If you are seeking a loan, make sure your credit history is in good standing before seeking a lender. This way you will be assured to receive the most options and favorable terms for your loan. Once you have confirmed your own financial profile is strong, it will be time to conduct some due diligence about your potential lender.

Here are five questions to ask your lender before committing to a loan. There may be additional questions you have pertaining to your specific situation but these questions will get you started in the right direction:

What Is the Loan Requirements/Process?

Before you start completing paperwork, it is important to contact a few lenders to see your options before committing to a loan. You should inquire about the lending requirements they have set including minimum credit score and income amounts. You should also ask about the loan process so you’ll have sufficient expectations for getting your money.

How Is the Interest Payment Calculated?

When you secure a loan, it is vital to understand the interest rate you will be paying back. If you aren’t careful, you can end up paying more in interest than you do on the actual loan. This is especially true with mortgages. Your interest rate will be determined mostly based on your credit history but you need to be sure you ask the lender how the interest will be calculated. Not all lenders use the same calculation and what you don now can hurt you financially

How Does the Repayment Play Out?

When you take out a loan, be assured it must be paid back. How you pay it back is an important consideration. You’ll need to confirm how much is due each month and how long the term of the loan stands. Some lenders will require a direct payment from your bank account while others will allow checks or online payments. Be sure you know your due date, the length of grace periods before a payment is considered late, and if you are allowed to repay your loan early. Some lenders impose penalties for early payoffs because they lose out on interest.

Is Activity Reported to the Credit Bureaus?

Not all lenders will report back to the credit bureaus with your repayment activity so it is in your best interest to ask first. When a lender reports prompt payment information to the credit reporting bureaus, it keeps your credit record up to date and can improve your credit score provided you keep up the prompt payments.

What Happens if I Skip a Payment?

While no one expects financial hardships to come, they often do happen from time to time. If you are having trouble making your loan payment during a month or for a longer stretch of time, you’ll need to know what happens if you go delinquent on your account. You’ll need to understand the consequences as well as the fees associated with late or missed payments.

5 Pieces of Information You’ll Want from Your Lender was created by and is property of American Consumer News.

Managers and coworkers may also be using these sites to determine “problem” workers. In these hard economic times you have to defend yourself from every possible angle, especially when it comes to your credit and livelihood.

If you blog, or post on Facebook, or “tweet” about how hard you were hit in the economy, or how hard bills are to pay, you may be damaging your potential credit. Lenders will determine you’re a high risk and decide not to lend you money. It’s been found that banks are accessing Facebook profiles, and actually reading posts and blogs about people having trouble paying bills. If you’re seen as a high risk borrower, you’ll have higher interest rates than someone with good credit – or it’s very possible that the lender will turn you down for credit completely.

Managers and coworkers may also be on your “friends” list. The significance is that you may be fired for posting negative things about your job on these social networking sites. Most jobs now require you to sign a kind of privacy clause that prevents you from saying anything sensitive to your job on any social site. This is because competitors could use this information against your job; or because it looks poorly on the business to potential consumers who may be reading what you write. To avoid losing your job because you accidentally let secrets slip, or because you bad mouthed a co worker or manager, be smart and don’t use your social networking site to complain about your job.

If you are a manager or owner of a business you should also think about using your social networking site. It’s nice to have one as a business owner because it’s like having a free website with no maintenance, that can be exposed to millions. However, your competitors are using them too, so just keep mum about any problems you are having, as the expression goes, don’t give ammo to your competitors.

In this economy it’s important to consider every aspect that may threaten your livelihood. Too much hangs on what you say on your social networking sites. Avoid blogging about bills, or co workers and managers and rest assured you are safer. Another tip is to keep whatever you say about your work life or financial life as broad as possible, and keep everything anonymous. Keep your social networking sites, play games and chat, just keep in mind that people that affect your financial future may be listening too.

Are Social Networking Sites Hurting Your Credit? was created by and is property of American Consumer News.

The answer is yes and there are many families facing this issue each day. I’m referring to individuals or families that are on the brink of financial disaster. There are millions of people that are right now standing on the slipper slope to financial ruin, living paycheck to paycheck, praying they face no emergencies and all the while making valiant attempts to remain current on their financial obligations. Unfortunately as life would have it some of these people will climb back up the slope and reach more stable ground and others need just one misstep and they will fall.

If you have significant credit card debt and are struggling to make the minimum payment each month it is time to take a hard look at your finances and get some help. Many people prefer not to accept the reality of their situation and continue struggling to keep creditors happy and in an attempt to maintain a good credit score. The fact remains if you have no plan on reducing your debt it is only a matter of time before you miss a payment and before you know it your credit score will plummet and you will still have to deal with paying off your debt.

There are many debt relief options available to you today, in fact companies helping people get out of debt are doing plenty of business right now. Unfortunately many people fail to seek help because they think they can do it on their own or they fear the negative effect debt reduction programs have on their credit score. People also fail to take into consideration the many factors that go into calculating your credit score, such as your utilization of available credit. It stands to reason that if you become pro-active in reducing your overall debt you will have a much easier time rebuilding your credit.

The fact remains that your credit score is vital to your financial future and if you truly wish to have a good score you must first get out from under your pile of debt before you can focus on maintaining a healthy score. Not only will your credit score recover you will be in a much better position to save money, invest in your future and build wealth.   Don’t let maintaining your credit score be a deterent if you feel you need help in getting out of debt.  The reality is this; if you are qualify and are considering a debt relief program your current financial situation is likely already having a negative effect on your credit score.

Credit Score VS Debt Relief Programs was created by and is property of American Consumer News.

• How much money you make, where you work or how long you’ve worked there
• How old you are
• Where you live
• Your race, religion, sex or national origin
• Your marital status
• The interest rates you’re currently paying on any of your accounts
• How much credit you currently have available to you
• Whether or not you are in a credit counseling program
• Child/family support obligation payments

The FICO credit score is used for many things, but it doesn’t quite define who you are.  When employers use the credit score as a determination for hiring, they are also going to need to review other details about you to get a complete picture. 

Lenders start with the credit score, but almost always need further information (including your current employment history, salary, etc) before they can finalize their decision.

This is important to keep in mind because even though the FICO credit score is extremely important – it’s not the magic number that provides all the answers.  If you find yourself with a lower credit score than you’d like, seek credit counseling or debt consolidation services of some kind, since it will help you (and doesn’t get reflected in the score!)

What Your FICO Score Doesn’t Say About You was created by and is property of American Consumer News.

If you are applying for such a position and anticipate a credit check as part of the application process, the best you can do is be up front about marks on your credit, including consistently late payments or charge-offs. Let them know that you acknowledge you have had issues with your credit and that you are working to clear them up. You do not have to go into explicit detail about your circumstances. Many employers would appreciate your honesty.

In the event you are applying for a position that does not deal with money, a credit check is inappropriate, as is any information about credit or financial obligations. Also, keep in mind that a credit check is very different from a background check. A background check is a standard procedure. Information that is already available to the public is used for this purpose but a credit check is not part of public record. Companies must also have a written consent from you to initiate a credit check.

Beyond potential employers, the only other people who can have access to your credit history and information for checking purposes include:

• Banks
• Insurance Agencies
• Credit Card Companies
• Governmental agencies reviewing licensing or special benefits
• Landlords
• Any other third party you give legitimate consent

Make sure you check your credit report regularly for inaccurate information and take a good look at who is checking into your credit with or without your permission.

Can Bad Credit Cost You a Job? was created by and is property of American Consumer News.

For people already facing debt crisis, it may seem like an ideal situation to transfer one credit card balance to another card. It appears to be a simple solution and an easy way to “pay off” your credit cards and allow you more room for additional purchases. Credit card offers come into your mailbox every day with attractively low interest rates on balance transfers. Take some good debt advice, While consolidating several small balances into one single payment may make sense, transferring large balances to card after card does not, especially if you continue to use the card for new charges.

If you transfer balances from one card to another and actually can make a large payment each month to pay down the balance during the low interest period, then this might be a reasonable choice. However, if you transfer the balances with no intention or way of making a large payment every month, it will only create further financial disaster. Instead, consider finding part time employment and commit to having all of your earnings go toward your credit card debt until it is paid off.  If a second job is not possible, review your budget and devote time everyday to cutting expenses where you can. The money saved should be put immediately towards your credit card so it is not spent elsewhere.

If you are interested in consolidating multiple credit cards onto one low-interest card with debt consolidation, do your homework and find a card that is right for your situation. Do not just accept any offer that comes in mail. Explore different cards, different incentive programs and read the fine print for each card you are interested in. There are plenty of credit card offers that will benefit your situation if you chose wisely and refrain from making new charging on your credit cards. Make sure you understand the amount of debt you are transferring and estimate how much your monthly payment will be. Once the balances are transferred, stop using your credit cards. Set aside money within your budget to save for things you need and stop purchasing things on credit you can’t afford.

Setting specific goals for yourself, such as paying off a credit card balance, will allow you to focus and help you to better understand what is necessary to reach that important financial goal and prepare you to work only with the cash you have on hand.

Debt Advice: Why Balance Transfers Won’t Help was created by and is property of American Consumer News.

 THE BASICS

1)      Your credit report is just that…a report of your credit or the money you owe(d).  It does not list utilities or cell phones since you pay those on a month-to-month basis.  It does not merge with your spouses’ credit, but if you have joint accounts with your spouse (or any other co-signer), those accounts will show up on both of your reports…and only in that instance will negatives and positives affect both reports.

2)      If you have a debt that is sold (a.k.a. sent) to a collection agency, that collection agency is going to post a claim of debt on your credit report, which negatively dings your credit score.  If you do not pay off that claim, the collection agency will sell it to a second collection agency and your credit score will be dinged again.  This can happen again and again, each time bringing your score down drastically. 

3)      When the first creditor sells the debt, they do not remove their claim from your report.  It is not their responsibility to do so; it is yours.  You do this by creating a “dispute” with each of the credit agencies asking for a correction.  When you’ve made your dispute, the credit agency contacts the creditor and the creditor has 30 days to deny or verify your claim.  If they do not respond at all, the credit agency will decide in your favor and the item you dispute will be changed or removed from your credit report forever.  If it gets put back on later, you can show the reporting agencies that they removed it, and they will remove it again. 

 STEP-BY-STEP CLEANING INSTRUCTIONS

Step 1:  Pull a 3-in-1 Credit Report with FICO Scores.  Although it is true that you can get your credit report for free every 12 months at websites like FreeCreditReport.com, FICO scores are usually not included and you need to know your scores to know if your score has really improved.  Therefore, it is an excellent idea to pay the extra charge and purchase the FICO scores for all three reports.  It is also a good idea to pay to have the 3-in-1 Credit Report pulled directly from one of the credit reporting agencies’ websites, as you will be able to make disputes online directly for two of the companies.  (Transunion is especially easy to make disputes with.) 

Step 2:  Read Your Report Carefully.  Your credit report is divided into four sections.  The first section includes your personal information like name, address, and place of employment.  The second section is a list of all items hurting your score (such as late payments, accounts sent to collections and collection agencies).  The third section is a list of all credit accounts in good standing.  The fourth section is a list of all inquiries made in the last 24 months. 

Step 3:  Print Out Your Report.  Once you have your credit report on the screen, print it out.  You are going to want to highlight things and make notes, and it’s easier to do this on a paper copy that you can reference later. 

Step 4:  Highlight EVERY Late Payment.  With a Yellow Highlighter, highlight all of the accounts that claim you paid 30, 60, 90 or 120+ days late. 

Step 5:  Highlight EVERY Collection Agency. 

Step 6:  Highlight EVERY Charged-Off Account. 

Step 7:  Begin Your Dispute:  Now that you have highlighted all the negative items on your credit report, you are ready to begin your dispute.  (Disputing online is easiest at Transunion’s or Equifax’s website.  You can also do this by phone…all of the information will be listed on their websites). 

Step 8:  Say, “This Account was Never Late.”  Dispute all items that are 30 days late (or more) by simply stating, “This account was never late.”  By doing so, you will be able to turn negatives into positives without deleting your credit history.  Many times, a creditor will not bother disputing such a simple claim, and it will changed automatically if they don’t respond.  (Remember to reference the account number listed and the creditors name when doing this by mail or phone.) 

Step 9:  Say, “This account is not mine.”  You want to do this for EVERY collection agency you highlighted AND every account that says it was “charged off.”  This way, you can have many of these companies removed and bring your score up quickly.  For companies that still do have your account, they will dispute your dispute and you can then deal with them as outlined in Part 2 of this Series.  (Again, reference the credit account number and the creditor from your report.) 

Step 10:  Submit Your Claim and Wait.  Once you have disputed the negative items on your credit report, the reporting agencies will begin an “investigation.”  Creditors have 30 days to respond to any disputes you made, and if they do not respond, the negative items will be changed or removed from your report.  Often, if you have paid off your balance and are in good standing with a creditor, a disputed creditor will not bother to contest the dispute you are making, thus automatically deciding the dispute in your favor.  The ones that do respond are the ones you may have to deal with over the phone or in writing.

Step 11:  Review and Retry.  Once the 30-day investigation period is over, the credit reporting agencies will send the investigation results to you by snail mail or email.  A new temporary section will appear on your report that lists each individual decision and it will only be visible to you (not to anyone you try to get credit with later).  If some of the items you disputed were not removed, consider disputing them again in a few months.  In the meantime, do a little extra legwork to ensure success on your next dispute. 

BETWEEN DISPUTES – THE LEGWORK

Step 12:  Make contact with creditors and collection agencies.  Let them know what you are trying to do and see if they will cooperate.  Ask them to make a note in your account verifying whatever your claim will be on your next dispute.  (You can dispute these items without making contact, but you have a better chance of improving your report if you can get them on your side ahead of time.)

Step 13:  Change Your Dispute Reasoning.  If you do not believe the same dispute you made in the first go-round will work in the second attempt, change the reason you are making your new disputes.  For example, creditors that were not removed can be re-disputed with “paid as agreed upon.”  If it is not disputed the second time, the item will be changed from a negative to a positive, thereby increasing your score. 

Although this may seem like a lot of work, it actually takes less then one hour to do for most people.  Also, it is a good idea to do this at least once a year to make sure that your credit report only lists the items you want it to have.  If you do not do this regularly, you are going into the credit game blind and you will deserve the bad score you get.

Also, check out the first two articles of this series (Manipulate Your Credit and Get Out of Debt Fast) to really increase your score fast in 30 days.   

RAISE YOUR CREDIT SCORE 200 POINTS IN 30 DAYS: Part 3 – Clean Your Credit Report was created by and is property of American Consumer News.

MAKE A GAME PLAN

Whether you are dealing with good debt or debt that is weighing heavily on your shoulders, it is important to have a game plan when working towards paying it off. No matter where you stand with your credit, your plan needs to consist of starting with the smallest balance and paying that off first.

1. Consolidate your debt as much as possible. Although many people would suggest getting a consolidation loan, it is not always an option if you actually owe a lot of money. Here are two options that can actually be more beneficial.

a. Tap Into Your Home’s Equity: If you have a Home Equity Line of Credit (HELOC) or are able to refinance a home, then this is going to be your best bet for getting out of debt fast. You see, when you get a HELOC or refinance your mortgage and take cash out, you are using the equity in your home to pay off your credit. This is beneficial because a) your interest rate can be as low as 5% saving you a lot more money then leaving balances on a credit card, b) your payments will be approximately 70% less then what they would be if leaving them on a credit card and c) the interest you pay toward a home loan will be tax deductible (whereas credit interest is not) and that tax deduction can save you even more money every year you have it. As an added bonus, transferring balances to your home equity will raise your credit score when it frees up your debt ratio on your credit cards.

b. Get a good deal on a balance transfer: If a refinance is not in your stars, then look to the credit that you do have. Call up your credit cards and ask them for deals on balance transfers. Many times, by simply asking, you can get 0% interest for a minimum of six months, or as little as 3% for the life of the debt. While you’re at it, ask if they will lower your interest rates as well. More often then not, they have no problem lowering interest rates, but you have to ask for it.

2. Start with the smallest balance first. Being able to pay even one card off can feel like a life changing event. Whatever balances you have not consolidated, begin with the smallest balance first. Even though it may not have the smallest interest rate, it is still best to get at least one card paid off. This gives you the option to request another balance transfer and transfer your balances again when the original deals expire.

3. rinse and repeat. That’s just my way of saying…keep going. Consolidate the balances you can, and then pay off the smallest balances right away. Keep asking for lower interest rates, and keep pressing your luck.

4. do try and keep your nose clean. While it may seem tempting to go out and keep charging up a storm, if you truly want to get out debt, you need to spend as little as possible during this period. Whatever you do charge on your cards, pay it all off each month plus whatever extra you can spare. By using the cards instead of your checking account, then paying everything in your checking towards your credit card, you create a good payment history on your credit reports and you lessen the likelihood of bouncing any checks.

THE TRUTH ABOUT DEBT COLLECTORS

Although every state’s laws and rights regarding Consumer Debt differ, all collection agencies have fewer rights when collecting debt then the original company you owed the money too. Not only do they have fewer rights thanks to the FTC, but they also have purchased you debt for as little as $0.10 for every dollar you owed. That means if you owed $1,000, they probably bought the debt for $100. Anything you pay over that is pure profit for them, and they make that profit by harassing and scaring you into paying. Do not let them intimidate you. You are the one with the gold; therefore you are the one that makes the rules. So, here is exactly how to deal with debt collectors so that you can settle for as little as 30% of what you owe.

Here are some other things to know before you settle:

A) A debt collector wants you to pay them NOW, and they will lie to you to make that happen.

B) A debt collector cannot take you to court unless they are located in the same state. This is the rule for the majority of states, and you can find out your exact rights at your local District Attorney’s office.

C) If you don’t wish to speak with a debt collector, simply send them a “Cease and Desist.” If they ignore it and depending on the state, you could have a case against them for harassment if they continue to call you.

D) Credit card debt is unsecured debt, meaning they cannot try to repossess any of your possessions. However, homes, cars and secured credit cards can be repossessed as these are secured loans.

E) Other then mentioned here, the only time a collector can garnish wages is if they have taken you to court and won.

F) They cannot ruin your credit “forever.” Any negatives a debt collector puts on your account is only there for seven years (give or take a year). After seven years, it will drop off and your credit score will go up…unless you have it removed immediately. (I will go over how to do this final step next week.)

THE GAME PLAN FOR DEBT COLLECTORS

1. FIND OUT WHO HAS YOUR ACCOUNT. Check your credit reports and call your credit companies to find out who now owns your account. By making the first step and call them, they will deal with you more respectfully.
2. ASK THEM HOW MUCH THEY ARE WILLING TO SETTLE FOR. Do not be the first to make an offer. The collection agency bought your account for pennies on the dollar and they already know the lowest possible profitable settlement, which could be as little as 30% of your original debt. Let them make an offer as it will likely be much less then you may offer.
3. OFFER THREE MONTHLY PAYMENTS. No company is legally allowed to take more then three postdated checks for an agreed upon amount. If you can get them to settle, they will try to make it an amount you can afford with three monthly payments. Play hardball. See how low you can get them before you give them any bank account information.
4. DEMAND THEY PUT IT IN WRITING. If you do not get the settlement in writing, the collection agency may take your money and sell your account to another collection agency. If you get no proof that your account was settled, you will have to start the process all over again. Be sure to demand this and be insistent. If they tell you they cannot, tell them you will not pay them until you receive it and demand that they at least email it to you (as email provides a digital signature and timestamp).
5. ONCE THE ACCOUNT IS PAID IN FULL, MOVE ONTO THE NEXT CREDITOR. Generally, a creditor will keep your account approximately 90 days before selling it to another collection agency. At least by selling it to someone else, they can make back the money they spent to buy the debt. Therefore, don’t feel you have to call all of your debt collectors at once. Start with the smallest amounts first, and then work your way to the next one. By the end of the year, you can easily pay off four accounts one after the other.

If you follow these steps to clean up your credit, the negative items will fall off your credit report completely in 6 to 8 years depending on the credit agency. However, you can dispute negatives on your credit report and get them removed within 30 days. Next week’s final article (“Cleaning Your Report”) will go over how to do this step by step.

RAISE YOUR CREDIT SCORE 200 POINTS IN 30 DAYS: Part 2 – Get Out of Debt Fast was created by and is property of American Consumer News.

To understand how your credit is rated, you have to know the credit formula and how to apply it to daily decisions. When you understand the credit formula, you will be able to manipulate your current credit whenever you want in order to maintain the best possible credit score. The pie chart below shows you exactly what percentages make up your credit report.

PAYMENT HISTORY (35% OF YOUR SCORE)

30-Day Fix # 1: Bring all of your accounts current

Since 35% of your score is based on payment history, having late accounts currently on your report will hurt your score drastically. Although there is no exact number on how much this can bring your score up, it does calculate a larger part of your score in total, and I have read that being current can increase your score as much as 60 points instantly.

30-Day Fix # 2: Pay all of your accounts within 30 days of the due date.

Most people believe that paying bills late hurts your credit. The truth is…Paying your bills more then 30 days late hurts your credit. The difference is the 30-day grace period that comes with every credit account. If you pay within 30 days of the due date, it will not be reported as late to the credit agencies. This does not mean that you will not have to pay a late fee to your creditor, but it does mean that paying late will not hurt your score unless you are “really late.” Plus, it does not matter how much you pay as long as you pay the minimum required.

DEBT RATIO (30% of Your Score)

30-Day Fix # 3: Pay down your “Revolving Credit” balances

The largest part of a Credit Score is NOT based upon how much money you owe compared to your income. Income is not a factor when calculating your score. Instead, credit reporting agencies look at how much money a consumer owes divided by the amount of available credit, which is your Debt Ratio. The magic Debt Ratio is to owe 35% of what you can spend (or $35 owed for every $100). However, this 35% usually only calculates open “revolving credit accounts.” Home mortgages and car loans do not bring down your credit score; they improve it instead. It’s the accounts that you spend and pay off quickly that affect your score the most. So, by paying your credit card and credit line balances down to 35%, you will bring your score up drastically.

30-Day Fix # 4: Raise your credit limits

Again, Debt Ratio is how much you can owe divided by how much you can spend. Therefore, if you cannot pay down your balances, try going up instead. To be specific, ask your creditors to raise your limits. It will incur a credit inquiry, which can temporarily lower your score in 30 days, but it will also lower your debt ratio increasing your score even more.

CREDIT HISTORY (15% of Your Score)

30-day Fix # 5: Put your paid-off credit cards away

When you are not using a credit card, you should NEVER close the account. Without open credit accounts, creditors do not know how you pay your bills or if you are a viable risk. Since your payment history makes up 15% of your credit score, you want to keep these paid-off accounts open because they will continue to report you to the agencies, although they are now reporting you as “On-Time” and “excellent with credit.” So, having open accounts with zero balances HELPS your credit and shows that you have a credit history. If you have problems with credit, these unused cards will counteract the negatives and will help keep your score afloat. If you close them, the good credit history associated with those cards will soon disappear from your report and affect your score accordingly.

NEW CREDIT (10% of Your Score)

30-Day Fix # 6: Try not to apply for credit unless absolutely necessary.

Having a high credit score does NOT guarantee that Creditors will open accounts for you. Many times, they look at how many credit inquiries you have had within a three to six-month period and how many new accounts you opened recently and make their decision based solely on these two factors. To a creditor, too many inquiries and too many new accounts means you are trying to drive yourself into debt, and therefore, you will not pay them back. Plus, each time you do apply for credit, an inquiry goes on one of your reports and can temporarily lower your credit score as much as 5 points per inquiry. At the same time, credit inquiries fall off your reports after two years. So, by going as long as possible before applying for credit again, you are having inquiries fall off your report (making your score go up) and having fewer inquiries in a short period of time (making you a more viable risk).

TYPES OF CREDIT (10% of Your Score)

30-Day Fix # 7: Get a loan

Having too much of one kind of credit can hurt you because creditors want to know you can handle a wide variety of credit. On-time payments to cars, houses, and credit cards make you appear responsible and credit-savvy. If you don’t own one already, consider buying a house, condo or mobile home. A home loan will not only increase your net worth, but it gives you buying power later on. Creditors LOVE homeowners, and home loans for owner-occupied properties are fairly easy to acquire. However, if a home is not in the stars for you anytime soon, consider financing a car or business instead. A different kind of loan can help bring your score up.

Now, in case you have not figured it out, I am not suggesting that constantly monitoring your credit to make sure it is always “excellent” is the best solution for anyone. In actuality, credit can and should be used wisely to help you invest and grow your net worth. Borrowing against your credit can bring your score down, but if you know that you are about to make a large purchase, you can shift your money and funds back into place and bring your score up for any 30-day period before an application. By doing this…by manipulating the funds you have…you will always be able to qualify for more credit when you want too. Keep that in mind when you read the second article on dealing with collectors and also keep it in mind when applying for new credit.

RAISE YOUR CREDIT SCORE 200 POINTS IN 30 DAYS: Part 1 – Manipulate Your Credit was created by and is property of American Consumer News.

At one time in the recent past, it was possible to see your score drop by 100 points for paying off a delinquent account.  New FICO score calculation formulas prevents “new payments on old debts” being the ultimate cause for a scoring decrease, however, it’s still not safe to assume that paying off the older debt will result in a score improvement. 

Other issues that might arise and hurt your credit when you pay an older debt might include:

- Settling accounts for less than the total amount owed

- Setting up a payment plan

- Inquiring about an old debt may re-set the statute of limitations in certain states

- Inquiring about an old debt may rekindle interest from the creditor in attempting to collect the money

- Some unethical collection agencies may promise “fixing” your credit score if you pay on the debt, which may not happen.

It’s not secret that having an account in charge-off, collections or marked as “delinquent” on your credit score will impact your credit score negatively.  But did you know that it matters more to your score how the original lender shows your account than how the account appears on the report from collections?  In other words, if your original lender is showing the account as a ‘charge-off’ with the balance still owed, sometimes paying off the bill in it’s entirety can result in having that lender mark the account as “paid” and the balance as zero.  This should boost your credit score.

If the original lender shows the account as charged off with a zero balance- your chances of improving the situation are slim- and your score is not going to improve simply by paying the old debt.

Settling

Many people choose to pay a “structured settlement” on old debt through a structured settlement broker.  This typically means that the lender or structured settlement company agrees to accept a lower amount than the total amount due for the account.  While you may feel good that you’ve paid it off, the account is considered closed, and you saved some money the reality of the situation is it will appear on your credit report as a settlement; and that can hurt your score.

In addition, when you settle on an account and pay less than the original amount owed, you have to claim the difference as income on your tax returns that year.  So if you are able to pay half of what you borrowed to settle the account, the other half has to be claimed as income on your tax return that year.

Why Paying Off Debts Might Damage Your Credit Score was created by and is property of American Consumer News.