are behind on your mortgage payments, you might be facing a foreclosure in the near future and wondering: How does foreclosure work? In this unfortunate event, it’s important that you understand the foreclosure process and know what your options—both to avoid foreclosure and minimize its impact.
The Truth in Lending Agreement and other regulatory bodies guide the way a foreclosure unfolds. That said, foreclosure is impacted by the laws and regulations of each state, so procedures may vary from state to state.
So how does foreclosure work? The foreclosure process begins when you are behind on your payments, including both the principal or any interest that has accrued. A homeowner receives a grace period of 15 days from the due date (usually the first of the month) to make a payment. Any late payment past the 15-day grace period will incur a 5 percent late fee. A payment that is 30 days past due will also result in a delinquency notice that will appear in your credit report.
If a mortgage is marked as delinquent for 90 days or more, lenders have the option to file a Notice of Default, or a document that allows them to formally start the foreclosure process. Once this notice is filed with the state, you have a pre-determined (depending on the state) number of days, though typically 30, to pay the requested amount of money to keep the mortgage up to date.
Soon after, your lender can obtain a legal judgment that will leave you with no right to the property and an immediate to vacate as soon as possible. Some banks have “cash for keys” programs that give homeowners a payment as an incentive to leave the property in a good condition. After a foreclosure, many disgruntled homeowners will strip a house of appliances, sinks, and even copper wiring, property that now belongs to the bank. This behavior is considered vandalism or theft and may cause former homeowners legal trouble.
After the bank confiscates the house, the home will be placed on the market in what is known as a trustee sale. This is announced by a Notice of Sale, which is posted on the property. Buyers are able to bid on the home, provided they meet the amount owed to the bank. If none of the bids meet this criterion, the house will be considered an REO, or real estate owned property. An agency will then try to sell the foreclosed home until the full amount owed to the bank is obtained.

What Is a Short Sale?

Question: What is a short sale, and is it a good alternative to foreclosure?
Answer: Let’s not mince words. The foreclosure process is a brutally taxing process that will leave you stressed and your credit in tatters. Though it is sometimes the best option to resolve your financial situation, take a moment to make sure you have considered all of your options before foreclosure becomes a reality. Asking the question—What is a short sale, and is it a good alternative to foreclosure?—is a smart place to start. Indeed, short sale might be something to add to our “foreclosure fix” list.
What is a short sale?
Also known as a compromise sale, short sale is the process of selling your distressed property at a lower market value than the balance of your loan. In other words, you will sell the home for less than what you owe on the loan.
The most important consideration for a short sale is finding a qualified real estate agent with experience in today’s market. You should try to find someone who is acutely aware of market fluctuations and who is best able to serve you, whether you are in a buyer’s market or a seller’s market. Many real estate agents are better suited to one market condition or the other.
With the credit crunch affecting many people’s ability to purchase a home, you may find that your home is valued below your mortgage. In this case, you should find an agent who works with short sales. After you receive an offer, your agent can help you work with the bank to determine the terms of the short sale.
When people ask the question “What is a short sale?” they also want to know: “Will it hurt my credit?” Your credit will still be hurt by a short sale, but it will be in much better shape after a short sale compared with a foreclosure. For one, there won’t be a trail of the delinquency notices and late fees associated with a foreclosure.
In a short sale, lenders consent to permit you to accept an offer for an amount that is less than the total you owe on your loan. You will still be charged with making up the deficiency, or the difference between what you can get in the sale and your loan, but because of the sale, this amount is reduced. Not all lenders allow short sales, but the current market has increased the willingness of many banks to negotiate in this regard.
Keep in mind a few things about short sales. Like foreclosures, a short sale can be long and exhausting process. Most lenders will only sign off on a short sale if you have been sent a notice of default. In the case that you declare bankruptcy, it’s highly unlikely that a lender will agree to a short sale. Remember, though, that lenders have never experienced a market like the current one, so many hard-and-fast rules of the past are more flexible now.
If you are wondering—What is a short sale?—you might already know that you are going to lose your home. Though this is, of course, sad, a short sale might be a better alternative to foreclosure because it causes fewer credit woes and increases the likelihood that you will own another home soon.

Is There a Foreclosure Fix?

Question: I need a foreclosure fix! How can I get my house back once the foreclosure process has started?
Answer: If you have defaulted on your home loan, you may still have an opportunity for a foreclosure fix by finding an opportunity to keep your home and stave off the foreclosure process.
As soon as you receive your first late notice—or preferably before you receive it—consider contacting your lender to work out an alternative payment plan or loan modification. If the foreclosure process has started, though, and you want to hold on to your property, you may have a few options.
The foreclosure process usually begins when you are three to six months behind in your payments. After such a period of delinquency, you will receive a Notice of Default, which formally puts your home into the foreclosure process. However, between the time that you receive a notice and when your home is sold, you may find a way to prevent or nullify the sale.
The first foreclosure fix depends on where you live. Some states offer a redemption period, a foreclosure provision that allows you to recover your home. Foreclosure laws in some states give home owners five days to buy back their house by paying the amount owed on the loan and any related late fees or other penalties. Some lenders might allow you to resume the loan if you can make a single payment that will bring yours back into good standing with your payment schedule.
If your state does not offer a redemption period, it might offer you a similar opportunity if your home is not purchased in the distressed property auction known as a sheriff’s sale. Again, you might have five days to make restitution to the lender or else risk losing your property.
If you cannot afford to pay the amount in full to get your home back, then you can look at other options to begin to halt the process as a temporary foreclosure fix. With foreclosures still a common occurrence through the nation, many lenders might be willing to work with you to prevent a foreclosure, since a foreclosure usually means a loss in their ledgers. Some lenders may offer refinancing or enrolling in a loan modification program. Others might be wiling to allow a short sale. (Read the post, “What Is a Short Sale?”
When it comes down to it, there is no quick fix for the foreclosure program. Your best bet at a foreclosure fix is to learn how to create a budget and trim expenses, then begin the loan modification process.

Can a Loan Modification Save Your Home?

In the wake of the turmoil caused by the global crash of the housing bubble, the government has been advocating loan modification programs, which are designed to encourage banks and other lenders to offer more favorable terms to borrowers with existing loans.
The housing bubble saw many homeowners take advantage of unprecedented loan opportunities. Lenders bent over backwards to hand out a smorgasbord of seemingly lucrative options like adjustable rate mortgages to homeowners. However, as we all know, the roof fell in rather quickly, and homeowners were left in desperate straits with sky-high payments due and on the verge of foreclosure. Many distressed homeowners started looking into bankruptcy facts, wondering whether bankruptcy was the best option.
Loan modification programs are based on the premise that the already-struggling banks may benefit by seeing these borrowers pay back some money rather than face a complete loss. Helping these homeowners avoid bankruptcy and foreclosure means the banks will get something rather than nothing.
Loan modification programs are a bankruptcy and foreclosure fix for many besieged property owners.
Most loan modification programs are based on reducing interest rates or payments for a period of time or even giving borrowers a complete break on interest payments for a few years. In other cases, a bank may renegotiate the terms of your loan; for example, you may be able to switch from an adjustable rate mortgage to a fixed rate mortgage based on your circumstances. Theoretically, loan modification programs can help delinquent homeowners achieve a semblance of stability and pay off the remainder of their loans.
The first step in the loan modification process begins with you picking up the phone and contacting your bank’s hardship department. You will need to divulge your income and explain the circumstances that are preventing you from making regular payments on your loan. Your lender can tell you whether you qualify. Most loan modification programs exist for people who have already defaulted on at least one payment. If you are making timely payments, the banks might be reticent to modify your loan, figuring you can continue to stay current on your loan and they can recoup 100 percent of the loan.
All modifications you might make to your loan will be conducted through your lender and not via the government. And because the loan modification program is only encouraged by the government, not all lenders have chosen to participate. As I mentioned, some loan modifications may be available only if you have been tardy on your payments, though I have heard of a few available for people who have never been late. Keep in mind that some loan modificationprograms may be subject to fees based on the type of alteration requested, so get all the information before you make a decision.
No matter how dismal your financial situation, you might be able to find a way to retain your house and prevent a dreaded foreclosure through a loan modification. This might be a wonderful option for you, but its availability will depend on your lender and its willingness to work with you. Call your bank’s hardship department to see if you are eligible for a loan modificationprogram and if so, what type of program might best benefit you. An important thing to keep in mind when you talk to your bank is that the economic situation is changing faster than we can predict. What might have been valid yesterday may no longer be available tomorrow. If you are turned down for a loan modification, try again in a month or two.

Secured Credit Cards: Avoid ‘em or Embrace ‘em?

In a lot of ways, secured credit cards sound like a raw deal. But if you have poor credit, secured credit cards might be your ticket to a great credit score.
Basically, secured credit cards—typically for people with bad credit—require you to pay a deposit that is equal to or greater than the limit before the card will be activated. Then, you can use the account as you would any other credit card. You would also pay the bill, just like you would any other credit card.
So, let’s imagine that you have a secured credit card with a limit of $500. Just to open the account, you would need to make a deposit of $500. Subsequently, you might charge $200 worth of stuff to the card.
Will the secured credit card company automatically apply the deposit to your balance? Nope—you need to pay the $200 bill, just as you would any other credit card. If you make payments, the balance will incur interest. And if you miss payments, the late payments will be reported to the credit-scoring bureaus, and your credit score will suffer, just as with a traditional (unsecured) credit card.
All the while, the bank holds onto your deposit. If you eventually default, the credit card company will keep your deposit, but only after they have turned you over to a collection agency and attempted to collect payment from you.
In short, secured credit cards require you to pay now, buy later, and then pay again, whereas traditional credit cards allow you to buy now, pay later.
If you make payments on time and learn how to build credit, you can eventually request that the secured credit card be transferred to a traditional credit card, at which point the bank will refund your deposit. The deposit will also be refunded if you close the credit card account, so long as you have no balance at the time.
Though secured credit cards might not seem like that great of a deal, they are necessary for two reasons. First, people with bad credit often cannot qualify for traditional credit cards, so secured credit cards allow them to build their credit scores (in this way, they are much like authorized users). Second, many businesses require that their customers have credit cards. For instance, most cell phone companies won’t give you a phone without a credit card—secured or otherwise.
As I mentioned, if you pay the bill on time and keep your utilization rate (the percentage of the balance held against the limit) under 30 percent, then a secured credit card will help your credit score just like any other credit card would. And as your credit card score begins to improve, you can contact the credit card company and ask if it can switch the card to unsecured.
While secured credit cards have high interest rates and force you to set aside a sizable amount of money as a deposit, they are an attractive way to rebuild your credit. Use them in the right way—with careful purchases and repaying your debt on time—and you’ll soon be back in the good graces of your credit card company.

The Magic of Authorized Users

One of my favorite ways to boost a person’s credit score is to teach them about the magic of authorized users. Authorized users are people who have permission to use other people’s credit cards. For instance, your husband might have a Citi card. His name, and his credit score, was used to apply for the account, but you have permission to use the account.
Becoming an authorized user is a powerful way to boost your credit score because you get to borrow the account holder’s good credit history. If you are an authorized user on a credit card in good standing, your credit score will reflect the credit card’s positive payment history by increasing. Beware, though: If you are an authorized user on a credit card in poor standing, your credit score will reflect the credit card’s negative payment history by dropping.
Keep in mind, however, that you must do three things to benefit from becoming an authorized user:

  1. Make sure that the credit card company reports your status as an authorized user to the credit bureaus.
  2. Protect yourself by finding the right account.
  3. Protect the account holder.

Let’s consider these one at a time.
Make sure that the credit card company reports your status as an authorized user to the credit bureaus.
In the past, people abused the power of authorized users, sometimes going so far as to buy authorized user status on a complete stranger’s account so that their credit scores would increase. The credit-scoring bureaus didn’t take too kindly to this, so they changed the rules. Now, they only consider authorized users if they are legitimately related to the account holder. In a best-case scenario, you would share a last name with the account holder, and you would live at the same address. At a minimum, make sure you are a relative of the account holder. Otherwise, the credit-scoring bureaus will not recognize your status as an authorized user, and your credit score will not improve.
Finally, make sure the account holder asks the credit card company if they report authorized users to the credit bureaus. Some do, but some do not. If the credit card company does not report your information to the bureaus, find another credit card.
Protect yourself by finding the right account.
As I mentioned earlier, your credit score could drop if you become an authorized user on a credit card that is not in good standing. The account to which you are added should have a credit card payment history that is clean. It should also have a credit card balance that never exceeds 30 percent of the credit limit. And if the account holder ever defaults on a payment or causes the balance to exceed the 30 percent threshold, remove your name immediately!
Protect the account holder.
It stands to reason that most authorized users have poor credit, or they would qualify for credit cards on their own. So it also stands to reason that your family members will probably be hesitant about giving you permission to use a credit card. What if you do a little retail therapy and then refuse to repay the debt?
Ensure the account holder that there are ways for you to benefit from authorized user status without actually being able to use the account. For instance, the account holder can shred the credit card that arrives for you, and they can refuse to give you access to the account number. In this way, you will benefit from the credit card’s positive history and create a layer of protection for the account holder.
As well, let the account holder know that your credit histories will not be merged. Your past credit mistakes will remain yours and yours alone. Only accounts that are shared will be reflect on each credit report.
When used correctly, authorized users can see their credit scores jump as many as 50 or 60 points just by being added to the right account. For this reason, we use authorized users to help people with credit repair after bankruptcy, foreclosure, or other financial meltdown.

Pre-Approved Card Credit Offers

If you are like most people, you have received several pre-approved card credit offers in the mail advertising low interest rates, an amazing new credit limit, or other special benefits. You might be wondering how these pre-approved card credit offers will impact your credit score and whether they are a good deal.
Keep in the mind the following points before you send away for these enticing credit offers.
The 1st Thing You Need to Know About Pre-Approved Card Credit Offers
Credit card companies usually obtain your information by paying credit-scoring bureaus (directly or through a marketing firm) to provide a list of consumers with the minimum credit standards for the card. If you are the recipient of one of these pre-approved offers, you may see the words “promotional” and “pre-approved” listed on your credit report. Some people may be swayed by the idea of being pre-approved, but a pre-approved credit card does not mean that you will even be guaranteed to obtain a card. The fine print likely tells you that final approval is determined by your application information.
The 2nd Thing You Need to Know About Pre-Approved Card Credit Offers
A pre-approved card sent to you will not affect your credit score. Credit inquiries made by credit card companies to determine your candidacy for pre-approved offers are considered “soft” and will not be included in your credit score. However, if you decide to sign up for one of these credit cards, you will be subjected to a real credit check, or a “hard” inquiry, and this will cause your credit score to take a slight dip as approximately 10 percent of your credit score consists of the number of hard inquiries you have listed on your credit report.
The 3rd Thing You Need to Know About Pre-Approved Card Credit Offers
Always read the fine print before you choose to open a pre-approved card. Though you may be persuaded by deals such as zero interest for a year on new purchases, the offers are rarely as straightforward as they seem. The language of some of the offers may not really match the reality of the credit card terms. For example, while an offer might boast “interest rates as low as two percent,” you might not fall into the category of people who receive this rate.
The 4th Thing You Need to Know About Pre-Approved Card Credit Offers
If you are considering applying for a loan to make a large purchase—such as a car—within the next year, you should probably avoid signing up for a new credit card. A new credit card can negatively affect your credit score in a few different ways. First, your credit score will decrease when the credit card company checks into your credit score. In addition, 15 percent of your credit score is determined by the age of your credit accounts, and old age means a better credit score. Opening a new credit account will drive down the average age of your credit accounts, reducing your credit score. Lastly, if you have too many credit cards, you may see your credit score drop.
The 5th Thing You Need to Know About Pre-Approved Card Credit Offers
Pre-approved credit cards may also put you at risk for identity theft. A common way for identity thieves to establish a credit account in your name is to intercept your mail and respond to a credit card offer in your name. As a result, your credit might be severely tarnished and worrying about excessive credit scores or too many credit checks will be the least of your troubles.
Because of this threat, the best way to deal with pre-approved credit cards could be to opt out from all offers. You can opt out by sending a letter to one of the three credit scoring bureaus and ask to be removed from their lists, or you can call (888) 567-8688 and ask to be removed from all credit card offers.
Either way, be sure you regularly review your credit report so you can protect yourself from identity theft.
A final note about pre-approved card credit offers: To find the right pre-approved card for your needs, your best bet is to search for a credit card yourself, trying to find the attractive offers on your own and shopping around for the best deal. Avoid signing up for the first offer you; instead, take a look at your other options. Just because something arrives at your door doesn’t mean you should put it in your wallet.