Among the most-asked questions about credit scores is this: What do I do about my credit score if I have a collections on credit report?
For sure, having a collection account on your credit report is a big deal. Creditors will be unlikely to grant you a loan if you do not pay your bills. Though a collection account is not as big of a deal as having foreclosure or bankruptcy facts on your credit report, your credit score will suffer.
And though it sounds crazy, making a payment on a bill in collection might cause your credit score to suffer again. Bills that have been turned over for collection hurt your score only a bit after two years, but as soon as you make a payment, your score will be damaged again. As well, making a payment renews the seven-year period in which an item stays on your credit report.
So what do you do about those pesky collections on 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.
Especially in today’s economy, you might be able to negotiate to pay less than the full amount of the bill. Though this doesn’t remove the collections from your credit report, paying a lesser amount can surely help your pocketbook!
Better yet, consider negotiating for both a smaller payment and a letter of deletion.
Not to be confused with a letter of payment, a letter of deletion is basically a letter they send to the credit bureaus saying that the bureaus should remove the collections on 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 tricky, though. This technique will work best if the collection item was not correctly sent into collections.
The Fair Debt Collection Practices Act limits the ways creditors and collection agencies can contact you. If you believe that 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 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.
Category: CREDIT BLOG
Closing Credit Card Accounts
As part of your plan for learning how to build credit, you might wonder if you should start closing credit card accounts. After all, if you have more than five credit cards, you have more than the ideal number.
True, credit scoring systems are happiest if you have no more than five credit cards. But before you make that call to the credit card company, be aware that closing credit card accounts can have a major impact on your credit score. Keep in mind a few basics about owning credit cards.
Fifteen percent of your credit score is derived from the age of your credit accounts, with older credit accounts giving you a better score. This part of your credit score is based on the average age of your accounts. As a result, every time you terminate older accounts, you drive down the average age of your accounts considerably and risk decreasing your credit score.
You should also consider how closing credit card accounts will affect the portion of your credit score that considers your credit card limits and balances. Your “utilization rate” is the ratio of your credit card balance against your credit limit, expressed as a percentage. If you have $800 of debts on a credit card and your available line of credit is $2,000, your utilization rate is 40 percent. Since credit-scoring bureaus reward people who have utilization rates below 30 percent, you should try to always keep your utilization rate under that threshold.
Closing credit card accounts can impact your utilization rate in a couple of ways. First, if you decide to cancel a credit card and transfer the remaining debt to another card, you may cause the utilization rate on the second card to rise sharply, which will cause your credit score to drop. Even worse than transferring a balance is leaving a balance on your card after canceling the account. If you leave a $700 balance on the canceled card, your utilization rate will suffer dramatically since the limit on the card will be $0.
So what is the plan for dealing with a bunch of credit cards? Even FICO agrees that closing credit card accounts is a bad idea. Your best bet is to keep all of them active but pay them off every month. You can even find ways to live debt-free and keep your credit cards active. A steady history of payments will demonstrate to credit-scoring bureaus your ability to manage your accounts and will eventually improve your credit score. Pay special attention to the cards with the highest limits, oldest ages, and best interest rates. Be sure to keep these cards active, maintaining a utilization rate below 30 percent.
A final note: Retail credit cards (those associated with a specific store, such as Bloomingdales) are an exception to the “keep-them-open” rule. Keeping a balance on these cards may be difficult since you probably do not need to buy something from these stores each month. Letting a retail account go inactive may not be the ideal choice, but it should not be a cause for alarm unless it causes your credit score to drop, in which case you might be able to reactivate the card with a simple phone call.
How to Build Credit Fast
People regularly ask me for tips on how to build credit fast. Among the usual—paying down credit card limits and becoming authorized users—I tell spouses to leverage each other’s credit scores.
For a variety of reasons, you might need to learn how to build credit fast. Maybe you are applying for a loan and want to secure lower interest rates. Perhaps you are a candidate for a job at a company that runs a credit check before hiring new employees. (After all, 60 percent of companies run a credit check at least some of the time.)
If you have a balance that exceeds 30 percent of the limit on a credit card, you can transfer a portion or the entire balance to your spouse’s credit card.
This is among my favorite tips for how to build credit fast because it makes a huge difference. With the credit scoring systems calculating outstanding debt as 30 percent of your credit score, your score will quickly increase if you lower your outstanding debt. You can then walk into the loan application or job interview with low personal debt and a higher-than-usual credit score.
Though you might lower your spouse’s credit score, you can quickly “buy back” the debt using your credit cards once you secure the loan or job. Of course, you will need to repay the favor if your spouse ever needs tricks for how to build credit fast!
Are you a Father with a Daughter? Then, you will appreciate this….
As many of you know, I have four kids, all less than four years apart. My wife Lily is a true super star.
So I went to my daughter’s preschool to read to read to her class. As all the kids gathered around, instead of my daughter sitting with her classmates, she wanted to crawl up next to my leg and sit there.
While I was reading, I didn’t even realize what was happening until I saw this picture my wife took:
Isn’t this the most precious picture you have ever seen? It melts my heart… I’m the luckiest man alive.
She didn’t want to watch “Dad” read…. she wanted to just be close to “Dad.”
Tell me what this picture says to you….
