For many people who’ve experienced financial issue getting credit in order to build your credit back up can become a huge issue. If you’re in this situation, don’t worry, there are still a few good options for you. One of these options that we recommend for fixing your bad credit is opening up secured credit card accounts.
What exactly is a secured credit card? A secured credit card is just like a regular credit card, but with one major difference. Your credit limit is secured with a cash deposit that the company will use if you default on your payments. It is important to understand that having a secured credit card does not mean you don’t have to pay your bill every month. These are not pre-paid debit cards where you spend the money that is in the account. They act exactly like regular credit cards where you are charged interest on your balance and late fees if you don’t make your payments every month!
Now, this might seem like a bad deal to the consumer, however, in order to help you build a good credit score your debtor needs to make sure they are covered in case history repeats itself. Here’s a look at exactly how they work:
You choose a credit limit and make a deposit to secure that credit limit.
The credit card company will issue you a credit card with that pre-set credit limit.
You make purchases and payments just like you would with a regular card.
After you have built a good credit history, you can request that card be converted to an unsecured card and to have your deposit refunded.
Also, if you decide that you do not wish to have that credit card anymore and close the account, the card company will refund your deposit, after any balance owing has been paid of course. Why should you get a secured card?
There are two main reasons: First, if you don’t qualify for an unsecured card, they are fantastic ways to build your credit score… as long as you get the right card. The second reason you should get a secured credit card is that there are a lot of businesses that will not let you use their services if you do not have a credit card. Most car rental companies, for example, will not rent a car to you if you do not have a major credit card. For them, the fact that you have a credit card means that you are less of a risk when it comes to letting you loose in their car. A few words about using your card…
There’s more to credit than just having a credit card. In fact, in order to build your credit, you will need to have between three and five credit cards. You’ll also need to make sure your balance never goes over 30% of your credit limit, even if you pay off the entire balance every month. Using just 30% of your credit limit shows the banks that you are responsible with your credit and are able to live within your means.
The dollar store can feel like a frugal shopper’s dream come true. Everything is one set price, so there’s no need to comparison shop. They’re usually not very busy, so you have plenty of space to browse for deals. Even better, the stock is always changing, so there’s always something new to see. However, like most things, if you’re not careful even the dollar store can be a retail trap of overspending. To help keep you dollar store savvy, keep these tips in mind before heading out the door: THINGS TO CONSIDER 1. Set a budget.
Just because everything is a dollar doesn’t mean you won’t overspend. In fact, the lower price point can lure you into putting more things into your cart than a shopping trip at a regular store. Bring only the cash you plan to spend or set a budget and firmly stick to it. 2. Check for quantity.
One way dollar stores make money is by selling you individual items you’d typically get bundled together such as socks, hair accessories and housewares. So while it’s only a $1 per item, you may have only been spending 75 cents per item in a bundled package at another retail store. 3. Check for quality.
Cheaper isn’t always better. If the item ends up breaking or you have to replace it sooner than expected, then you’re actually losing money. Always check the overall quality of the item and determine whether the cheaper version will hold up as well as the regular priced item. 4. Avoid certain consumables.
Products such paper towels, toilet paper and even food are not good dollar store buys. The reason for this is the quantities are usually off from regular store products. For instance, paper towels have bigger sheets so you use the roll faster. Food is usually in smaller quantities than you’d get at other stores. Light bulbs may be cheaper, but they are not energy-efficient which means you’ll be replacing them move often. Keep in mind the usages and quantity when buying consumables. 5. Avoid food products.
If you’re already a savvy shopper than you know that you can get better food deals with coupons at your regular grocery stores. You’ll also avoid getting inferior products or products with smaller quantities. BEST THINGS TO PURCHASE 1. Paper Products
Keep in mind tip #4 and avoid paper towels and toilet paper. However, other paper products such as greeting cards, wrapping paper, books, office supplies and stationary can provide excellent savings at a dollar store. 2. Holiday & Seasonal Decorations
Seasonal items are fun and help capture the essence of the season or holiday you are celebrating. However, those extra items can add up. Dollar stores typically have a great array of inexpensive alternatives, especially if you’re the creative type. Before doing any holiday decor shopping always stop by your local dollar store to check out what they have. 3. Children’s Toys & Games
Given the fact that most toys don’t hold a child’s interest for more than a few months anyway, the dollar store can be a great resource for toy and game purchases. You’ll want to check quality on some of the products, but most items are fairly good substitutes. Puzzles and workbooks are great dollar store purchases. 4. Household Products
You can find an amazing assortment of household products at the dollar store from home decor to kitchen and tableware and even cleaning supplies. You’ll always want to check on the quality and if it’s worth the specific use you have for it. It may be cheaper to get a $1 baking dish if you know you’re using it for a potluck and don’t want to worry about getting it back. It’s also a good find for children’s dishes and bedding. 5. Storage Items
Storage items can be fairly expensive. Even at discount stores you’ll find yourself paying $5 or more for storage options. At the dollar store every piece is only a $1. They often have unique storage options as well. You’ll wan to visit at different times to check out new products that may make storing things in your home more effective.
How do you use your local dollar store?
A low credit score is bad news, particularly if you are trying to renegotiate the terms of a loan, applying for a home loan, trying to land a job, or searching for an apartment. In today’s environment, you need a high credit score for a slew of reasons. So if you need to build your credit score, don’t worry. Here are three strategies to boost your low credit score, and fast! 1. Correct your credit limits. Almost half of Americans have a credit card with a limit that is incorrectly reported to the credit bureaus. Credit card companies often omit or misreport credit card limits to the credit-scoring bureaus.
This causes your utilization rate (your balance expressed as a percentage of your limit) to appear higher than it actually is. Imagine that pay your Visa balance down to $300. Because your limit is $1,000, your utilization rate is 30 percent, which is the maximum utilization rate the credit-scoring bureaus want you to have.
So your score should increase, right? Not so fast. If the credit card company is only reporting a $500 limit, you will appear to be carrying a 60 percent utilization rate. And this hurts your credit score.
Are you one of the many Americans suffering from this mistake? Find out by pulling your credit report from www.720FicoScore.com. If the credit card companies are inaccurately reporting any credit limit of yours, immediately begin the process of correcting this mistake by using the forms and worksheets necessary to correct this mistake. 2. Become an authorized user on a credit card owned by a family member or spouse. If you have fewer than five credit cards, becoming an authorized user on a family member’s credit card is one of the quickest ways to improve a credit score, so long as you choose an account with a clean credit history. Becoming an authorized user allows you to borrow the account holder’s clean credit history, which will cause your low credit score to quickly increase. 3. Find creative ways to lower your utilization rates. Your utilization rate is the balance you have on each individual credit card expressed as a percentage of the limit. If your limit is $4,000 and your balance is $2,000, your utilization rate is 50 percent. If your balance decreases to $1,000, your utilization rate drops to 25 percent.
The credit-scoring bureaus respond best to people with utilization rates below 30 percent. If you have a high utilization rate, your low credit score can start to improve by getting your utilization rate below 30 percent.
Obviously, you can lower your utilization rate by paying down your balance. You can also lower your utilization rate by transferring a portion of your credit card balances to credit cards with higher limits, or asking your credit card companies to increase your limits.
If you have fewer than five credit cards (the maximum number you should have), you could also open a new credit card that holds some of your debt. Keep in mind that opening a new credit card will cause your score to drop initially, but so long as you keep the balance below 30 percent and make timely payments, your score will start to improve in about six months.
And if you are married, be sure to read my article about how to build credit fast by transferring balances to your spouse’s credit cards.
Why would you want MORE credit cards with lower limits?
The percentage of your available credit that you’re using is called your credit utilization rate. For instance, if your limit is $1,000 and your balance is $430, your utilization rate is 43%.
Credit bureaus weigh this number heavily when calculating your score. The lower the rate, the better. The sweet spot is keeping utilization under 30%. This is often called the 30% rule. Using the earlier example, if your credit limit is $1,000, you don’t want your balance to go over $300.
On-time payments are important, but they don’t tell the whole story. Lenders also want to know if you live within your means, and utilization is how they measure it. Even if you pay off your balance in full every month, letting it climb above 30% before the statement closes can hurt your score.
What if you don’t have a preset limit?
Some cards, like certain American Express products, don’t have a traditional spending limit. In that case, the credit bureau looks at the highest balance you’ve ever charged and uses that as your “limit.” If your highest balance was $8,000, the 30% rule means you shouldn’t let your balance rise above $2,400.
What should you do if you currently exceed the 30% rule?
If your balance is above the 30% mark, you have a few options:
Pay down your balance until you’re under the threshold.
Spread your balance across multiple cards to keep each one below 30%.
Ask your issuer for a credit limit increase (just confirm it’s reported to the bureaus).
If you have fewer than five cards, consider opening a new one to give yourself more available credit.
Want to see which cards give you a fast path back to the 700s? Visit our credit card offers page for a full list of secured and unsecured cards that report to all three bureaus.
FAQ: Does opening a new credit card really help lower utilization?
Yes. Opening a new credit card helps lower utilization because it increases your total available credit, making your balances a smaller percentage of your overall limit. For example, if you owe $1,000 and have $2,000 in available credit, your utilization is 50%. If you open another card with a $2,000 limit, your utilization instantly drops to 25%, without paying down a single dollar.
That said, there are short-term trade-offs. A new account typically triggers a hard inquiry and lowers the average age of your credit, which can cause a small dip in your score. The good news is that this dip usually lasts only a few months. By the six-month mark, the benefits of lower utilization and on-time payments often outweigh the temporary loss of points.
The important thing is that the new account reports to all three credit bureaus and is managed responsibly. If you let balances creep above 30% on the new card, the benefit disappears. If your current cards don’t give you enough room, check out this list of credit cards currently approving our clients.
Key takeaway: Adding a new credit card and keeping the balance below 30% is one of the fastest ways to reduce utilization and improve your credit score.
FAQ: How many credit cards should I have to follow the 30% rule?
Most people see better results with three credit cards, because spreading balances across multiple accounts keeps each utilization ratio low. With only one or two cards, even small charges can push you over 30%, making your score look riskier to lenders.
The “right” number of cards really comes down to how you spend and whether you pay on time. If you take on more accounts than you can keep up with, it can backfire. But having fewer than three cards may hold you back. Adding another account, even a secured card, can give you more room to breathe and help build a stronger payment history.
Key takeaway: Most people do best with three to five credit cards. That’s the sweet spot for keeping utilization low and boosting your score. If you don’t have that many yet, it may be time to check out some new card offers that match your credit profile.
FAQ: Can a secured credit card really improve my utilization ratio?
Yes. A secured credit card counts toward your total available credit the same way an unsecured card does, even though it requires a deposit. Many people start with secured cards after bankruptcy or a financial hardship because they’re easier to qualify for. When used properly (i.e., keeping balances below 30% and paying on time every month) they build both utilization and payment history.
Over time, issuers often convert secured cards into unsecured ones, raising your limit and giving you more room to manage utilization. Here is a list of secured and traditional credit cards that are currently approving our clients.
If you have a very low limit on your only credit card, you need to follow the 30% rule and open new credit cards. Imagine, for instance, that your only card has a $500 limit. Even a $200 balance puts you over the 30% rule. That means you will be penalized by the scoring system even if you pay the card in full each month.
The solution is to pay your balances down before the statement closes, request a limit increase, and open at least two new credit cards.
FAQ: Is utilization calculated per card or across all accounts?
Utilization is calculated in both ways: 1) per card and 2) across all your revolving accounts. Lenders look at whether each individual card is managed responsibly, but they also want to see that your overall balances stay under 30%. One maxed-out card can raise red flags and lower your credit score, even if you other behavior is spot-on.
FAQ: Where can I find credit cards that report to all three bureaus?
Not all credit cards report to all three bureaus, which is critical when you’re trying to follow the 30% rule. If a card only reports to one or two, your score might not improve as quickly as you expect.
The good news is that we’ve gathered a list of cards that are consistently reporting to Experian, Equifax, and TransUnion, and that are currently approving our clients, even those with less-than-perfect credit.
These cards give you the best chance to expand your available credit while building a solid payment history that shows up everywhere lenders look.
Want to have some extra cash around? Frugal spenders have long known that it isn’t always saving on big-ticket items that makes a real dent in saving money. It’s the little things you do everyday that can add up. When it comes to creating personal wealth, taking the time to educate yourself on other options can go a long way to giving you some extra dough to spend on things you’d really like such as that vacation you’ve always wanted to take.
To help get you started in the right direction, here are 20 little everyday ways you can save money. Shopping
Shop outlet stores.
Buy clothes at thrift or secondhand stores.
Shop at discount stores.
Buy food such as bread at local food outlet stores.
Try generic brands of products.
Use customer rewards programs.
Purchase 2-liter bottles of soda instead of cans.
Use coupons.
Cut back on disposable product usage.
Buy used whenever possible.
Eating Out
Share meals when you eat out.
Only order water when you eat out.
Bring your own lunch to work.
Cook at home.
Entertainment
Rent movies from RedBox.
Watch matinee movies.
Potluck family get-togethers or parties.
Utilize the public library or free books online.
Bills
Turn off lights and electronics before going to bed.
Combine cable, internet and telephone services if possible.
Cancel cable and use Netflix.
Extra Savings
Consider memberships for places you frequent.
Wash and vacuum your car at home.
Withdraw money from your own bank accounts.
Avoid overdraft charges.
Cancel unused memberships.
Pay credit card balances in full each month and avoid interest rates.
Unless parents decide to make a concerted effort to begin teaching children about credit, our nation’s children might become victims of a system that is deceptive, manipulative, and cloaked in mystery.
Our banks, educational institutions, and government officials do not make information about credit easily accessible. They do not tell us that no credit is as bad as poor credit. They do not tell us that we might be unable to rent an apartment or secure a job if our credit scores are low. They do not tell us that we could pay thousands of extra dollars in interest if we have a mistake on our credit report.
Banks and educational institutions certainly do not think it is their responsibility to conquer the critical task of teaching children about credit.
Because of all of this, parents would be wise to start teaching children about credit when they are young. Otherwise, parents might be sending children into a world that measures reputation by a three-digit credit score without a wink of knowledge about handling credit responsibly.
Moreover, teaching children about credit, as well as how to manage credit, will help parents raise financially responsible adults, and it will open doors for children.
When I counsel people about how to build credit, they are always shocked when they first hear my method for teaching children about credit. Here it is, and you might think I’m crazy… I think you should add your children as authorized users to one of your credit card account, so long as it is in good standing.
I know this makes me sound crazy, so let me explain.
By adding your children as authorized users to an existing credit card account, you will give your children the opportunity to “borrow” your good credit score, which means their credit scores will begin to increase.
At the same time, you can guard your credit by keeping credit cards away from your children. When you establish your children as authorized users, most credit card companies will send your children credit cards. You can request that the credit card company not issue a card to your children, or you can shred the credit card when it arrives. In this way, your children’s credit scores will benefit from the behavior on your account, and your credit will be protected.
Though I recommend that you add your children as authorized users before they turn 14 years old, you can add them at any age. After all, a two-year-old added as an authorized user will have 16 years of positive credit under his belt by the time he reaches adulthood.
The second part of teaching children about credit is to begin an educational platform whereby your children learn about interest rates, budgeting, savings, and credit scoring. Once your children begin demonstrating that they understand the value of money and are financially responsible, you might want to provide children with credit.
Start by establishing a Bank of Mom and Dad. If your son wants to buy something, lend him the money and create a weekly or monthly payment plan. Then insist on timely payments that include interest, just like a credit card company would do. If your child is late, assess a late payment fee as part of your strategy for teaching children about credit.
Once your child demonstrates continued financial responsibility, consider providing an actual credit card to your teenager. I suggest that you allow your child access to the card only long enough to hand it to a cashier, and only if you are present. This way, the child will not be able to memorize the credit card number, nor will he have prolonged access to your account.
As part of your strategy for teaching children about credit, make sure that your children pay interest and, if they exceed the prearranged limit or fail to make a payment by the due date, you should access an over-the-limit fine or late payment penalty. You should also insist that your children pay you instead of the credit card company. Because you are the primary cardholder, you can preserve your credit by making payments on the account regardless of whether your children are paying you.
When the credit card statements arrive, sit down with your children and explain the statements. Discuss your annual percentage rate, annual fees, late penalties, over-the-limit fines. Ask your children to verbalize their plans for paying their loans in a timely manner.
Expect your children to make mistakes, and help them create plans for correcting their mistakes. If they splurge and end up owing more than they can afford, perhaps they can do extra housework in exchange for an increased allowance. And, of course, teaching children about credit means that you call their cell phones—perhaps at 8 on a Saturday morning—to inquire about any late payments!
An education is an investment in yourself that, if used properly, will always pay for itself many times over. It’s quite possible that Schoolhouse Rock said it best – “It’s great to learn, ‘cause knowledge is power.” Whether you’re attending a four-year college, reading books by experts in your chosen field, or watching seminars on YouTube, acquiring knowledge is one of the best things you can do for yourself.
In order to succeed in your chosen profession, you need to know what you’re doing, and in order to thrive in that profession, you need to understand that knowledge isn’t a static thing. To stay on the top of your game, you need to be constantly reeducating yourself with the newest information that’s relevant to your industry. Think about it for a second. Would a realtor do very well if he wasn’t constantly reading up on the housing markets? Would a hairstylist survive if she was still handing out hairstyles from the 60’s? Could a lawyer do his job if he didn’t bother to look at new laws or at decisions from other courts that might affect his clients?
The answer to all of these questions, of course, is no. In order to keep yourself valuable to your company, you need to be up to date on everything about your job. To maximize your growth potential at your place of business, you should really know more than you need to know. If your boss quit tomorrow, would you have the necessary skills and knowledge to say, “I can do what he did, let me take care of it?” Chances are, the person with that expertise would jump straight to the top of potential replacements.
And this theory doesn’t just apply to your specific vocation. You may want to learn a skill that compliments your chosen profession, like a painter learning to use Photoshop or a car salesman learning how to rebuild engines. Or, it could be that your educational choices are taking you in a completely new direction. Maybe you’re a banker who’s always wanted to know how to restore classic cars. Perhaps you’re a social worker who’s always wanted to learn to play the violin, or a business major that wants to learn to cook gourmet meals.
Regardless of what you do for a living, the point is this – learning new things can only increase your personal worth. Just look at the “Renaissance Men” throughout history. Leonardo da Vinci is most known as a painter, but he was also a sculptor, architect, scientist, writer, musician, and inventor, among other things. Even if the things you learn don’t relate to your work, or even to anything you normally do, just think of the confidence that you will gain knowing that you’ve mastered a new skill or become knowledgeable on an entirely new subject.
So, what’s stopping you? For many people, the barrier they encounter has to do with either time or money. Taking college classes, even at a community college, can require a big time commitment, and after factoring the price of gas, books, and supplies, a single class can wind up costing hundreds of dollars. At a four-year university, the cost of classes is significantly more, with most people having to take out student loans that take decades to repay. The average person can’t hope to be able to spare the time and/or money necessary to partake in either of these options.
But the beauty of the world today is that we don’t have to. There are literally dozens of places where you can educate yourself, on your own terms, at your own pace, about anything you want, for absolutely free. And all of these places can be accessed from your living room. I’m talking, of course, about the Internet. The Internet is the single greatest collection of knowledge and information from every corner of the world, and in this day and age, more and more websites are offering free classes for anyone interested. Let’s take a look at some of the best places to get a free education online: iTunes University
iTunes U is an entire section of iTunes where colleges and universities form around the US can offer online courses to anyone with an iTunes account, completely free! And these aren’t small schools. We’re talking about courses from Oxford, Yale, Harvard, MIT, Washington College, and many more. Of course, no amount of iTunes U courses will get you a degree, but the knowledge you acquire will stay with you for the rest of your life. The Personal MBA
From the website: “The Personal MBA is a project designed to help you educate yourself about advanced business concepts on your own terms.” This site takes a collaborative approach to education, encouraging you to read books from their list of the “99 best business books” and then discuss them within the community in order to educate yourself at your own pace, with the help of thousands of other people doing the exact same thing. Lynda.com
Lynda.com is a site that boasts over 40,000 video tutorials on a variety of technology-based jobs, from photography to audio and video, from 3D visual effects to accounting and online marketing. They fly experts from around the world to their studios in California to produce the highest quality, most informative tutorial videos available on the web. Membership to the site is $25 a month (a side benefit of this is that there is no advertising on the site), and is well worth it, but if you don’t want to pay, there are more than 5,000 of their videos available 100% free. Other resources: FreeOnlineEducation.com Free Educational Resources from Ed.gov GCFLearnFree.org
Another way to pick up an Ivy League education without racking up $100k in loans is through “open courses.” These are actual courses being taught at prestigious universities, available to you for free online. Just a few examples include: Open Yale Courses MIT Open Courses University of Irvine Open Courses UMass Boston OpenCourseWare Webcast Berkeley Carnegie Mellon Open Learning Initiative Johns Hopkins Bloomberg School of Public Health’s OpenCourseWare
As you can see, there are many ways that you can further your education and increase your knowledge without paying anything at all. In these difficult economic times, every dollar counts, and being able to sit in on classes at Harvard or Yale for free is something that should be taken advantage of! The Internet truly is the information superhighway, and learning to harness that information and use it for your benefit is an important skill to master.
For even more links to free education on the internet, check out the 100 Best Websites for Free Adult Education.
This is a justified concern because creditors are unlikely to grant a loan if there’s a history of slow or no payments. A collection account is not as severe as a foreclosure or a bankruptcy, but your credit score will suffer.
The best way to handle delinquent debt is to pay it, right? Wrong!
How Bad Does a Collection Hurt Your Credit?
Paying a delinquent bill could be a double whammy on your credit report. Why? Making a payment on a bill in collection may cause your credit score to suffer again because bills turned over for collection hurt your credit score the most for two years. After that, the decrease in your credit score is not as great.
If you make a payment after two years, you renew the seven-year period in which an item stays on your credit report and your score will be damaged again.
So what do you do about those pesky collections on your credit report? Paying your bills is your responsibility, even if it causes your credit score to suffer.
However, you can and should negotiate with the creditor or collection agencies to minimize the damage.
Negotiate with creditors or collection agencies to pay less than the full amount of what you owe. This will not remove the collections from your credit report, but it will help your pocketbook!
How to Deal with a Collection on Your Credit Report
The best solution is to negotiate for a smaller payment and a letter of deletion.
FYI: A letter of deletion is not a letter of payment. A letter of deletion is what a creditor or collection agency sends to the credit bureaus. It allows the bureaus to remove collections from your credit report. This is obviously the best-case scenario. Your credit score will surge if you can get a letter of deletion that wipes the collection from your credit report!
Qualifying for a letter of deletion is not easy. If the collection item was sent in error to the credit bureaus, it’s much easier to receive a letter of deletion.
The Fair Debt Collection Practices Act limits the ways creditors and collection agencies can contact you. If you believe they have violated the Act, you might be able to get a letter of deletion, so long as you promise to pay the collections on your credit report.
The most common violation of the FDCPA occurs when a collector fails to advise debtors about their right to dispute part or all of the debt within 30 days of first contacting the debtor.
Click here if you would like an introduction to a FDCPA attorney who can help you.
How Will Collections Affect A Credit Report?
How bad does a collection hurt your credit? Here are three things to know …
A collection can lower your score by 80–110 points if you started in the 700s, or 40–50 points if your score was already low. The impact is strongest in the first two years.
Scoring models treat collections differently. Older FICO versions (used in most mortgages) still penalize both paid and unpaid collections. Newer models like FICO 9/10 and VantageScore 3.0/4.0 ignore paid collections and weigh medical debt less.
The best outcome is deletion. Paying a collection doesn’t always raise your score, but it stops calls and lawsuits. If you can negotiate a pay-for-delete, the account can be erased from your report completely, giving you the fastest recovery.
A collection is one of the most damaging marks that can appear on your credit report. How bad does a collection hurt your credit? It depends on your starting score and which scoring model a lender uses.
I’ve spent more than two decades teaching people how credit scoring really works through my free credit education course, 7 Steps to a 720 Credit Score, and I’ve reviewed thousands of credit reports. In every case, one thing is clear: No matter where you start, a collection signals that you’ve fallen behind on payments, and lenders now see you as higher risk.
A collection account isn’t as severe as a foreclosure or a bankruptcy, but it will hurt your score, sometimes by more than 100 points. Understanding the impact is the first step toward limiting the damage and rebuilding stronger.
How Bad Does a Collection Hurt Your Credit?
The damage depends on where your score was before the collection. If your score was in the 700s and you otherwise have a strong history, a collection can drop your score by 80 to 110 points because it signals a sharp financial setback. If your score was poor prior to the collection, the drop might be closer to 50 points or less, since your score already reflects negative patterns.
Remember: Payment history makes up 35% of your FICO score. A collection shows that you let a debt go unpaid for months until it was charged off. That makes lenders nervous, which is why a collection is one of the most damaging things to have on your credit report.
How Can I Rebuild My Credit Score Fast?
How bad does a collection hurt your credit score? It can be a fast drop, but rebuilding your score can happen in just 12 to 24 months!
That said, not all scoring models treat collections the same way. Older FICO versions (still common in mortgage lending) count every collection as negative, regardless of the balance or type of debt. FICO 9, FICO 10, and VantageScore 4.0 are more forgiving. They ignore paid collections altogether and give less weight to medical debt.
Unfortunately, you can’t always tell upfront which scoring model is being used because lenders don’t have to disclose what version of FICO or Vantage Score they are using. What you can do, though, is make an educated guess based on the type of loan.
Here’s how different models treat collections:
Scoring Model
Who Uses It Most
Unpaid Collection
Paid Collection
Medical Debt
FICO 2, 4, 5
Mortgage lenders (FHA, VA, Conventional)
Hurts score
Still hurts
Counts fully
FICO 8
Many auto lenders, some credit card issuers
Hurts score
Still hurts
Counts fully
FICO 9 / 10
Some banks, auto lenders, newer credit cards
Hurts score
Ignored
Weighed less
VantageScore 3.0
Free credit score apps, some lenders
Hurts score
Ignored
Weighed less
VantageScore 4.0
Some personal loan lenders, banks adopting newer models
Hurts score
Ignored
Under $500 not reported
Why Paying a Collection Can Sometimes Hurt Your Credit
To understand why paying a collection can sometimes hurt your score, it’s important to understand that credit scoring models pay more attention to newer information than older information. This makes sense: Your current behavior is a better reflection of your future behavior since your current financial situation is more important in how you will manage future debt.
If you have an unpaid collection that has been idling in the background for a few years, paying it might bring the account into the foreground. In older scoring models, the account won’t reflect good standing, so it could look like you have a current account in collection. Yikes.
The debt isn’t re-aged in terms of how long it stays on your report (collections still fall off after seven years from the date of first delinquency), but the scoring system may treat the update as recent activity and weigh it more heavily in the short term.
Still, paying is often the smarter move because:
It stops collection calls and the risk of lawsuits.
It shows future lenders you’ve taken responsibility.
In newer models, the benefit is immediate.
That said, be smart about how to deal with a collection on your credit report …
How to Deal with a Collection on Your Credit Report
The best outcome is a pay-for-delete agreement. This means the collector agrees to remove the account from your credit report once you pay. Not every agency will agree, but if they do, you get the best possible result: the debt is gone and the mark disappears.
How can you get a pay-for-delete agreement? We suggest saying something like this …
If you can’t get a letter of deletion, here are other strategies to consider:
Negotiate a lower settlement. This won’t erase the mark, but it may save you money.
Dispute errors. If a collection was reported by mistake, you have the right to challenge it with the credit bureaus.
Check medical debt rules. As of 2023, medical debts under $500 no longer appear on credit reports.
And be sure to join our free credit-education course, 7 Steps to a 720 Credit Score, where you will learn how to naturally improve your credit score in 12 to 24 months.
Have other questions about how to handle collection accounts? Check out these Frequently Asked Questions …
FAQ: How many points does a collection drop your credit score?
The exact point drop varies, but Experian has reported declines of up to 110 points for a single collection. The hit is usually sharpest for people with excellent credit because they have more to lose.
Here’s a rough idea of how much a collection might hurt your credit score:
Starting Score
Typical Drop from 1 Collection
750+ (Excellent)
80 to 110 points
680–749 (Good)
60 to 90 points
580–679 (Fair)
40 to 70 points
Below 580 (Poor)
20 to 40 points
Compare that to a late payment. A 30-day late payment might cause a 20 to 60 point drop, while a 90-day late payment can cause 70–100 points. A collection carries the same weight as a 90- to 120-day late payment, sometimes worse, because it signals the account was never brought current.
The good news is that while the initial drop is steep, many people see their scores begin recovering within 6 to 12 months once they start adding new, positive credit behavior.
Key takeaway: A collection can drop your credit score anywhere from 20 to 110 points, depending on where you started, but the damage isn’t permanent. Many people see their scores begin to rebound within a year once they start rebuilding the right way. To adopt the patterns of behavior that will help you rebuild your credit score, enroll in our course, 7 Steps to a 720 Credit Score, a free credit education course that shows you exactly how to add positive credit behavior, fix reporting errors, and climb back to the 700s faster.
FAQ: Does Paying a Collection Help Your Credit Score?
It depends on the scoring model: Newer versions ignore paid collection accounts, while older versions still count any collection account (paid or not) as negative.
FICO 9, FICO 10, and VantageScore 3.0 and 4.0: Paid collections are ignored completely. Once updated to “paid,” the collection no longer hurts your score.
Older FICO versions (including those used for most mortgages): Paid collections still count against you. To the algorithm, the fact that the debt reached collections in the first place is what signals risk, not whether you later paid it off. So, paying them won’t boost your score, and in some cases, updating the status may cause a short-term dip. (Keep reading to learn why this happens.)
That means someone preparing for a mortgage may not see a score increase after paying a collection, but someone applying for an auto loan or personal loan might.
Scoring Models Compared
Scoring Model
Unpaid Collection
Paid Collection
Medical Debt
Who Uses It Most
FICO 2, 4, 5
Hurts score
Still hurts
Counts fully
Mortgage lenders
FICO 8
Hurts score
Still hurts
Counts fully
Many auto lenders, credit cards
FICO 9 / 10
Hurts score
Ignored completely
Weighed less
Some banks, auto, personal loans
VantageScore 3.0
Hurts score
Ignored completely
Weighed less
Free apps, some lenders
VantageScore 4.0
Hurts score
Ignored completely
Under $500 not reported
Some banks, personal loans
The key takeaway here is this: If you’re applying for a mortgage, assume your paid collection still counts. For most other types of loans, newer models are more forgiving. One way or another, join our free credit-education program, 7 Steps to a 720 Credit Score, where you will learn how to naturally improve your credit score in 12 to 24 months.
FAQ: Do all collections hurt your credit the same way?
No, not all collections hurt your credit score equally. The type of debt makes a difference. Medical collections are treated more leniently, with unpaid balances under $500 excluded entirely as of 2023. Credit card and loan collections remain highly damaging and are reported in full. And unfortunately, utility and smaller bills can hurt just as much as larger debts because credit models focus on the presence of a collection rather than the amount.
Here’s a quick comparison:
Type of Collection
Older Models (FICO 8)
Newer Models (FICO 9 / Vantage 4.0)
Medical debt (paid)
Still reported
Removed
Medical debt (under $500)
Still reported
Not reported
Credit card debt
Reported, counts fully
Still counts fully
Installment loans
Reported, counts fully
Still counts fully
Utility bills
Reported, counts fully
Still counts fully
Key takeaway: While all collections are harmful, medical debt is the one area where recent reforms have given consumers some relief.
FAQ: Why does a small collection hurt as much as a big one?
Credit scoring models measure the likelihood of a person being delinquent in the next 24 months, not the balance size. In that way, a $50 parking ticket in collections can hurt your credit score as much as a $5,000 credit card bill in collections.
To the models, both accounts mean the same thing: you defaulted. Even if you’re paying your other bills on time, one collection signals a higher risk of future default. That’s why even small bills, such as a forgotten utility payment or a gym membership, can do outsized damage.
FAQ: How long does a collection stay on your credit report?
Collections stay on your credit report for seven years from the date of the original delinquency. This is the date you first missed a payment and never brought the account current. Paying the collection does not restart the clock, but in some states, making a payment can restart the statute of limitations for legal action.
The good news is that lenders and credit scores care more about recent behavior. Even if a collection is still visible, its effect fades the older it gets, especially if you’re paying on time and keeping balances low on new accounts.
Here’s what you should know …
Years Since Collection
Impact on Credit Score
What to Expect
Year 1–2
Biggest impact
Scores can drop sharply (up to 110 points). Lenders see the collection as fresh evidence of risk.
Year 3–5
Moderate impact
Damage lessens as long as you build positive history with on-time payments and low balances.
Year 6–7
Minimal impact
Older collections carry little weight in scoring models. Account drops off entirely after seven years.
If you are serious about rebuilding your credit score, be sure to enroll in our free credit-education program, 7 Steps to a 720 Credit Score, to learn how to offset the impact of collections.
FAQ: Can you get a mortgage if you have collections on your credit report?
Yes, you can get a mortgage if you have collections on your credit report, but it may limit your options. Different loan programs treat collections differently:
Loan Type
Treatment of Collections
FHA
Collections over $2,000 require review; may need to be paid or explained
VA
May require explanation or repayment plan
Conventional (Fannie/Freddie)
Collections allowed, but factored into risk
USDA
May require resolution before approval
In practice, underwriters often prefer collections to be paid, even if the scoring model ignores them. That’s because unpaid debts raise questions about financial responsibility.
If you’re preparing to buy a home, it’s worth paying or settling collections before applying, especially recent ones. It won’t always raise your score directly, but it makes you more mortgage-ready.
FAQ: Can paying or settling a collection restart the clock?
Yes, paying or settling a collection can restart the clock, but it’s important to understand which “clock” we’re talking about. There are two timelines at play:
The credit reporting clock: Per the Fair Credit Reporting Act, collections stay on your credit report for 7 years from the date of first delinquency (the date you first missed a payment and never brought the account current). Paying, settling, or even making partial payments does not restart this seven-year reporting period. This rule comes from the Fair Credit Reporting Act (FCRA).That said, when you pay a collection, the account updates with a new status date. In older scoring models (like FICO 8 and the versions used in most mortgage lending), this “fresh activity” can cause the collection to be weighed more heavily in the short term, even though the seven-year clock itself does not change.
Then there is the statute-of-limitations clock: This is the period of time a creditor or collector can sue you to collect the debt. It varies by state, often three to six years, but sometimes longer. Making a payment, even a small one, can restart this clock. That means a debt that was about to expire could suddenly become legally collectible again.
Key takeaway: Paying a collection won’t restart how long it stays on your credit report, but it can restart the legal window for a lawsuit. Before paying or settling, know your state’s statute of limitations and consider negotiating a pay-for-delete to get the best outcome. And if you are serious about rebuilding your credit score, be sure to enroll in 7 Steps to a 720 Credit Score, a free credit-education course.
Auto loans: Many auto lenders use FICO 8, which counts both paid and unpaid collections. You might get approved, but with higher rates.
Mortgages: This is where collections hurt the most. FHA, VA, and USDA may require repayment plans for larger collections. Conventional loans will count collections in your risk profile. Some lenders will flat-out deny until collections are resolved.
Personal loans: Approval varies widely. Fintech lenders and credit unions may approve if you’ve paid collections or show strong recent history.
Key takeaway: A collection doesn’t mean automatic denial, but it can limit your choices and cost you more in interest. Rebuild your credit score using the strategies taught in 7 Steps to a 720 Credit Score to qualify for better rates faster.
Ignoring a collection doesn’t make it vanish, but the outcome depends on the type of debt, the size of the balance, and the collector.
Here’s the reality:
Credit damage: The collection will stay on your credit report for up to seven years from the date of first delinquency, whether you pay it or not. The biggest score drop happens in the first two years, and after that the impact lessens over time.
Medical collections: As of 2023, medical debts under $500 don’t appear on credit reports at all. Larger medical debts may still show up, but they’re less likely to lead to lawsuits than credit cards or personal loans.
Collection calls: You’ll still get phone calls and letters, though you have rights under the Fair Debt Collection Practices Act that limit how far collectors can go.
Lawsuits: For smaller debts, lawsuits are less common because the cost of suing is higher than what they might recover. For larger balances, collectors may sue, and if they win, they can garnish wages or freeze accounts depending on state law.
Interest and fees: In some cases, balances can grow, but not always. Some debts are capped once they’re sold.
Key takeaway: If you truly can’t pay, ignoring a collection may feel like your only option, but it won’t make the debt disappear. The collection will age and eventually fall off your report, but you may deal with years of lower credit scores and potential harassment.
For people who have multiple collections or can’t keep up with bills, bankruptcy can be a smarter path. Bankruptcy stops lawsuits and wage garnishments, wipes out most unsecured debts, and allows you to rebuild your credit in 12 to 24 months instead of waiting seven years. If you are curious about bankruptcy, schedule a free consultation with our debt professionals to have your questions answered.
FAQ: What’s the difference between disputing a collection and negotiating a pay-for-delete?
The difference is that disputing challenges the accuracy of a collection, while pay-for-delete is a negotiation to remove a valid debt after payment.
Disputing means you’re telling the credit bureaus that the account is inaccurate, incomplete, or not yours. If the collector can’t prove it’s valid, the bureaus must remove it. Disputes are strongest in cases of reporting errors, outdated information, or identity theft. (If you need help disputing an error caused by identity theft or bankruptcy, be sure to enroll in 7 Steps to a 720 Credit Score for a free review of your credit report and legal support related to errors.)
Pay-for-delete (also called a letter of deletion) is when you negotiate directly with the collection agency. In exchange for payment (sometimes the full balance, sometimes less), they agree to request removal of the account from all three credit bureaus. It works even if the debt is valid, but not every agency will accept it. When it works, you will likely see your credit score improve quickly.
Strategy
When to Use
Cost
Success Depends On
Result
Dispute
If the collection is wrong or not yours
Free
Collector failing to verify
Deletion if successful
Pay-for-delete
If the collection is valid but you want it removed
Payment (often less than full)
Collector agreeing in writing
Deletion if honored
Key takeaway: Disputing a collection is your right under the Fair Credit Reporting Act. Pay-for-delete is a negotiation tactic. Both can remove a collection, but disputes only work for errors, while pay-for-delete can sometimes remove valid debts.
Yes, but only if the collection is inaccurate, incomplete, or can’t be verified. Under the Fair Credit Reporting Act (FCRA), you have the right to an accurate report. If a collector can’t prove you owe the debt, the bureaus must remove it.
An error might be removed if:
The debt isn’t yours (identity theft or clerical error).
The amount reported is wrong.
The collector can’t produce documentation proving the debt is valid.
The debt is older than seven years and should have already fallen off.
If you need help disputing an error caused by identity theft or bankruptcy, be sure to enroll in 7 Steps to a 720 Credit Score for a free review of your credit report and legal support related to errors.
To dispute a collection, submit a formal challenge to the credit bureaus (Experian, Equifax, and TransUnion) stating that the account is inaccurate, incomplete, or not yours. Under the Fair Credit Reporting Act (FCRA), the bureaus must investigate within 30 days and remove the account if it cannot be verified.
Here’s how to do it step by step:
Go to AnnualCreditReport.com, the government-approved site for receiving free copies of your credit report from all three bureaus. Pull your Experian, Equifax, and TransUnion credit reports.
Look for any account that you don’t recognize, debts already paid, duplicates, or anything reporting incorrectly.
Collect documents like payment records, correspondence with the creditor, or identity theft reports.
Submit a dispute. You can do this online through each bureau’s website, by mail, or by phone. Send the disputes via certified mail, or file them online.
The bureau will contact the collector to verify the debt. If the collector doesn’t respond or can’t prove it’s valid, the account must be deleted.
You’ll receive an update. If the collection is removed, your score may rise quickly. If it remains, and you believe it’s still inaccurate, you can escalate by filing a complaint with the Consumer Financial Protection Bureau (CFPB) or consider legal help.
You can also consider enrolling for free in 7 Steps to a 720 Credit Score. If you’ve been through bankruptcy or are a victim of identity theft, you will receive a free review of your credit report and legal support to help with disputes.
Key takeaway: To dispute a collection, pull your credit reports from AnnualCreditReport.com, identify errors, gather supporting documents, and file disputes with Experian, Equifax, and TransUnion online or by certified mail. The bureaus must investigate within 30 days and remove the account if it cannot be verified.
FAQ: Should I dispute a collection account that is valid?
No. If the collection is valid, disputing it usually won’t work, and it could even backfire. The Fair Credit Reporting Act (FCRA) gives you the right to dispute items that are inaccurate, incomplete, or that can’t be verified. But if the debt is yours and it’s being reported correctly, the credit bureaus will almost always verify it and leave it on your report.
And here’s the kicker: Filing too many disputes, especially on valid accounts, can make the bureaus flag your file as “frivolous.” That makes it harder to get real errors corrected in the future.
If the collection is valid, your best options are:
Negotiate a settlement (possibly for less than the full balance).
Ask for a pay-for-delete agreement, where the collector removes the account from your report once you pay.
Consider bankruptcy if you have multiple collections and unmanageable debt. Bankruptcy wipes out most unsecured debt and can set you up to rebuild your credit faster than years of struggling with collections.
Key takeaway: Disputes are a powerful tool for fixing mistakes, not erasing accurate negative items. If the collection is valid, focus on resolving it strategically instead of disputing it.
There’s nothing quite like the rush of getting something new, especially if it’s something you’ve wanted for a while. In today’s economy, many people are suffering and dealing with financial issues that they’ve never had to face before. In an effort to lift up their spirits, retail therapy has become the new chocolate. It’s almost as if as a nation we’ve begun to think if we don’t spend it while we have it, we might never get the chance again.
The upside of this is that there is a solution, and it doesn’t always mean cutting out shopping. If you’re in the process of building your credit or paying off debtors, you still need to feel like you’re able to “buy” things without putting a damper or another black mark on your finances. That means paying a little more attention to how and why you buy and trying different ways to get that “new” feeling without having to make a purchase.
To help get you started, we’ve compiled a list of ten alternatives to retail therapy. Our goal is to provide you with alternatives that not only feel good, but are also light on your wallet. Breaking The Habit by Staying Home
What has made us into a commerce society? Often, one turns to shopping just because it’s something to do, and for others it’s become a habit – simply a part of their lifestyle. To help break the habit, consider these alternatives: Night Out at Home
Instead of going out to dinner or out to enjoy the nightlife, consider staying in with friends instead. A party or get-together is significantly cheaper and more rewarding experience than going out. Have everyone bring something to contribute and enjoy your time together. Movie Night
With Netflix and Redbox, home entertainment has never been cheaper. Get together once a week to watch a TV series on Netflix or make it a movie night with $1 movie rentals from Redbox. Game Night
Whether your cup of tea is board games or video games, getting together for a little friendly competition is always an inexpensive night out. This works great in a group or for couples as a date night. You can make it a weekly night out by switching up genres or games each time you get together, and by having a different person or couple host each week. Host a Make Your Own (Something) Night
Instead of taking expensive cooking or hobby classes, considering taking a stab at learning something new with a group of friends. Break down the cost of all the materials needed and split the expense between everyone attending. Have someone designated as the “guide” for the night and have fun trying something new in a comfortable environment. Going Out On A Budget
When it comes to going out, expenses can add up quickly. Avoid overpriced escapes with these economic alternatives. Going Natural
Nature is a beautiful and free commodity that we can always take advantage of. Go for a hike, go on a photography walk or just enjoy the sunset. Picnics in the park, frisbee golf and bird watching are also excellent examples of using Mother Earth’s resources to create fulfilling experiences. If you’re feeling up to a longer excursion, consider camping as a great alternative
to a hotel getaway. Get Physical
Many forms of exercise are inexpensive and entertaining ways to spend time. Get in shape and have fun doing it with activities like enjoying a bike ride, roller blading by the beach or lake, scenic walks or playing sports with friends. Local Events
Many cities have free local events that offer a nice entertainment alternative. It’s a good way to support your local community and have a great time meeting people in your area or just getting out to enjoy something new. Community-Based Stores
With the economy on a downward trend and the increased competition of discount stores, local retail stores have had to turn to new methods to attract customers. One trend is hosting in-store events. Local wine or gourmet shops hold free (or nominally priced) wine or food tasting events. Bookstores have readings and author meetups. Game stores hold game nights and tournaments. Home improvement and craft/hobby stores hold free (or nominally priced) lessons. Call around or visit your local stores’ websites to find out what events might be occurring. Purchasing Power
When there’s no way around it and you absolutely need to go shopping, consider these tips to avoiding overspending. Trade In for Something New
Many stores that sell used products will buy your used items for store credit or sometimes even cash. Clean up some extra space in your place and trade up for something new by going through your older items. Books, music and games are all excellent trade-in items. You can also use services such as eBay to do this as well, only using the money you make from selling items to purchase newer ones. Buy Used
Save the environment and your pocketbook at the same time by buying used. The items may not have that fresh new feel, but they are definitely a lot cheaper, and most used stores and thrift stores have fairly good standards in what they accept. This is an excellent option for clothing, books, children’s toys and furniture, exercise equipment and home decor. Set A Budget & Stick To It
The biggest problem with shopping is the tendency to overspend. If you only bring the exact amount of cash you desire to spend with you, all temptation to pick up that extra item at the check stand is removed. Use the Barter System
Sometimes, focusing on how to get money to get what you want is the wrong way to go about things. If you open yourself up to new possibilities, there could be quite a few alternative ways to get what you really want. In many cases, you might be able to swap services with someone to get what it is you need. Maybe you need your lawn mowed weekly. Perhaps that person needs a service you can offer in exchange. Never be afraid to think outside the box or to just ask someone for another solution. They are probably in the same situation as you and would welcome an alternative to getting what they want as well.
Remember, that the focus isn’t always on finding the cheapest or most inexpensive way of doing something. It’s about finding the richest experience for yourself at a smart expense. Think about your own lifestyle and what makes you happiest. Now, search for creative ways to keep those experiences while paying less to have them.
Credit is a tricky subject. Everyone thinks they know the right thing to do, and everyone seems to be an expert. The fact is, there are a lot of myths and untruths about the way your credit score is compiled. The biggest and first mistake most people fall for is believing that no or little credit equates to good credit. This couldn’t be further from the truth.
Imagine someone you didn’t know came up to you and asked if they could borrow money from you. They promised they’d pay it back to you in a week. How would you know they were responsible or even ethical enough to return your investment? Now, let’s say a trusted friend you’ve known for years came up to you and asked you for the same favor. Your response would more than likely be quite different than the one you had towards the unknown person.
When you have little or no credit, credit bureaus view you as the stranger asking for money. They have very little information on whether you are a good investment and whether they are likely to see a return. You have to become like the trusted friend and create credit history to have a valued and trusting relationship.
This doesn’t mean go out and apply for multiple credit cards and start taking out loans. While you need to show credit history, you also don’t need to go into debt. To create a good credit score, you need at least three credit cards with balances below 30% of your credit limit and an installment loan.
Now, you may be thinking that credit isn’t really a big of deal and you don’t want to have credit cards and loans because they are a hassle. This way of thinking can hurt you financially more than you know. Your credit score is used to determine a number of things including, believe it or not, your automobile insurance and even your job worthiness.
When it comes to purchasing a house, your interest rate is determined by your credit score. This means you could be paying thousands more for your home because of bad credit decisions. Think about this:
On a $300,000, 30-year fixed rate mortgage, a person with poor credit (below 620) would pay $589 more a month than a borrower with a 720 credit score. That’s $589 a month! Imagine what you could do with an extra $7,068 a year. You could buy a new car, save for your child’s college tuition or with wise investments, double, triple, or even quadruple the money!
The bottom line is, your credit score can either help or hurt you financially. Learning the ins and outs of how to maintain a high credit score will give you a great return on your investment of time and research. It may even help you live the life you dream without overextending yourself.
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An education is an investment in yourself that, if used properly, will always pay for itself many times over. It’s quite possible that Schoolhouse Rock said it best – “It’s great to learn, ‘cause knowledge is power.” Whether you’re attending a four-year college, reading books by experts in your chosen field, or watching seminars on YouTube, acquiring knowledge is one of the best things you can do for yourself.
