Will Paying Off an Unsecured Loan Raise My Credit Score?

Reader Question: Will paying off an unsecured bank loan immediately raise my credit score?

Making regular payments on the loan over time will certainly help your credit score. But paying the loan off completely won't make as much of a difference. Only one way to find out, if you're really curious -- check your score about a month after you pay off the unsecured bank loan, and compare it to where it was before.

Check out the FICO scoring chart here on this website, and you'll see that payment history influences your credit score more than any other single item. So if you've been making your payments on time for the unsecured bank loan you have, that's a big plus.

With that being said, the most important thing is to ensure the account gets removed from your credit reports after you pay off the unsecured bank loan. Or, if the account still appears on your report, the status should be changed to reflect the fact that you paid it off. In other words, you want your reports to paint an accurate picture of your financial status.

Paying the loan off will also help you improve your debt-to-income ratio (if your income stays the same), because you'll be eliminating one of your debts. And this alone is worth striving for. Your DTI ratio is one of the top three things a mortgage lender will look at when reviewing you for a home loan.

Credit Card Debt Settlement When You Cannot Pay Your Bills

Reader Question: I am in financial crisis and cannot pay my overdue credit card bills. Is there any way the card companies will lower the interest rate or let me pay less? Or will they be able to settle in some kind of way?

There are always ways to settle credit card debt. Just keep in mind that any form of debt settlement will have a negative impact on your credit score. Anytime you hear the word "settle" used in this context, it means you are paying less than the full amount owed. For many people, this ends up being the only viable option. And if your credit score is taking a hit anyway (from all of those overdue bills), then a credit card debt settlement may be something to consider.

I usually recommend settlement as a last resort, or at least a secondary option after you've tried other things. The first and best step is to come up with a budget that allows you pay your credit card balances in full. But when the debt becomes too large, with too much interest on top of everything else, this can sometimes be difficult.

Credit card companies will often agree to settle the outstanding debt in some way. In their eyes, some kind of payment is better than none at all. Often, this type of settlement involves a lump sum payment or monthly payment plan on the part of the customer, and in exchange the card company will waive some of the fees and/or interest. In some cases, the fees alone can account for 30 - 40% of the overall balance, so it's a pretty significant reduction on their part.

If I had to create a scale of best options to worst options for handling credit card debt, it would look something like this:

• Best option - Managing finances to avoid debt accumulation.
• Second best - Creating a payment plan to pay down the debt.
• Third best - Settling the credit card debt in agreement with the card company.
• Fourth best - Filing for bankruptcy.
• Worst option - Ignoring the problem altogether.

This shows you where I would place credit card debt settlement in the grand scheme of things. It's not the best option, but sometimes your options are limited by circumstance. I realize that. I would always recommend working with a nonprofit credit counseling agency first, before attempting any form of settlement.

Here's the difference between these two strategies:

• Credit Counseling - These companies will help you come up with a payment plan and budget that allows you to chip away at your debt. With this approach, the payment will typically go straight from you to the creditor (i.e., you won't send the money to a middle man).
• Debt Settlement - Also referred to as "debt negotiation" companies, these organizations try to arrange a settlement with the credit card company on your behalf. They typically charge up-front fees and will have you make payments directly to them, so they can in turn handle the payments to your creditors. Be wary of these services.

If you do decide to try and settle your debt with the card companies (as opposed to paying the balances in full), you'll need to consider the following:

1. Will you help yourself, or seek professional guidance?

There are private companies and nonprofit organizations that specialize in helping people with debt settlement / negotiation. If you have a large amount of debt, or if you hold credit cards from many different companies, it might be best to have professional guidance.

2. If you seek professional help, watch out for sharks.

Unfortunately, many of the companies mentioned above will take advantage of people in debt situations. Click here to see what I mean. They will make bold promises, such as claiming they can settle all of your debt without having it affect your credit score (nearly impossible). They'll claim that they can help you get your debt paid for only 25% of the total balance due (or 10%, or 30 or 50%). In truth, these companies cannot force a creditor into an agreement. So you need to make sure that any type of credit card debt settlement is approved by the original creditor.

I'd like to think that there's a legitimate credit / debt counseling organization for every bad one. But I don't know if that ratio holds true or not. In any case, there are some legitimate companies who can help you negotiate a settlement with one or more of your creditors.

3. Research debt negotiation companies before using them.

The FTC recommends that you check a company out through the Better Business Bureau and your state Attorney General, before doing business with them. Because of all the credit counseling scams (that used to be much more prevalent in the past), most states in the U.S. cracked down on these companies and began to require licensing. So check with your state Attorney General's office on this. They have an obligation to help you, as a resident and taxpayer.

Does that help you out some? I hope so. If you have a follow-up question, just submit it through the same box where you typed the original question.

Related Q&A sessions:

• Where should I start when paying off credit card debt?
• How do I set up a debt payment plan for overdue accounts?

I Want to Pay Off My Credit Card Debt - Where Should I Start?

Reader Question: I stopped paying my credit cards bills 2 years ago (debt was $14,000). I changed my cell number, moved away from the home I was living in. Now I want to pay the bills off, month my month. What is the best thing that I could do?

Because of the amount of debt you have, you might want to get some credit counseling. Believe it or not, you can get some excellent counseling without paying for it -- or paying very little. For example, the National Foundation for Credit Counseling (NFCC) is a non-profit organization that helps people in situations like yours. From what I read on their website, many of their counseling and training programs are free, or very affordable.

Granted, you could probably do what they would do for you. But sometimes it helps to have a "pro" in your corner, especially when you're talking about a large amount of debt. In this case, a credit counselor would probably help you set up a payment plan to pay off the credit card bills in monthly fashion (as you mentioned in your question).

I'm willing to bet the credit card companies have turned your accounts over to debt collection agencies by now. That's typically what happens when somebody stops paying their bills. So the repayment plan would probably be coordinated through the collection agency, with the credit card company's approval.

As you may already know, however, debt collection companies can sometimes be jerks when you talk to them on the phone. That's why you might want to arrange some kind of payment plan with the help of a credit counselor like the NFCC. I don't work for the NFCC, nor do I get any kind of "kickback" for recommending their services. I've just heard a lot about them in the past, and most of what I hear is good.

Hope that helps. Good luck.

Should I Close Credit Card Accounts When I Pay Them Off?

Reader Question: Should I close credit accounts when I pay them in full?

That's up to you. It's not a question I can answer. If you don't think you'll ever use the accounts again, then it might be wise to close them. Having a lot of open credit accounts can increase the chance of identity theft, simply because you have more data circulating.

Just keep in mind that closing your old accounts can affect your credit score. Sometimes it can even lower your score. As you can see by the FICO scoring chart below, the length of your credit history accounts for 15% of your FICO score (the one most commonly used by lenders). So if you cancel your oldest accounts, you could shorten your credit history.



By paying your balances in full, you have already helped your credit score. Closing the accounts won't make much of a positive difference (if any), but it could potentially have a negative impact by shortening your history. I usually recommend that people keep their oldest credit card account open, even if they plan to close the others. This will help maintain the length of the history, which helps maintain the score. Something to consider.

Also, make sure you never close out a credit card account that still has a balance on it. You seem to realize this already, by the nature of your question. But I thought I would point it out for other readers. By closing an account that still has a balance, you reduce your available limit to zero. This makes it seem as if you've maxed out your credit card ... which in turn can lower your score. So if you do decide to to cancel an old account, make sure it has a zero balance.

Related Q&A sessions:

• Will paying off my bills raise my credit score?
• Paying off collections and debts to improve a score

I hope that helps you out a little. Good luck with your financial future, whatever you decide to do.

I Paid My Credit Card Debt But They Are Still Contacting Me

Reader Question: How long can they collect money for old credit card debts? Some of the stuff coming to me is 11 years old or more. Those records and debts are paid and they keep sending me more.

I'm not sure who "they" are, but if you are referring to collection agencies there are ways to stop them. A collection agency cannot collect on a bill that has been paid or settled in the past. I suggest you read the FTC's rules regarding fair debt collection. Basically, it says to send the debt collector(s) a letter stating that you have paid the debt, along with any supporting documentation you have.

Here's an excerpt from the part about paid bills:

A collector may not contact you if, within 30 days after you receive the written notice, you send the collection agency a letter stating you do not owe money. However, a collector can renew collection activities if you are sent proof of the debt, such as a copy of a bill for the amount owed. -Source

So the first thing you should do is verify that you have, in fact, paid the debts in question. If you're certain of this, then send a letter to the collection agency or credit card company who is contacting you. If I were you, I'd send it by certified mail so you have proof of their receipt. Check out the FTC's website (hyperlinked above) for more information.

Hope that helps.

Will My Score Rise When a Bill Comes Off My Credit Report?

Reader Question: If after 7 years a bill comes off my credit report, will my score go up?

If by a "bill" you mean a negative entry such as outstanding debt or a collection item, then yes ... your credit score will likely go up when that item is removed from your credit report. It might go up a lot or a little, depending on various factors.

Also keep in mind that, over time, a negative item on your credit report will have less of an effect on your score. In other words, negative entries tend to get "diluted" with age. For example, when a collection account is first reported to the credit reporting agencies, that's when it will have the biggest impact on your score. As time goes on, the impact lessens. So by the time that item comes off your report (at the seven-year maximum for most negative items), it may only increase your score a few points.

Other factors that influence the effect:

Is the negative entry an isolated event, or is there a pattern of unpaid bills and collections? If it was a one-time isolated event, your score may increase significantly when the item comes off. If it's part of a larger pattern of unpaid bills and collections, then your score will increase less dramatically when the item comes off -- if at all.

So to sum up -- yes, you will probably see your credit score rise when the negative entry comes off your report. The size of that increase will depend on a variety of factors. Be sure to check your report at that point, to make sure the item is removed. If it's not, you'll need to dispute it with the reporting bureau(s).

How Do I Read My Equifax Credit Report?

Reader Question: How do I read my Equifax credit report?

You start at the top and read from left to right. Just kidding. Here are some of the most important sections of your Equifax credit report.

For the benefit of all readers, let me clarify something first. Equifax is one of the three credit reporting companies in the United States. The other two are TransUnion and Experian. So you actually have three reports. Keep this in mind when you review your credit report information for accuracy -- you need to look at all three of them.

Now on to the question at hand. How to read your Equifax report. Here are some of the key items to look at when you read through the information:

Item 1 - Personal Information

At the top of the document, you should see your personal information. This will include your, current address, phone number, social security number, etc. It's not that big a deal if they have your old address or phone number. The main thing here is to make sure your full name and SSN are correct -- if they are wrong, you could have somebody else's credit / financial data on your Equifax report. It's a fairly common mistake.

Item 2 - Public Records

Reading down through the report, you will probably come to the "Public Records" section next. Here you will any legal judgments that have been made against you. This might include court-ordered foreclosure, a bankruptcy filing, a lien of some kind, or any other legal action. If there is something listed here that is clearly not yours, you should dispute it through the Equifax website.

Item 3 - Account History

This is one of the most important sections in your Equifax report because it counts the most toward your overall credit score. This will be a list of credit accounts you have, and it will also include any items that have been sent to collection agencies in the past. What you are looking for here are (A) accounts that clearly are not yours and (B) duplicate entries.

Now, a duplicate entry is not necessarily the same account listed twice. You are looking for the same account with the same status shown twice. For instance, if two different collection agencies are reporting the same item, and they both have a status of "in collection" ... then you have a duplicate entry situation that should be disputed.

Those are the most important things to look at when you read through your Equifax report data. The article below has some more detailed information on this subject.

Related Q&A session:
How to Read Your Credit Report

Hope that helps. Happy New Year.

Unpaid Medical Bills On Credit Report Until 2009 - Then What?

Reader Question: I never knew I had unpaid medical bills. My credit report says it will stay on there until 2009. What happens to the debt after that?

When you have unpaid bills, the account is typically sent to a collection agency. But since you didn't even know about them, this probably never happened. You would certainly know if a collection agency took over the account (from the hospital or doctor), because they make a habit of calling constantly to seek payment.

So my guess is that the hospital or clinic just reported it to the credit reporting agencies, and that was the end of it. If the unpaid bills are showing up on your credit report, but you were never hounded by a collection agency ... that's probably what happened.

When a negative item such as this hits your credit report, it can only stay on there for a few years. By law, most negative information must come off after seven years. A bankruptcy filing can stay on your report for a bit longer, up to ten years. After that "expiration" date has lapsed, the item will come off your report. This means the item it will no longer affect your credit score -- nor will it be visible to any lenders who check your credit when considering you for a loan.

Of course, you might still owe the debt. It just won't show up on your credit report after seven years. In other words, the debt may remain even though the negative entry is removed from your credit file.

Related Q&A sessions:

• Overdue medical bills and credit scores
• How do hospital bills affect my credit rating?

Hope that helps you out. Take care.

I Paid Two Collection Agencies for the Same Credit Card Debt

Reader Question: How can I get reimbursed for paying the same credit card debt with two different collection agencies?

If two different agencies were truly collecting on the same account, then one of them was in the wrong. It's common for these companies to sell accounts to others in their industry. But for obvious reasons, only one agency can collect on a debt at any given time. So the first thing you should do is research the history of that particular account.

If I were you, I would contact both of those agencies as well as the credit card company. I would want to know (A) which agency first get the account from the card issuer, and (B) which agency ultimately ended up with the account. If you can put this picture together, you should be able to determine which one was rightfully collecting on the debt, and which one was wrongfully collecting. The burden of proof is on you at this point, so you'll have to do this kind of research.

Once you know the history of the collection item, you can dispute the payment with one of the agencies and request reimbursement. If they refuse to reimburse you, then you can file a Better Business Bureau complaint (for free) and consider legal action (for a fee).

Here's a similar question answered at AllExperts.com. The guy who answered this question works for a collection agency. He offers some great advice on how to proceed, in a way that's likely to get results! It's certainly worth a read.

Here's a thread on a legal forum you might want to check out:
http://www.expertlaw.com/forums/showthread.php?t=11064

And another one from a debt consolidation forum:
http://www.debtconsolidationcare.com/forums/two-agencies.html

I hope that helps you out some. Good luck.

How Does Debt Consolidation Affect My Credit Score?

Reader Question: "Between myself and my spouse, we have a total of 9 credit cards totaling about $7,000 in debt. We are looking to consolidate our credit cards so that we can take care of our debt once and for all. My question- Will debt consolidation affect our credit score negatively at all? We are looking to buy our first home in the next 6 months or so and need all the help we can get as far as our credit score is concerned. We want to spend these next few months lowering our debt-to-income ratio and we believe debt consolidation will help. Some friends of ours joke around and say that consolidating debt is as bad for your credit as filing for bankruptcy is. This isn't true, right?"

Response:

No, it's not true. Consolidating and paying off your debt is practically the exact opposite of filing for bankruptcy. In the first scenario, you are taking proactive steps to pay off your credit card balances 100%. In the second scenario (bankruptcy), you are throwing up your hands and saying, "We are broke and cannot pay you back. Sorry."

Keep in mind there are different ways to consolidate your credit card debt, and they have different affects on your credit score:

Some people go through debt management programs that advise them to settle their outstanding balances -- wherein the credit card company agrees to accept less than the full amount owed. This method is commonly used by people who have fallen behind in their payments, been buried under late fees, etc. Any form of debt settlement will have a negative impact on your credit score, because it shows you cannot handle your financial obligations.

This is different from a debt consolidation loan, which typically pays off the full amount of the credit card balance. A consolidation loan shows that you are proactive about your finances, and that you take responsibility for your own debts. This should have little effect on your credit score, if any.

The one thing that might become an issue is the length of your credit history. As you can see by this FICO score chart, the length of your history accounts for a percentage of your overall score. It's a small percentage, but it's still a factor. If you pay off your credit card balances and the close the actual accounts, you could shorten your credit history in the process. So it might be best to pay the balances off via the debt consolidation, but keep one or two of the accounts open -- ideally the oldest accounts. This will help you maintain the length of your credit history while eliminating the actual debt.

All the same, you should keep tabs on your credit score to see what happens to it. In the off chance that it drops slightly, you will at least be aware of it. And then you can do what's necessary to raise your score before buying a home.

Here's the rule of thumb to keep in mind:

• Anytime you pay your creditors less than what you owe them, it generally has a negative effect on your credit score.
• But when you pay them all of what you owe, it generally has a positive effect on your score.

If you think of this from a mortgage lender's perspective (which is relevant to your home-buying plans), it makes a lot of sense. By consolidating your credit card debts, you will save money by chopping down some of those interest rates. You'll also reduce your debt at the same time, obviously, and this has a positive effect on your debt-to-income ratio. In other words, you can use debt consolidation / reduction to make yourself better qualified for a mortgage loan -- if you go about it the right way.

Here's a similar Q&A session you should check out:
Will debt consolidation help me qualify for a mortgage loan?

And here's an article on BankRate.com that explains debt management programs and how they affect your credit score:
http://www.bankrate.com/brm/green/debt-consolidation/basics4-6a.asp

If you plan to use a debt consolidation loan to pay off your credit card balances, I recommend reading the first article (hyperlinked) and skipping the second.

Hope that helps. Good luck.

Can I Raise My FICO Score from 499 to 750 - And How Long?

Reader Question: Is it possible to raise a FICO score from 499 to 750 if pay off all my debts and pay all my bills on time? If so, how long would that take?

To answer the first part of your question -- yes, it's possible to raise your FICO score 250 points. As for how long that will take, I couldn't even make an educated guess. The reason is that there are many variables that affect an individual's credit score (how long is the credit history, how many lines of credit are being used, etc.)

Here are some previous Q&A sessions you may wish to peruse:

How to Raise Your Credit Score Fast in 2009
This person wrote in asking a similar question to yours. In the response, I offered four specific strategies that can help you improve your score as quickly as possible. It includes the things you mentioned in your question, as well as a couple of things you didn't mention.

How Do I Fix My Score as Quickly as Possible?
A similar question to the one listed above, but in this response we will take a look at the FICO scoring model, one item at a time. You can't raise your score effectively until you understand how the scoring system works. This article is a great place to start.

What Is a Good FICO Score In This Economy?
A couple of years ago, you probably could have qualified for the lowest interest rates on a mortgage loan with a FICO score of 650 or above. Today, however, that is no longer the case. In the current economy [and who knows what will happen six months from now], you would probably need a score above 750 to qualify for the best rates on a loan.

If you haven't done so already, you should also review your credit reports (from all three reporting agencies) to make sure there are no errors. According to a study conducted by National Association of State Public Interest Research Groups, 79 percent of consumer credit reports contained errors. So get copies of yours and read through them for accuracy. If you find any mistakes, dispute them right away.

So, to sum up, it's certainly possible to raise your FICO score from a 499 to a 750. But how long that will take depends on many variables, so it's not something I could predict. Still, it's a worthy pursuit.

If you accomplish this goal and would like to share your success story with the readers of this blog (anonymous for your protection), just get back in touch with me later on. I'd love to publish it as a real-life story of credit success. You can reach me through this blog or by using the contact info on the main website. Good luck!

How Do Credit Inquiries Affect My Score?

Reader Question: How many points are taken when a lender views your credit?

I cannot answer that because there are a lot of variables at work. In fact, I'd be willing to bet the creators of the credit scoring models could not give you a definitive answer either. Generally speaking, a single inquiry resulting from a loan application will either (A) not affect your credit score at all or (B) only decrease the score by a few points.

For the benefit of all readers, here's some background information on credit inquiries and how they affect your credit score.

In this context, an "inquiry" is when somebody requests a copy of your credit report. This is commonly referred to as a "credit check." There are two main types of inquiries, and only one of them can affect your score:

• Involuntary inquiries - This is when somebody pulls your credit report and score without your input or request. By law, a business needs a legitimate reason to make such an inquiry. This might include a periodic review of your credit by your card company, an employment-related inquiry, or some other purpose. Involuntary credit inquiries do not count against your score.
• Voluntary inquiries - This is when somebody makes a credit inquiry as a result of your actions, like when you apply for a car loan or a mortgage loan. These types of inquiries do count against your credit score, but usually in a minimal way.

Voluntary credit inquiries fall under the category of "new credit." You can see by the chart below that this category of information only accounts for 10% of your FICO credit score, and the inquiries themselves only make a portion of that percentage. "New credit" refers to the number of recent inquiries that were made, as well as any new accounts / loans that may have come in the wake of those inquiries.



In most cases, one or two voluntary credit inquiries made in this fashion (when applying for a loan) will not affect your score at all. If it does have an impact, it will only lower your score by a few points.

It's not necessarily the inquiries themselves that are taken into account, but the new lines of credit that are opened up. In other words, the scoring models are smart enough to know that people will often "rate shop" to compare offers from different lenders. So they don't really penalize you for this.

Here's what the MyFICO website has to say on this subject: "So if you find a loan within 30 days, the inquiries won't affect your score while you're rate shopping." -Source: www.myfico.com (This comes from the company who created the most widely used credit scoring system.)

If You Make a Lot of Inquiries

If you have an excessive number of voluntary credit inquiries within a short period of time (and I'm talking more than a dozen here), then your credit score might take a bigger hit. This sets off a red flag that you are in some kind of financial trouble, and it puts you into a demographic category of people who are more likely to declare bankruptcy in the future. So your credit score might be lowered much more than "a few points."

Here's what you should take away from this. The normal process of applying for a mortgage loan or car loan will result in voluntary credit inquiries, because you give the lender your permission to pull your credit as part of the application process. In most cases, this has such a small impact on your score (if any) that you shouldn't even worry about it. An excessive number of inquiries, on the other hand, could lower your score significantly.

How Can I Tell If My Credit is Getting Good?

Reader Question: How can I tell if my credit is getting good?

You first need to establish a "baseline" to know if your score is moving upward or downward. Then you would need to periodically check your credit score -- maybe once every six to nine months or so. If you find that the number is going up, then your credit is improving. A higher number is better within this context.

I don't mean to make light of your question, but that's really all there is to it. Find out what your score is now, and then check it again in a few months. Of course, it helps if you're proactive about improving your credit. The number won't go up on its own, at least not significantly. You need to learn what influences the score, and then focus your energy on improving those key factors.

Here are some related articles you may want to review:

Good Credit Score in 2009
This article on our sister website explains how the world of credit and financing has changed over the last year or so, in response to the economic crisis we are dealing with. This is a question many people will have in the new economy -- what is considered to be a good credit score?

How to Raise Your Score Fast in 2009
This article is the perfect follow-up to the last one. It's another topic that will be very popular in 2009, especially among home buyers. In fact, I would go so far as calling this article "required reading" for all consumers.

How to Clear Up a Bad Credit History
If you are asking this question because you have some negative items on your credit report that are dragging your score down, then this article is worth reading as well. It explains the steps you can take to consistently improve your score over time, mainly by addressing the factors that have the biggest influence on your credit.

I hope this answers your question. If not, just type a follow-up question into the same box where you asked this one. Good luck, and happy holidays.

~Brandon

Medical Bill Sent to Collections - How it Affects Your Credit Score

Reader Question: I have a dispute regarding a medical bill and it just went to collections. How will this affect my credit score?

I found some previous Q&A sessions that will help you understand the relationship between unpaid medical bills and credit scores. So instead of answering this question from scratch, I thought it would benefit you more to have a list of the previous questions on this subject.

Overdue Medical Bills and Credit Scores
This person asked a question very similar to yours. How does this situation affect your credit scores? This article outlines the billing process that takes place in most medical offices. So if your account has already been sent to collections you might know all this already. Still, it's worth a read.

How to Dispute Medical Bills on Credit Report
This person obtained her credit reports and found that there were some unpaid medical bills that were sent to collection in the past, and she wanted to know how she could dispute the item. She didn't provide much detail about the situation, but I can assume she wanted to dispute the item because either (A) it had been on her report longer than the allotted time or (B) it was an erroneous entry to begin with.

Removing Unpaid Medical Bills Before 7 Years
Most negative items will stay on your credit report for a period of up to seven years. This is the maximum length of time. By federal law, negative entries must be removed after seven years. This person had some medical bills sent to collection and wanted to know if there was a way to remove them from the credit report before the seven years was up.

You mentioned in your question that you're trying to dispute the account. So it seems you already know the two primary options you have once a medical bill goes to a collection agency. You can dispute it, if you feel there is a billing mistake being made. Or you can pay the bill through the collection company.

Once the account is reported to the credit bureaus (probably by the collection agency), it will appear as a negative item on your credit report and will thus hurt your score. But here's what you should take away from all this: A negative entry that was eventually paid off will have less of an impact on your credit score than a negative item that was never paid off. In other words, by paying off a past debt -- even after it has been sent to collection -- you can reduce the impact it has on your credit score.

And if you do end up paying the bill, it's best to pay it off completely rather than making a settlement for a lesser amount. You'll be helping your score by paying the medical bills off entirely, even if you have to make a series of payments in order to do that.

I hope that helps you out some. Good luck.

How to Set Up a Debt Payment Plan for Items on Credit Report

Reader Question: How do I set up a payment plan to pay off the things on my credit report?

First off, I would like to congratulate you for being proactive about fixing the situation. Debt reduction and repayment has many benefits, but only if you take the necessary steps to make it happen. A lot of people choose to ignore the problem. So it's refreshing to see people doing the right thing once in a while. Kudos!

In most cases, you would work with the company who is reporting / holding a particular account, and you would agree on some kind of debt payment plan. It needs to be something you can afford, obviously. And as long as the creditor is getting the money paid back in some form or fashion, they'll be happy with just about anything. From the creditor's point of view, it's better to get the money back in installments than not getting it back at all.

As an example, let's say I had a store credit card that I stopped making payments on (for whatever reason). After a few months, the store will probably turn my account over to a collection agency and write it off their own books. This is called a charge-off because the store is simply charging the bad debt off and taking the loss. They are also transferring the account to a collection company.

So now I will have two negative items appearing on my credit reports, just for this one account. The store's charge-off will show up on my report, and there will also be an entry labeled as "in collection" from the company that took over the account.

If I wanted to set up a debt payment plan in this type of scenario, I would contact the collection company and work toward some kind of agreement. In most cases, it's best to do this by mail or email (rather than on the phone). For one thing, this gives you a record of communications -- a paper trail, if you will. It also helps you avoid any kind of over-the-phone bullying or harassment.

There are also debt management companies that specialize in creating debt payment plans for people in your situation, if you'd rather not do it yourself. I know that Credit.com offers a free debt consultation you might want to look into. I don't know that much about it, aside from what it says on their website. Learn more here

Related Q&A Sessions:

• Should I pay off my debt in full or make payments?
• Should I pay off my debt to increase my credit score?

I hope that helps you out a little. Good luck with whatever you decide to do.

Can a Credit Card Company Take My House?

Reader Question: Can a credit card company take your house if you live in North Carolina?

A credit card company cannot swoop in and take your house away from you. It's possible, in theory, that they could try to put a lien on the house through a court of law -- but even this is unlikely. Here's why.

If you stop making payments to your credit card company, the first thing they will do is send a notice of overdue payment (and you can probably expect a penalty fee to be assigned at this time too). Eventually, the credit card company will turn your account over to a collection agency. The agency will call you to no end, trying to elicit the money you owe.

It's possible, but extremely rare, for the card company to sue you in a court of law. If they did sue you and won their case, it's possible they could try to put a lien on your house. This would have to be court-ordered by judge. But for people who still owe money on their house (which is most of us), the mortgage lender is the primary lien holder. So if a court-ordered foreclosure took place, the mortgage company would absorb most of those proceeds -- if not all of them. This would leave the credit card company with a big legal bill and nothing to show for it.

Most financial advisers tell people with money problems to protect their home at all costs, since it's generally the biggest and best asset a person has. Sometimes this means defaulting on other things, such as credit card bills ... and then taking care of those issues when you're in a position to do so.

I'm not advocating that you blow off your credit card company. While it's unlikely they could ever take your house -- or that they would even try -- they can certainly make your life worse. They can send your account to collections, which will show up as a negative entry on your credit report. This will drag your credit score down and make it harder to get financing in the future.

Should I Pay a Negative Account in Full or Make Payments?

Reader Question: Is it best to pay a negative account in full or to make payments over time?

That's up to you. If you want the negative item to come off your credit report as quickly as possible, then you'd be better off paying the debt all at once, as a lump sum. If you cannot afford to pay it in full, then you could set up a payment plan with the creditor or collection agency that currently holds the accounts.

So it's a question of budget versus expediency:

• The "all at once" approach will get the negative item removed from your reports sooner, which means your credit score will probably increase to some degree.
• The "over time" approach will delay the removal of the item (and the effect it has on your score).

Your credit report will only be updated to reflect the paid item when it's paid in full -- it probably won't be updated in increments if you pay over time. So, from a reporting and scoring perspective, the benefits will only come with the debt is paid off and the negative item is removed from your credit reports.

If you do decide to pay it off all at once, make sure you're in a good position to do so. For example, consider your income and the chance that it may be affected by economic "forces." Don't dip into any emergency funds to pay a debt off in full. I offer this last bit of advice because we live in very uncertain times, economically speaking.

Related Q&A sessions:

• Should I pay off my debt to increase my credit score?
• How long does it take to make significant improvements?

Hope that helps you out. Good luck, and happy holidays.

I Settled Credit Card Debt But Collection Agency Says I Owe

Reader Question: I settled a debt with a credit card company two years ago and now they send me a letter from a debt collection agency that I owe twice as much. What do I do?

We don't offer legal advice through this blog, so I can only help you with the credit reporting side of this. If the credit card company is once more reporting an old debt that you've previously settled, then it will likely show up as a negative item on your credit report again. But if you've truly settled that debt in the past, and you have the paperwork to prove it, you should be able to dispute the negative item and have it removed from your credit report.

Unfortunately, the burden of proof rests with consumers, and not with the people who report the debt. It's sort of like being guilty until proven innocent -- the reverse of our justice system. And the only one who can prove you innocent is you, or a lawyer acting on your behalf.

When you dispute an item on your credit report, the reporting agency is required by law to investigate the item. If they're findings are in line with your dispute, or if they are unable to verify the item one way or another, the negative item must be removed from your reports.

The first thing you should do (if you haven't done so already) is to research the collection agency's claim to see if it's legitimate or not. If you previously settled the debt in its entirety, and you feel the new claim is illegitimate, then you might want to get some legal advice on the matter. It all depends on what kind of proof of payment you have in your favor.

Paying Off Collections and Debts to Improve Credit Score

Reader Question: If I paid all of my collections off and paid my credit cards down this month will my score improve next month?

I have no way of knowing for sure, but it's certainly possible. The credit scoring models tend to be somewhat "quirky," to be put it nicely. For example, this article on MSN Money explains a situation where a person paid off an old debt, only to have it hurt their score. While such scenarios are rare, it can happen too. Like I said ... quirky.

If I were you -- and I had the means to do so -- I would go ahead with the plan to pay off your collection accounts and pay down your credit cards. In addition to improving your life in general, there's a strong chance this could improve your credit score significantly. Whether it happens by next month or not, I cannot say. But it's possible. I have personally witnessed somebody raising their score by more than 90 points in a couple of weeks, just by resolving some errors on his credit report.

Generally, speaking it's best to eliminate any collection items that are on your credit reports. Such negative entries can stay on your credit for up to seven years, and they will prevent you from achieving your highest score possible.

Paying down your credit card balances is also a good idea in most cases. For one thing, credit cards typically have a high interest rate (compared to other types of financing). They are actually designed to keep you paying for life, if you only make the minimum payment each month.

Also, by paying down your balances, you are improving your credit utilization ratio at the same time. This is a financial term that compares your total available credit to the amount you are currently using. And as you can see by the chart below, it accounts for 30% of your FICO credit score.



The blue area in this chart (payment history) also includes outstanding debt, collection items and the like. So by reducing your credit card balances and settling your collection items, you are improving two of the strongest factors that influence your score. (Here's an explanation of the entire chart if you're interested.)

Personally, I think it's a wise idea to do both of those things. There's a very good chance you'll see an increase in your credit score, and it's even possible that it could start within a month or two.

Hope that helps. Good luck.

Related Q&A sessions:

• Should I pay off my debt to increase my credit score?
• How long does it take to make significant improvements?

Disclaimer: This blog provides financial suggestions and considerations of a general nature only. It does not provide specific financial advice. So you should not make any financial decisions based solely on the information provided here.

If I Stop Paying My Mortgage, What Can the Bank Do?

Reader Question: I sold a property four months ago, and the money is in the bank. Now, my income is not enough to afford my current monthly payments and other expenses. If I stop paying my current mortgage, can the bank take my money in the bank?

No, the bank cannot take the money you have in the bank from the previous sale -- or any of your liquid funds, for that matter. Not unless you used some of that money as collateral on your mortgage loan (which I'm assuming is not the case).

In most cases, when you take out a mortgage loan for a house, the property itself is used for collateral. So while the bank probably can't touch your bank funds when you default on the mortgage, they can certainly take your house away.

If you stop making your mortgage payments, you will eventually go through the foreclosure process. In addition to damaging your credit, this will make it much harder to get another mortgage loan in the future.

If you are having trouble making payments on the home, you should pursue a strategy that lets you avoid foreclosure altogether. You can learn about these options on our main website (see previous hyperlink), and we also have some videos on this subject in the real estate video section of the site.

Hope that helps. Good luck.

How a Debt Write-off / Charge-off Affects Your Credit Score

Reader Question: Is my credit score hopeless if I have write-offs?

For the benefit of all readers, I'd like to explain the terminology being used here, with regard to the write-off and charge-off process and how it affects your credit.

Let's say I have a store credit card that I haven't made payments on in some time. In other words, I have unpaid debt associated with that card. A lender / creditor will try to recoup the payments I owe them for a certain period of time. They will send me letters about the overdue balance, and they will probably turn the account over to a collection agency at some point.

After a few months of trying to get me to pay the debt (and usually at the six-month point), the store will write off the account as bad debt. This is like say, "This person has not paid what they owe, nor do we expect them to at this point. So we will 'eat' the loss." They will then report the bad debt to the credit reporting agencies as a charge-off account. This is when it goes on your credit reports as a negative entry. And since your credit score is based on the information within these reports, this negative item can lower your credit score.

How much it hurts your score depends on several factors, so there's not way I can say exactly. You can be sure your credit will take a hit, though, and you can find out how much by requesting your scores online. By law, negative items such as unpaid debt can stay on your credit report for a period of up to seven years. After that, it must come off.

Keep in mind, also, that a debt write-off and charge-off does not mean the debt is forgiven. You still owe it, and the collection agency and/or the original creditor can still come after you to settle the debt.

How to Negotiate With Credit Card Companies

Reader Question: I've been a model customer for my credit card company for more than ten years. Never missed a single payment in that time. But recently, they more than doubled the interest rate on my card! This seems ridiculous and unjust to me. How can I negotiate with the credit card companies when something like this happens?

For what it's worth, you are not alone in this situation. It's a rising trend right now, and it's rising significantly. In fact, we just posted a response last month for a person who asked why their credit card company was raising their interest rate.

How to negotiate with credit card companies is a popular topic among cardholders right now, and with good reason. Most people are unwilling to accept a doubling in their interest rate -- especially those of use who have been good customers in the past.

I say "us" because this recently happened to me as well. The interest rate on my Citi card went from 11% to just over 19% ... literally overnight. This is increasingly common right now, and in my opinion it's going to get worse over the coming months.

Here's my reasoning for this prediction. The credit card companies are behaving this way because they -- like the rest of the business world -- are in a state of financial panic right now. They have legions of customers who are defaulting on their credit card payments, as a result of economic conditions (job loss, foreclosures, etc.). So they are preparing for the worst by making as much money as they can right now -- even if it means squeezing their best customers with higher interest rates. It's a survival move, pure and simple. Oh, and there's a healthy dose of greed in there as well.

So how can you negotiate with your credit card company if they do this? Well, you could write them a letter explaining how you have never missed a payment and don't deserve such treatment. This could go either way -- it could be ignored, or it could produce a response.

If you do send such a letter or email, I recommend that you threaten to take your business elsewhere (in the form of a balance transfer). Be specific too. Do some research and find a better deal with one of the other credit card companies, and point this out in your correspondence.

I have seen this tactic work for a friend of mind recently. His card company lowered his rate back to where it was before they jacked it up. And his increase was something ridiculous, like 8% to 19%. He is an example of how to negotiate with credit card companies effectively.

What strategy am I using? Well, I am so disgusted by this squeeze tactic that I'm not even giving my card issuer a chance to fix it. I am transferring the balance to a company with a lower rate, and then I'm going to roll it into a mortgage refinance. Goodbye balance, and good riddance credit card companies. I'm not dealing with them anymore. That's my negotiation strategy. :-)

Related articles:

• New credit card regulations approved recently
• Why do these companies target college students?

I hope this answers your question. Remember, you don't have to sit there and take it. There are ways to negotiate with credit card companies to get what you deserve. And when that fails, there are ways to transfer your balance for a lower rate and better treatment. Better still, there are ways to pay off your balance entirely, through debt consolidation loans, refinancing, etc.

Credit Score Ratings Explained - Glossary and Overview

Reader Question: Are credit scores and ratings the same thing? What is a FICO score? And what does it all mean to me, as a home buyer?

It's easy to get confused by all of the different terminology used to describe credit scores and ratings (along with different reports and scoring models). So let me start by explaining the difference between your credit rating and your credit score, and then we can discuss how it affects you as a home buyer.

While they are often used interchangeably, credit ratings and scores mean slightly different things:

• Let's start with the credit rating. This is an overall assessment of the creditworthiness of a person or business. It assesses the level of risk associated with that person or business, from the perspective of the lender or creditor. A credit rating is often expressed as a letter, such as A, A-, B, etc.
• Your credit score is similar to this, but it is expressed as a number. This is a more specific measurement of your creditworthiness. To determine this number, data from your credit reports is put through some kind of scoring model (FICO is the most commonly used). This produces a numerical grade referred to as your credit score.

So when you hear somebody refer to their credit score rating they are typically referring to the numerical assessment mentioned above. This brings up the second part of your question -- what is FICO? This acronym stands for Fair Isaac Corporation, which is the company that developed the scoring model used by most mortgage lenders. Bear in mind there are different models used to produce different credit scores. But the FICO model is the most popular, and it my view it is slowly but surely becoming the standard.

Why is this important to you, as a home buyer? Well, when you apply for a mortgage loan, the lender is going to review all aspects of your financial background. They will look at your income, your debt, your current assets, and yes ... your credit score and overall rating. They will use this information to determine the level of risk associated with giving you a loan.

If you have a high credit score / good credit rating, you'll have a better chance of qualifying for a loan. You will also get a better interest rate on the loan, and this means a smaller mortgage payment -- obviously a good thing. On the contrary, if your credit score rating is low, you'll have trouble getting approved for a mortgage loan. And if you do get approved, you'll end up paying more interest on top of the principal. This is why it's so important to maintain good credit when trying to buy a home. It opens up a lot more doors for you -- literally and figuratively.

Now when you hear somebody refer to their credit score rating you'll know exactly what they are talking about. Two different but closely related things.

New Credit Card Regulations Approved Today

I wanted to take a break from answering credit questions to share some positive news that was announced earlier today. I've written before about new regulations on the credit card companies that were pending approval. I'm pleased to say that those new regulations were approved today by the Federal Reserve Board and other regulatory bodies.

Of course, they won't go into effect until summer of 2010 ... so be on the lookout for price gouging from your credit card company! I predict the card companies will do anything and everything to squeeze their customers between now and July 2010. They are already in some sort of financial panic mode, which is why they've been using all sorts of tricks to jack up interest rates and assign penalties on their customers -- even their most responsible customers.

The new credit card regulations take a number of steps designed to protect consumers from such abuses. This is a developing story, so I'll be adding to this blog post throughout today and tomorrow. If you want to learn more in the meantime, check out this CNN story on the new regulations.

Summary of Regulations

Here are some of the restrictions being imposed on the credit card industry by these new (and long overdue) federal regulations:

• No more double-cycle billing, which was a way to apply extra interest on current bills based on previous bills.
• Credit card companies cannot increase the interest rate on balances unless a paid is late by more than 30 days.
• Customers must be given a reasonable period of time in which to make payments. Hopefully, this will also put an end to their most recent trick of changing due dates in order to impose penalties.
• Credit card statements must clearly show the exact date (and even the time of day) that a payment is due. Any changes to the account must be listed in bold, or published separately from the statement to ensure the customer understands the changes.
• The new regulations will also mark the end of "universal defaults" -- a practice through which the credit card companies would increase the rate on all cards issued when a customer only missed a payment on one card.
  

Credit Score of 505 With Negative Entries - What to Do?

Reader Question: "I am a 22 year old, and when I first turned 18, I applied for tons of department store credit cards and never paid anything. I currently have a credit score of 505 and have 37 negative items on my report, all from 2004. I have since gotten married and become more financially stable, with no current credit cards, no car payments, or anything of the sort. I am having trouble raising my score to buy a house. We would really like to buy a house ASAP as renting isn't working out as well as we had hoped. Do you have any advice to me, or should I just wait until 2011 when the negatives will be removed?"

Based on the information you've provided, there are several things you need to consider:

Item #1 - The Possibility of Mortgage Qualification

Could you even get qualified for a mortgage loan right now, with a credit score in the 505 range? Given the current economic situation, I think anyone with a score less than 600 is going to have trouble getting approved for a home loan. It might be possible, but it's probably unlikely.

So if the answer to this first question is no, you know what you need to do. You'll need to find some way to improve your credit score. More to follow on this.

Item #2 - The Affordability of Your Monthly Payments

If you eventually get approved for a home loan with a credit score below what's considered a good FICO score, you will pay a higher interest rate. This is the key disadvantage of buying a home with bad credit -- it typically means you'll pay a lot of interest. Of course, this means you'll have a larger mortgage payment each month as well. So once you get past the approval question, you have a question of affordability. In most cases, getting a home loan with poor credit is a bad idea.

Item #3 - How to Boost Your Credit Score

If you decide it's best to improve your credit before you apply for a mortgage, then the next question becomes: "How can I improve my score as quickly as possible?" You seem to realize that your negative credit items will come off after seven years (in accordance with the Fair Credit Reporting Act). So this should automatically boost your score by removing that information from your credit reports.

Negative items tend to have less of an impact on your credit score over time. But having so many of them may limit the degree to which your score can increase. Still, it's a good idea to make sure you're doing everything possible in the meantime to maintain a good score and (ideally) improve it. Here's an article that explains how to go about it:

How to Boost Your Credit Score as Quickly as Possible

Item #4 - How Does Your Spouse Factor In?

You said you were married now. How is your spouse's credit, income and debt level? If you plan to apply for the mortgage together, then your spouse plays a role here as well -- hopefully in a positive way. Here's an article that talks about this subject:

My Credit is Bad But My Spouse's is Good

Obviously, I can't tell you what to do in this situation. But I'm willing to bet you already know the answer to that question, deep down inside. I hope this information helps you make an informed decision. Good luck.

Credit Card Companies Changing Payment Due Dates

Reader Question: Why are the credit card companies allowed to change the dates on payment due dates? I'm talking about anywhere from 1 to 6 days. Then I get hit with a late payment fee along with a rise in my interest rate. I do everything electronically and they still find a way to get me, forget the fact that I've never been late in the past and my financial situation has not changed.

You are not alone. Do a Google search for this topic and you'll find a lot of angry folks out there who've been through the same thing. In fact, this happened to one of my relatives recently.

Basically, this is the latest scam being used by credit card companies to bleed their customers dry and protect their bottom line. Did I just accuse them of perpetrating a scam? I think I did. I make no mystery of the fact I dislike the credit card companies. They're not a big fan of my blog either, but I'm willing to accept that. :-)

This is just one of many abuses perpetuated by the card companies over the years. It's also why the federal government is finally -- FINALLY -- taking strong action about it.

In fact, a new piece of legislation is going to be introduced tomorrow. It's one of the strongest laws in quite some time, as far as the credit card companies go. It is intended to put an end to many of the "tricks" these companies have been getting away with. It will also establish a Cardholder's Bill of Rights designed to protect consumers from such abuses. The new legislation is expected to pass without much opposition, and if so it would go into effect in 2010 (about a year from now).

CNN Money just ran a story about this yesterday. You can read it here.

Related Q&A Sessions:

• Credit Card Laws and Consumer Protection
• Why Did the Rate on My Card Suddenly Go Up?

Hope that helps you out.

~Brandon

Getting a Home Loan Before Starting New Jobs

Reader Question: My husband has good credit but very little work history or income. I have bad credit but good work history and income and just finished school. We are moving to another town soon. Is it possible to get a home loan before actually starting our new jobs that will be offering higher incomes?

I think you're going to have a hard time getting a mortgage loan without current income. It may have been possible in the past -- based on your work history, current assets, etc. -- but in this economy there's much less chance of that happening.

My wife and I did something similar a few years ago. We left our jobs in one state and moved to another state. We did not have jobs waiting for us, but we were confident we could find jobs fairly quickly. I'm not sure that we could have qualified for an actual home loan at that point, but we did get approved by a home builder to start the building process on a home. They knew they could've sold it to somebody else if we fell through, so we got the go-ahead to customize the floor plan, choose all the options, and start construction. Thankfully, we got jobs soon after that and were able to qualify for the home loan.

Like I said, that was a few years ago. So I'm not sure that would work in the current market, where many home builders are struggling and laying off employees.

The other scenario is to move into an apartment in your new city (temporarily), and then apply for a home loan when you're actively employed. This will also give you time to learn the "lay of the land" and choose an area where you want to live, if you haven't already decided. I think this is your best bet given the current state of the economy. That's my opinion, anyway.

As for the bad credit / good credit issue, you may want to check out the related Q&A session below:

My Spouse Has Bad Credit - Can We Get a Mortgage?

Hope that helps. Good luck with your move and your new jobs.

How Can I Improve My Credit Without Using Credit Cards?

Reader Question: How can I improve my credit score without using credit cards?

That's an excellent question, and it shows that you already understand something about the world of credit -- that using a credit card responsibly is one way to build a credit history.

It does seem sort of like a trap or a scheme, doesn't it? The credit card companies (scourge of the earth that they are) would certainly want you to think that using their cards is the only way to build up a good credit score. But this is simply not the case. Sure, the responsible use of credit goes a long way toward improving your score. But it's certainly not the only factor.

It's getting easier to establish a credit history and score without using cards. In recent years, the Fair Isaac Corporation (which is the company that created the FICO scoring model) has introduced some new scoring methods that take into account your history of paying rent, making car payments, etc. In other words, it's a way to judge the applicant's financial responsibility without the need for credit card usage. So you should make every effort to pay all of your bills on time. By the way, it's called the "Expansion Score" in case you want to research it.

Taking out a small loan from your bank, and paying it back within the time allotted, is another way to improve your score without resorting to the use of credit cards. With a good payment history on loans, your score will increase over time. According to Craig Watts, public relations manager for Fair Isaac, your credit score will "continue increasing until it reaches the ozone layer."

For many people, this is a favorable alternative to using credit cards. For one thing, most people need a loan at some point in their life anyway. Secondly, you'll probably get a better interest rate on a small loan from your bank than you would get from the credit card companies -- these companies often charge a ridiculous amount of interest, after luring you in with a teaser rate. I'm not saying you should take out a loan if you don't need one. But if you do need one, it's nice to know you can strengthen your credit score by paying the loan back on time.

Opening a checking or savings account (and using it responsibly) can also help you establish a good credit history. This is something that mortgage lenders look at as well, when considering you for a loan.

Here's a relevant article at Kiplinger.com you should check out. It offers more suggestions for improving credit without using cards.

Related Q&A:

• How to Build a Credit History
• How to Raise Your Score Fast in 2009

I hope this helps you out, or at least gives you some things to consider. It's definitely worth further research. I found quite a few articles online when preparing this response, so you should do a little detective work with Google as well.

How Do I Clean Up My Credit Report History?

Reader Question: How do I clean up my credit report history?

That depends on what you mean by cleaning up your history. If you're referring to erroneous information that should not be on your credit report, then you should dispute those errors through the reporting agency that sent you that particular report.

Here are some of the most common errors that people clean up / dispute:

• Credit accounts showing up on your report(s) that are clearly not yours. This is often the result of an identity mix-up.
• Negative information that should have been purged already but remains on the credit report. By law, negative items can only stay on your credit report for 7 - 10 years, depending on what they are.
• Duplicate entries, as when the same exact item is reported twice.

All of these things can be disputed through the reporting company's website, and doing so will help you clean up your credit report history.

For example, if you order all three of your reports and find that the one from TransUnion has a mistake on it, you would go to their website (TransUnion.com) and look for the "disputes" link. Then you would click that link and follow the instructions for disputing the error. It's the same process for the other two companies as well -- Experian and Equifax.

However, if you are talking about negative but accurate information on your credit report, there's not much you can do to clean these items up.

For example, if you had some kind of account sent to collection in the past, and it accurately shows up on your credit report ... then there's really nothing you can do. The negative item can stay there until it exceeds the time limit set by the federal government (see Fair Credit Reporting Act), at which time the item must be removed.

Here's a similar Q&A session you should read. This person used the word "clear" instead of clean, but they essentially asked the same question as yours: How do I clear up my credit history?

Hope that helps. Good luck, and happy holidays.

Does the Free Yearly Credit Report Give You Everything?

Reader Question: Does the free yearly credit report give you everything that is in your credit report?

Yes, because they are one and the same.

By law, you are entitled to one free credit report per year, from each of the three reporting agencies that collect and distribute that information. Keep in mind there are three reports produced by three different companies (Experian, TransUnion and Equifax), so if you want to conduct a truly comprehensive review of your credit situation, you need to get all three documents.

Fortunately, you can request all three of them at once by visiting the official website for this purpose -- AnnualCreditReport.com. This website is jointly owned the three companies mentioned above, and it's the only one recommended by the federal government (specifically, the FTC).

This is what the website looks like, at least when I took this screenshot earlier this morning. Look for the button that says "Request Report" and follow the instructions provided.

Image: Where to get your annual credit report for no charge.

The next question most people have after they obtain their information is, "How do I read it?" In other words, what am I looking for as I sort through the documentation? We have an answer to that question too, and you can find it below.

If you find any errors within these documents, you can dispute it through the company that produced that particular report. It's possible to have an error on one of your reports but not on the other two, because the data doesn't always agree among these three companies. So when you find what you feel is a mistake, you must dispute it through the right company. All of the credit reporting agencies have a "disputes" section of their websites for this very purpose.

Related Q&A Sessions:

• Common questions about the free yearly credit report
• How to read and review your reports for accuracy
  

Hope that helps you out. Happy holidays.

Where to Find Credit Card Debt Consolidation Help

Reader Question: I want to buy a home within the next couple of years (preferably next year), but I have several credit cards that are nearly maxed out. I was considering a debt consolidation plan of some kind to help out with this. Is this a good idea to help me get qualified for a mortgage loan late on? And where can I find credit card debt consolidation help that's legitimate?

You've actually touched on several important issues with your question, so let me address them one at a time.

Will debt consolidation of credit cards help me qualify for a mortgage loan?

It may or may not help, depending on your financial circumstances and the method of consolidation you use. So before I go any further in answering this question, let me state my usual disclaimer. I am not recommending for or against a credit card debt consolidation in your particular case -- that's obviously a decision you'll have to make on your own. The purpose of this blog is to help you gain some perspective on the issue, so you can eventually make a well-informed decision.

Okay. With that disclaimer out of the way, let's press on.

Yes, consolidating your credit card debt can be an effective financial move in general, and it can also help you qualify for a mortgage loan down the road. Most importantly, it can help you improve your life by (A) reducing the excessive accumulation of interest and (B) giving you a path to a debt-free life.

In order to understand how credit card debt consolidation ties into mortgage loan approval, I have to introduce some financial terminology. You may already be familiar with these, but for the benefit of other readers I must explain credit utilization ratio and debt-to-income ratio. Both of these things influence your chance of getting a home loan, and they are both directly related to your credit card debt.

• Credit Utilization Ratio -- Simply stated, this is the percentage of your available credit line that you are currently using. Let's say I have three credit cards, and each of them has a $10,000 limit. That means my total limit across the three cards is $30,000. If I add up all three of my balances (amount owed) and it comes to $15,000, then I'm using half of my available limit. Here, my credit utilization is 50%. And that's not so good! This is one of the primary factors that influence your credit score.
  
• Debt-to-income ratio -- This is another comparison expressed as a percentage, but it compares your monthly gross income to the amount of money you pay toward your debt each month. In other words, it shows how much of your take-home pay goes toward debt payments every month. Mortgage lenders will consider your DTI ratio (among other things) when considering you for a loan.
  

So what do these things have to do with a credit card debt consolidation and mortgage approval? Everything! While they don't show the full picture of your finances, these two ratios do offer a snapshot of how well you manage your finances, how much debt you carry, how much you are currently relying on credit, etc. In other words, they help lenders determine the level of risk associated with giving you money.

Now, let's talk about credit card debt consolidation and how it affects these two items (and your chances of getting a mortgage loan). There are actually several ways you can consolidate your debt, but I'm going to focus on what I feel is the best option in most cases. I'm going to discuss a debt consolidation loan and how it ties into all of this.

Credit card debt is one of the worst kinds of debt to have, especially when you have a lot of it. Based on your question, it sounds like you already know the reasons why. And it can be summed up with one word -- interest. Aside from "payday loans" and other cash-advance tools, credit cards generally have the highest interest rate of any form of debt. Higher than mortgages, car loans, student loans, etc. This is especially true if you've missed payments in the past, in which case the credit card company will usually jack up your interest rate.

Some people have so much credit card debt (with so much interest on top of it), that they'll be paying it off for the rest of their lives. Why? Because people in this situation are typically unable to pay more than the minimum balance due each month. You can never pay off your credit card debt my making only the minimum payment. The system is designed that way on purpose. From the perspective of the card companies, the best kind of customer is the one who has to make payments for his or her entire life! It's sort of like being a drug dealer ... you don't ever want your buyers to kick the habit. You want them for life.

This is the biggest problem with running up a lot of credit card bills. It can be extremely difficult to pay off, because of the interest that accumulates on top of the principal.

This is also where the credit card debt consolidation loan comes into the picture. It could save you a lot of money on interest, not to mention making your life a lot easier. Some people are paying a ridiculous amount of interest on their credit card balances, and when you spread that over multiple cards it becomes staggering. So the idea with a consolidation loan is to combine all of that high-interest debt and pay it off with a single loan -- ideally one with a lower interest rate.

For example, consider the amount of money you could save (and how much easier it would be to pay down your debt) if you replaced four credit cards with 20% interest rates with a single consolidation loan with a 10% interest rate. Suddenly, there is a light at the end of the tunnel.

Now let's revisit the concept of the credit utilization ratio we defined earlier. Let's say you have four credit cards. Three of them have big balances that are near the limits (if not maxed out already), while one of them has a smaller balance. If you use a credit card debt-consolidation loan to pay down the big balances on the three cards, you suddenly have a much more favorable credit utilization ratio ... because you are using much less of your available limit. And as you can see from the chart below, this ratio (expressed in red and labeled as "amounts owed") is a major influence on your overall credit score. Achieve a more favorable utilization ratio, and you could increase your credit score as well. In turn, this would make it easier to qualify for a mortgage loan.



Keep in mind, however, that you can pay down a balance without closing the account. And in some cases, this is the better option. You see, if you close your oldest credit accounts completely (like that card you got when your first turned 18), you would be shortening the length of your credit history in the process. This could affect your score in a negative way. You can see from the chart above that the length of your history is also a big factor in your overall score. So in some cases, it's best to keep an account open even if you pay the balance down to nothing -- or next to nothing.

When used properly, this strategy for credit card debt consolidation (and others like it) can also help you improve your debt-to-income ratio that we defined earlier. By cutting down all of that interest into something more manageable, you would have an easier time paying down the debt. This will give you a more favorable DTI ratio, which can improve your chances of getting qualified for a mortgage loan.

Let's move on to your second question.

Where can I find debt help that's legitimate?

By using the word "legitimate," you have suggested that you are somewhat suspicious of debt consolidation help and the companies that provide it. I can understand this concern. Unfortunately, we live in a world where some people see the misfortune of others as an opportunity for themselves. This is true of debt consolidation companies as well.

With that being said, however, there are many legitimate and reputable companies that can help you come up with a credit card debt-consolidation plan. Of course, this process all starts with you. You'll need to have the motivation and discipline needed to reduce your debt. But there's plenty of help to be found. Here are some companies and programs you might want to consider:

• Credit.com offers some free debt consultation programs. You might want to look into that and see if it appeals to you.
• The National Foundation for Credit Counseling is a non-profit organization that offers a variety of financial counseling to consumers. They have several debt-related counseling programs as well, and some of them are free.
• Bankrate.com has a good article that explains the pros and cons of the various debt consolidation methods. It's worth a read as well.
  

I hope that answers your question, and I wish you all the best in your financial future. Good luck, and happy holidays.

~Brandon

Can a Credit Card Company Take My House?

Reader Question: Can a credit card company take my house away if I don't pay them?

No, a credit card company has no right to take away your house if you don't make payments, because you never agreed to put your house up as collateral when you opened the account. At least, I hope you didn't.

The bank who holds your mortgage can certainly take your house away, if you stop paying the mortgage. That's called foreclosure, and it's happening to millions of Americans right now, as a result of mortgage crisis. But a credit card company does not have this kind of right -- your dealings with them are separate from your home ownership.

With that being said, your failure to make payments on a credit card could affect your future ability to get mortgage financing or refinancing. It can seriously lower your credit score, which would make it harder to get another mortgage loan down the road, or even to refinance your current home.

When you stop making payments on your credit card account, the company will typically go through a predictable series of steps. They do it all the time, unfortunately, so it's a very systematic process:

At some point beyond the payment date, they will send a "soft" reminder about the overdue payment. This will typically come as a form letter. They may impose a penalty fee at this point to, which increases the amount you owe.

Next, they will typically send a stronger letter that warns of the account being sent to a collection agency. If they do send it to collections, it will be reported to three credit reporting agencies. This is when it starts to affect your credit score (because that score is based on the information found within your reports).

Later on, if you apply for a mortgage loan on a new house, or if you try to refinance your current home, the lender will review your credit score and other financial information. If your score took a big hit because of your failure to make credit card payments, the lender would probably decline your application.

Keep in mind that your payment history accounts for about 35% of your overall credit score -- more than any other single item. See our FICO scoring chart for a visual example of this. So while the company cannot take your house away for missed payments, they can certainly affect your life!

Hope that helps.

College Students and Credit Card Debt

Reader Question: Why do credit card companies target college students so aggressively, when many of them are already buried in debt?

Yours is certainly a valid question. I've seen quite a few news programs about college students running up a lot of credit card debt by using their cards carelessly. Of course, these same programs often fluctuate between news and sensationalism. But in general, there does seem to be a rising trend of credit problems among college kids.

I did some research when responding to this question, and it seems that the average credit card debt among college students is around $2,200. This is according to Nellie Mae, one of the largest student loan companies in the United States (and part of Sallie Mae). Keep in mind this is just the average. I'm sure a lot of students have much more debt than that. For an adult, this might not seem like a large balance. But you have to keep in mind these are college kids who generally do not make a substantial income (if any) while attending school.

That brings us up to your question. Why do the credit card companies seem to target college students so much? Here's why:

Students are Ideal Customers for These Companies

Let's step out of our "nice guy" shoes for a moment and step into the shoes of a marketing executive with one of the big credit card companies. When you think about it from this angle, you can see that college students are the perfect target for our marketing efforts. The majority of them do not have a significant income (they are students after all), so they are more inclined to use their credit cards as a primary method of payment.

There's also a new "crop" of potential customers entering colleges each and every year, so we have a self-renewing source of business. The marketing logistics are fairly simple as well, especially when the colleges use some kind of centralized mail system such as box numbers. This makes the students easy to reach, which saves us money on the logistical side. Most colleges will actually let us set up "recruiting" kiosks right outside the student union -- even better for business!

If these students fall behind on their payments (as they often do), we have an opportunity to pile on the penalty fees and jack up their interest rates. This means even more revenue for us! And as a credit card company, revenue is pretty much all we care about. It's our holy grail.

Besides, we know from our statistical data that Mom and Dad will chip in and rescue their kids when they accumulate too much credit card debt, so there's minimal risk for us. If they can afford to put their kids in college, they can afford to pony up for some of the debt. High gain and low risk ... just the way we like it.

Now let's break character and step back into our "nice guy" shoes. Do you feel dirty? Sort of like a ruthless predator? Yeah, me too. But at least now you can see why the credit card companies target college students with such focus.

Two Sides to the Credit Issue

Keep in mind, however, there are two sides to this argument. Do the credit card companies target these kids a little more aggressively than they should? Yes. Do many of these college students use their cards irresponsibly and pile up debt knowingly? Yes.

You can't expect these financial institutions to change their business models -- at least, not without laws forcing them to change. So in my opinion, the solution to this problem is actually quite obvious:

• Teach these kids how to manage their finances, and how to use credit responsibly.
• Teach them about the ill effects of maxing out cards and accumulating debt -- how it hurts your chances of getting a mortgage loan later on, etc.
• Make it a required course for first-year students, or at least a one-week mandatory seminar on the subject.

A few years ago (or perhaps even more recently), two women actually proposed some credit card reforms in congress. Both of them were mothers of college kids who had committed suicide as a result of their excessive credit card debt. Of course, because congress is in bed with the credit companies and banks, the proposal didn't get very far. But I salute those courageous women for at least trying.

Sure, people need to be responsible for their own actions. But here's what I find utterly despicable. Many colleges actually invite the credit card companies to set up shop on campus and "harvest" a new crop of customers. I saw it in James Surlock's documentary Maxed Out, and I was shocked by it. These companies will set up kiosks and give out free schwag to get kids to sign up. "Hey son, fill out this application for a free t-shirt." Why do the colleges allow this? Because they get paid, of course.

Kids go to college to learn -- not to be preyed upon right out of the gate. But maybe I'm just underestimating the power of greed.

If you ask me, most colleges are ignoring the problem at best, and contributing to it at worse. And their students are paying a hefty price.

Why Don't All Three Credit Bureaus Agree?

Reader Question: I recently ordered my credit reports from all three of the credit reporting bureaus. The information varies from one report to the next, and there's a mistake on two of them but not the third. Why don't all three of the credit bureaus agree with the information they provide?

The easiest answer is that they are three different companies, and they collect and distribute data independently from one another. In fact, that's also the most accurate answer.

TransUnion, Equifax and Experian are three separate entities. They serve the same basic function of collecting and reporting financial data about consumers, but they each have their own exclusive and proprietary data (and their own way of interpreting that data). This is why the information provided by the three credit bureaus doesn't always agree the way you might think.

This is also why your three credit scores don't always match up. When lenders review your score in consideration for a loan, they will typically pull two out of three -- or they'll use your FICO score, which is the most commonly used scoring model.

To help you understand how this all works, I've created a list of events that take place in these situations. Let's call it A Day In the Life of a Credit Score.

• As soon as you get your first credit card, or open your account with a retail store, you are officially "on the grid." This is when you start building a history of credit, and it's when the three bureaus mentioned above start collecting information about you. Spooky, I know, but that's how it works.
• The way you use your credit is noted by these companies, and it will eventually show up in your credit reports. Do you pay your bills on time, or do you have overdue accounts? Do you use your credit sparingly and manage it well, or are you nearly maxed out? Have you ever had an account sent to a collection agency? All of this stuff is recorded as part of your history.
• Your credit reports are then used to produce your scores. They are put through a scoring model such as FICO, which converts all the raw information within your reports into a single numerical score (a higher number is better).
  
• Your credit score is one of the factors that lenders use to determine your "creditworthiness" -- a financial term that describes whether you're a big risk or a small risk for the lender.
• But ... because the data is originally collected by three different credit bureaus, it doesn't always agree like you might imagine. There's only one of you (I hope), but there are three of them. And they all produce different reports and scores, which may not always agree with one another.
  

Probably more information than you wanted, but that's how we roll here at the Consumer Credit Help blog. I hope this answered your question, and I wish you well in your financial future. Happy holidays!

~Brandon

Credit Card Laws and Consumer Protection Laws

Reader Question: I keep hearing stuff on the news about credit card companies and all the stuff they get away with. They seem like predators to me. Can they get away with anything, or does the federal government have credit card laws for consumer protection?

It sounds like you're as big a fan of the credit card companies as I am. :-) It does seem like they'll do just about anything to make money off consumers. The key is to use your cards responsibly and manage your debt.

Yes, there are some federal laws that limit what these companies can and cannot do. Some laws are specific to the credit card companies while others are for consumer protection in general. There's a lot of information about this subject online, and at first I didn't want to tackle the question. There's a lot of subject matter! So instead of repeating all of the information here, I'll just make a list of credit card laws, consumer protection acts and the like. I've also provided some links to related resources where you can learn more about these laws.

Let's start with some of the more recent information and work backward from there:

#1 - The Credit Cardholders' Bill of Rights

This federal act (House Resolution 5244) was passed in 2008. The law calls for credit card reform intended to reign in the card companies. I've seen some "toothless" legislation in the past, but I'm actually excited about this new law. Not only is it a comprehensive law (it has ten clear-cut restrictions against the credit card companies), but it's also pretty ambitious in scope. It seeks to abolish most the abuses most commonly cited by angry consumers -- interest rate increases with little or no notice, tricks with payment due dates, excessive fees, etc.

Where to learn more: You can read all about this bill and even download a one-page summary on the government website of Carolyn Maloney (D-NY), who is the chairwoman on the consumer credit subcommittee. Learn more here

#2 - Fair Credit Reporting Act (FCRA)

As the name implies, this federal law focuses on how consumer credit is reported. But it's still relevant to this discussion, so I've included it here. The FCRA was established in 1970 and (at the time of this blog post) it was last updated 2003. Primarily, this law sets guidelines on the three credit-reporting companies (Experian, TransUnion and Equifax). Among other things, the FCRA requires these companies to offer consumers a free copy of their credit reports once per year.

Where to learn more: This credit law is enforced by the Federal Trade Commission (FTC), and you can learn more about it on their website. You can even download the entire act as a PDF file, which could be useful if you ever have trouble sleeping. Learn more here

#3 - Consumer Credit Protection Act (CCPA)

This law was created in 1968. Among other things, it prohibits the credit card companies from practicing any form of discrimination against customers, based on age, sex or income. It also establishes certain rights for cardholders, which makes me think that certain parts of it will soon be surpassed by item #1 on this list (the Cardholder's Bill of Rights).

Where to learn more: You can find information about this credit card law on various websites. The FDIC's website actually has the full text of this law available on one page. Learn more here

#4 - Fair Debt Collection Practices Act (FDCPA)

This is actually part of item #3 above (and act within an act, if you will). It was added to the CCPA in 1978. As the name implies, this law regulates debt-collection practices and prevents abuses from those within this field. Among other things, it requires collectors to verify debt information in order to ensure accuracy. And since is essentially the other side of credit, this federal law deserves a spot on the list.

Where to learn more: This law is under the purview of the Federal Trade Commission, so you can learn more about it by visiting the FTC website: Learn more here

Which Credit Card Laws Did We Miss?

I would like for this blog post to be a "living document," and I intend to update it as needed to serve our readers. So if there's an important credit card law that I've overlooked, please feel free to contact me. The best way to do that is by entering your message in the credit Q&A box at the top of this blog.

Three Major Consumer Credit Reporting Companies - Who Are They?

Reader Question: In my research, I have read a lot about the three major credit reporting companies and agencies. I am confused about who these companies are. I also see them referred to as bureaus and agencies. Is this all the same? Are they part of government? Any clarity you can provide is much appreciated.

First off, thanks for expressing your appreciation. You'd be surprised by how rarely we get a "thanks" sent in with questions. It's refreshing to encounter a reader with manners! :-)

Now, on to the question at hand...

I can understand your confusion, because the three major credit-reporting agencies go by many names. I have seen them referred to as bureaus, agencies, networks, entities, and a whole slew of acronyms. So let me simplify this for you. There are currently three companies that maintain credit data on consumers in this country. They are TransUnion, Equifax and Experian (the latter used to called TRW, by the way). Regardless of what people call them, these are the three credit reporting companies being referred to.

That answers part of your question. Now for the second part. No, these organizations are not part of the federal government. They are private-sector companies.

You might wonder why such companies should have the right to collect and sell consumer credit data for a profit (and a big profit at that). You would not be alone in wondering this. I have yet to encounter a reasonable explanation for this, but that's another blog post entirely.

Here is how the three major credit-reporting companies describe themselves, according to the "About Us" sections of their individual websites:

• Experian -- "A global leader in consumer and business credit reporting and marketing services." -Source
• TransUnion -- "A global leader in credit and information management." -Source
• Equifax -- "A global leader in information solutions, we leverage one of the largest sources of consumer and commercial data..." -Source

So there you have it, in their own words. How can we have so many global leaders in a given field? Good question, but also the subject of another blog post. :-)

What Do the Credit Reporting Companies Do?

As the title implies, these three companies collect credit-related data on consumers and report it to lenders, creditors, auto dealers and the like (basically, anyone who is authorized to do a "credit check" on a consumer). This is their primary customer base of the credit reporting companies -- the financial institutions that request credit information on potential buyers and borrowers.

These three organizations are also indirectly responsible for your credit score, because those scores are based on data that comes from the reports these companies produce. Of course, your actions influence all of this data, but it's the three major consumer credit companies that collect the information it, process it, and run it through a scoring model to produce a final score. This is why you have three credit reports, as well as three (possibly different) scores.

How Do I Fix My Credit Score as Quickly as Possible?

Reader Question: Somebody told me that it takes years to increase a credit score, at least in a significant way. Is this true or is there a shortcut to the process? How do I fix my credit score as quickly as possible?

Depending on the actions you take, you can actually improve your score in weeks or months -- as opposed to years. If somebody tells you it took them years to fix their credit, it's probably because they didn't try very hard. If you take the right approach, you can boost your score quickly. Here's how to go about it.

The key here is to focus on the things that matter the most. By learning which factors affect your score the most, and by focusing your energy on those areas, you can fix your credit quickly indeed.

With that in mind, let's talk about the different things that influence your FICO score (the one most frequently used by lenders). As you can see by the scoring chart below, there are several categories of data that determine your overall credit score. This data comes directly from your credit reports that are maintained by the three reporting agencies.



So let's at each slice of the "pie," one item at a time. And let's start with biggest chunk first, the 35% that's shown in blue.

Payment History -- This category refers to your history of making payments, and it influences your FICO score more than any other single item. So if you want to fix your credit quickly (which is the whole point of this lesson), you need to understand this concept. Your payment history includes just about every type of bill you can think of -- credit cards, mortgage payments, student loan payments, etc. If you get behind on these payments (and it's reported to the credit agencies), then it's going to hurt your credit score. So pay all of your bills on time!

Also in this category are matters of public record, such as bankruptcy filings, garnished wages, and other types of legal judgments. These things can also have a major impact on your score.

Amounts Owed -- This category reflects the amount of your available credit that you are currently using. It takes into account all lines of credit that you currently hold. You'll often hear the term "utilization ratio" used to describe this, which is simply a ratio between the amount of credit you have and how much you are utilizing.

Within this context, a lower percentage is better. If you are using 90% of your available limit (i.e., you are nearly maxed out on credit), it shows that you cannot manage your finances properly and rely too much on credit. This will have a negative impact on your FICO score. On the contrary, if you are only using a small percentage of your available credit line, it shows that you are a responsible credit user. This will help to improve your score.

So let's get back to the idea of fixing your credit as quickly as possible. If you put together what we have learned so far, you can see it makes a lot of sense to (A) pay your bills on time and (B) keep your credit balances low. These two things combined will help you fix your score quickly and considerably.

Length of Credit History -- This is the last piece of the pie I'm going to discuss. Now that you understand the basic concept, you can research the other factors on your own. This category simply refers to the length of time you've had credit accounts open. A longer, more stable credit history helps you maintain a good score.

A lot of people think they can improve their FICO score quickly just by closing some of their credit accounts. But that's not always the case. In fact, you can actually hurt your score by closing accounts, especially is you cancel the oldest one you have on record. For example, if you got a credit card when you first turned 18, and you are now 30, then that particular account (if left open) will give you a 12-year credit history ... give or take. But if you were to close that account, and the next-oldest one was only six or seven years old, you would basically be shortening your overall credit history. This can hurt your score.

Lastly, I'd like to stress the importance of reviewing your credit reports once a year. This will help you spot errors, such as accounts that aren't yours, duplicate entry items, and other inaccuracies. These things can drag your score down lower than where it should be. Here are some tips on reading your reports.

You asked how to fix your credit score as quickly as possible, and now you are armed and ready to do just that. Take the information I've given you and put it into practice. You should start seeing dramatic improvements in a matter of weeks.

Related questions:

• How to raise your credit score fast in 2009
  
• What is a good FICO score in the current economy?
  

I hope this helps you out some. Good luck, and happy holidays.

Home Loans for People With Poor Credit

Reader Question: I hope to buy a home next year, and if I do I'm going to need a loan to pay for it. I have a poor credit score, but I'm working on improving that. Are there home loans for people with poor credit these days, and if so who offers them?

I have some good news and some bad news for you. Let's get the bad part out of the way first.

Because of everything that has happened to our economy over the last year or so, there are few (if any) mortgage lenders that will give home loans to people with poor credit histories. In fact, this is part of the reason our economy is in such bad shape right now. These types of loans used to be given out all the time. They are referred to as subprime mortgages, since they are given to borrowers with poor credit (i.e., subprime borrowers). The only way lenders could make these home loans affordable was by using adjustable-rate mortgages and deferring the high interest until some point down the road.

Long story short, this type of lending / borrowing practice led to a lot of home foreclosures over the last few years. Some of the lending institutions that specialized in these subprime loans have since collapsed, while others have been reorganized to serve a different business model. So now, in the current economy, there are few lenders willing to offer home loans to people with bad credit scores.

Good News for People With Poor Credit

I said I had some good news for you, in addition to the bad. And here it is...

Whether you realize it or not right now, it's actually a good thing you cannot get a home loan when you have bad credit. As I mentioned above, the only way you could get a subprime mortgage in the past was to pay a ton of interest on the loan. This is what drove a lot of people to bankruptcy and foreclosure -- record-breaking numbers, in fact. So in the grand scheme of things, the absence of poor credit home loans is actually a good thing.

Here's another positive note for you. It's not that difficult to improve a poor credit score. With a combination of financial discipline and good old-fashioned determination, you can improve your credit situation in a matter of months. If you do this first and then apply for a home loan, you'll get a much better interest rate. This translates into a smaller mortgage payment each month, and who doesn't want that?

So my best advice for you is to focus your energy on fixing your poor credit situation first, and then apply for a loan when you're in a better position to do so.

Improving FICO Score After Chapter 7 Bankruptcy

Reader Question: I filed chapter 7 bankruptcy and it was discharged over a year ago. Since filing, in order to improve my credit, I have a low-limit credit card, an auto loan, and a student loan, all of which have been paid on time for over a year, they are reporting to the credit bureaus as such. However, my FICO scores are not improving. I'm hoping to be able to purchase a home within the next year. Is there anything else I should be doing to raise my FICO score?

Without knowing your full financial picture, I can offer the usual advice for improving a FICO credit score. For starters, you might want to check out the FICO scoring chart here on the blog. It shows the factors that have the biggest impact on your score. Thus, they are the factors you should focus on when improving your FICO number.

A Chapter 7 bankruptcy filing will stay on your credit report for ten years. Some of the other filings (such as Chapter 13) come off after seven years, because they include full or partial repayment of the debt. But a Chapter 7 usually does not include repayment, so it typically stays on your credit for the full ten years allowable by law.

Of course, you can improve your FICO score during that ten-year period. In fact, the bankruptcy filing will have less of an impact on your score as time passes. If it's only been a year since the date of your filing, you could see your credit score start to go up soon -- if everything else is optimal.

You mentioned the low-limit credit card you have. Having a lower limit can sometimes affect your FICO score, especially if you're using most of that limit. If you look at the chart I linked to above, you'll notice that your "amounts owed" accounts for 30% of your score. The industry term for this is credit utilization ratio, which simply refers to how much of your available credit you are currently using. If your card has a low limit, and you are nearly maxed out on that limit, then your utilization ratio will be high. This can hurt your overall score.

I don't know if this is the case with you or not, but it's entirely relevant so I had to mention it. If you think you're using a high percentage of your available credit, you might want to start by paying down your balance. You can keep the account open to maintain the length of your credit history, if necessary. But by reducing the balance, you will likely improve your FICO score at the same time.

I've listed some related articles below that might help you out. Good luck.

Related articles:

• Improving Your FICO Score Fast in 2009
• How to Repair Credit After a Bankruptcy Filing

Disputing a Collection Item on Your Credit Report

Reader Question: I am currently trying to dispute a duplicate collection entry item though since I had originally disputed the older one, then Experian sent a response back that it "was already disputed and verified" for both duplicates. Can't I do something?

I'm not sure I understand the exact nature of your question, as you intend it. If the duplicate entries are exactly the same, then Experian should remove one of the items. In some cases, however, you can have more than one entry for an overdue account that was sent to collection. For example, there might be one entry from when the account was first sent to collection, and another entry when the original creditor charged off the account.

With that being said, two people cannot try to collect the same account from you. So if the original creditor has you listed for an overdue account, and the collection agency has you listed for that very same outstanding account ... then you have a duplicate entry issue. In this case, you should be able to dispute it. It's important that you look at the status of the item, and not just the account number.

It's hard for me to say whether or not yours is a legitimate duplicate entry, because I don't know any of the circumstances. If Experian is telling you that it the dispute was previously researched and verified, then it means they do not see any duplicate issues that need correction. So if you truly feel there is something that needs correction, but they refuse to do anything about it, you might want to seek legal advice from an attorney.

Another option is to negotiate a payment with the collection agency. If you do this, I recommend doing it by mail as opposed to over the phone. For one thing, this gives you a paper trail. Secondly, it will avoid any harassment that might come from a phone conversation. People who work for collection agencies are not always the friendliest folks ... or the most professional, for that matter.

Related questions:

• Duplicate entries on a credit report can lower your score
  
• Writing a letter to dispute an item in your report
  

I hope that helps you out a little. Good luck.

How to Improve Credit After Bankruptcy

Reader Question: We filed bankruptcy, it has been discharged, now we want to buy a house. But our credit scores are low. We don't owe anybody. How can we improve our credit scores?

It sounds like you filed a Chapter 13 bankruptcy, which includes debt repayment. That type of filing can stay on your credit report for up to 10 years, but it has to come off after that. The Fair Credit Reporting Act limits how long negative items (like a bankruptcy filing) can stay on your credit. While the limit is ten years, the credit reporting agencies typically remove Chapter 13 filings after seven years.

Here's a quote from Maxine Sweet, one of the VPs at the Experian credit reporting company:

Bankruptcy can be reported for up to 10 years from the filing date ... Experian reports Chapter 13 bankruptcy for seven years because it includes partial debt repayment. Chapter 7 bankruptcy remains for 10 years from the filing date because none of the debt is repaid.

With that being said, you can still improve your credit score after a bankruptcy filing, even while it remains on your report. Additionally, the filing will have less of an impact on your score over time (up until it's removed completely).

Here's a Q&A session from October you might want to peruse:
How to Repair Credit After Bankruptcy

So while you cannot remove the bankruptcy filing from your credit report, you can do plenty to rebuild your score over time. I would focus on the following:

Make sure you continue to pay all of your bills on time. As you can see from this credit scoring chart, your payment history accounts for 35% of your overall score -- more than any other single item.
Work out a budget that allows you to pay down your credit card balances over time. By reducing your balances, you are decreasing your "credit utilization ratio." This is another factor that has a big impact on your overall score.

These two things will improve your credit score more than anything else. So they are worth the effort. Also, if it's been a while since you last checked your credit reports for errors, duplicates and other inaccuracies, you might consider doing that as well.

Related articles:

• How to Raise Your Credit Score Fast in 2009
• Rebuilding Credit After a Bankruptcy Filing (excellent article)
  

I hope that helps you out some. Good luck, and happy holidays.

Paying Off Debt to Increase Credit Score

Reader Question: I have paid my debt in full. How long will it take for my score to rise?

In the previous Q&A session, I explained how certain types of debt have a bigger impact on your credit score than others. If you paid down a lot of credit card debt, then you'll have a much better credit utilization ratio. This can account for as much as 30% of your overall score.

As for how long it takes to see a difference, this is much harder to answer. In most cases, your score will go up as soon as your credit reports change in some positive way. Remember, your score is computed from the information contained within your reports -- so when those are updated, you should see an increase in your score as well.

Here's another article you might want to peruse. This person asked a very similar question to yours. They wanted to know how long it would take to improve a credit score significantly, so it's worth a read.

There's something else worth mentioning here. By paying down your debt, you have also improved your debt-to-income (DTI) ratio. This is one of the factors a lender will look at when considering you for a loan. They consider your credit score and DTI ratio more than anything else. That's a big plus too.

I know this answer is not as exact as you would like, but there's no way for me to say exactly how long it will take for your score to rise. If I were you, I'd wait a couple of months and check my credit score again. You'll probably see a difference.

Hope that helps you out some. Good luck, and happy holidays.

-Brandon

Will Paying Off My Bills Raise My Credit Score?

Reader Question: Will paying off all of my bills raise my credit score?

It can certainly help. But you should be selective with what you pay off first. I would start with your credit card balances. As far as bills go, this will help improve your credit score faster than anything else. And to explain why, I have to hit you with some heavy financial terminology.

Credit Utilization Ratio -- (n) The percentage of your available credit that you are currently using. One of the factors used to determine your score.

Let's say you have two credit cards, and they each have a limit of $10,000. So your total available limit is $20,000 (between the two cards). Now let's assume that you have a balance of $1,000 on each of those cards. So you are using 2K of the 20K in available credit. In this scenario, your credit utilization ratio is only 10% ... and this is pretty darn good. Better than most people in this country!

As you can see by the handy chart below, this single factor (amount owed) accounts for about 30% of your overall FICO credit score. The FICO number, by the way, is the one used by most lenders when considering you for a loan. So it's important.



Now let's assume that you go on a spending spree (kind of like Sarah Palin hitting Neiman Marcus on the campaign trail), and you drive your balance up to $10,000 between the two cards. Ouch! Now you're using 10K of the 20K you have available ... so your credit utilization ratio has gone from 10% to 50%. This will hurt your credit score.

This is why I suggest you start with those credit card balances. When you pay those down, you are also achieving a more favorable utilization ratio. And this will help you increase your overall credit score. Combine this with the fact that most cards have a ridiculously high interest rate (I hate credit card companies, by the way), and you can see the many benefits of paying those things down!

I would keep the accounts open though, especially the oldest accounts. If you close your older credit accounts, you are actually shortening your credit history in the process. And as you can see from the handy chart above, the length of your history accounts for 15% of your FICO score. So pay the balances down, but keep the accounts open -- the oldest ones, at least.

So if you're looking for something to pay off, that's where you should focus your attention at first. But reducing your overall debt is beneficial as well. In addition to improving your life in general, it also improves your debt-to-income ratio ... which is another factor used by mortgage lenders and other creditors when considering you for a loan.

Hope that helps. Good luck!

-Brandon

Free Annual Government Credit Reports - They Don't Exist

Reader Question: I am trying to find the website where I can obtain the free government credit report I'm entitled to once a year. But none of the websites I've found are government sites. Where do I go to get my annual reports?

Actually, there is no such thing as a government credit report -- this information is issued by private companies, not by Uncle Sam. This is a common point of confusion among consumers in the U.S. So I welcome the opportunity to clear things up, for you and for anyone else who reads this blog post.

The federal government does not maintain credit data on U.S. consumers, nor does it issue credit reports. The government does regulate the three private companies that issue reports, but the connection ends there.

There are three credit reporting agencies that perform this role: Experian (formerly called TRW), TranUnion and Equifax. These are private-sector companies, mind you. They are not government entities.

These three companies are regulated by the Fair Credit Reporting Act (FCRA), a law enacted by the federal government in 1970 (and updated a few years ago in 2003). When the law was last amended, the government added a clause that is relevant to your question. Actually, they added an entire new act to the existing one -- the new one is called the Fair and Accurate Credit Transactions Act or FACTA. Under this new government legislation, signed by President George W. Bush, the credit companies were required to create a website where consumers can request their free yearly reports (you are entitled to one report per year, from all three companies).

So while this website was mandated and authorized by the federal government in 2003, it is jointly owned and maintained by the credit reporting agencies. Because they are the ones who maintain data on U.S. consumers and issue the reports.

You can visit this above-mentioned website at AnnualCreditReport.com. See screen-shot image below.

If you want to know why there are so many other websites offering this information, you should check out this previous Q&A session.

So let's sum things up. There are no free government credit reports because Uncle Sam does not maintain such data. The federal government regulates the three companies that issue reports (TransUnion, Equifax and Experian), but that's as far as their involvement goes.

I hope that helps you find what you're looking for. Good luck.

Related question: What does three credit reporting mean?

How to Dispute Medical Bills on My Credit Report

Reader Question: I have a medical bill on my credit report from when I was 17 years old. Is there a way to dispute that?

I don't know how long ago 17 was for you, but for the sake of education I'll assume that was more than seven years ago. In that case, yes ... there is a way to dispute the medical bills that are still on your credit report.

According to the Fair Credit Reporting Act (FCRA), negative information such as overdue medical bills must be removed from your credit file after seven years. So if it has been longer than that, but the negative information remains on your report, you are well within your rights to dispute the negative item. Here's how to go about it.

Disputing Medical Bills After 7 Years

First, you need to identify the company that produced the credit report in question -- unless, of course, the error occurs on all three of your credit reports. Then you would dispute the error through with that particular reporting agency, and you would provide whatever supporting documentation was needed. You can do this online through the company's website, by mailing a letter to them, or by doing both. I recommend starting with the online approach, simply because it's faster and easier for you.

Here's a hypothetical example of how I would go about doing this, if I was in your situation. Let's assume that I obtain my free reports (in accordance with the FCRA that gives me free access), and I find an error on one of them. It's an unpaid medical bill from when I was 20 years old. Because I'm now in my mid 30s (more or less), I can see that this negative item is clearly more than seven years old. As a result, it should no longer be on my credit report.

So here's what I do...

1. First, I check all three of my reports to determine which ones have the unpaid medical bills. I learn that only one report has the outdated item on it, and it's the one produced by TransUnion. Now I know who to contact in order to dispute the medical bill entry.
2. I visit the company's website (TransUnion.com in this hypothetical scenario), and I look for the link / menu item that says "Disputes." When I click the link, I'm given several options on how I want to proceed. I can do it online, by phone, or by sending a dispute letter by mail.
   
3. I choose the online method, so I click the corresponding link. Because it's my first time visiting the website and disputing a credit report entry, I am asked for my personal information -- name, address, etc.
   
4. From here, I just follow the instructions and provide the necessary information. Eventually, I am asked to describe the item in question. I explain that the unpaid medical bills are more than seven years old, so in accordance with the Fair Credit Reporting Act they must be removed from my report. I give whatever dates or other information is necessary to support my claim.
5. Because I've chosen to dispute the item online through the company's website, I will be able to log in to my account and check the status of my dispute later on. This is one of the benefits of starting this process online.
   

After this, it's simply a case of staying on top of the issue until the negative item is corrected / removed from the report. If the unpaid medical bills actually showed on all three of my credit reports, I would go through this process on the websites of all three reporting agencies -- Experian, TransUnion and Equifax. Sure, it's a pain in the neck. But it's also important, because it has a direct impact on my credit score.

I hope that helps you out. Good luck.

Related article: How do overdue medical bills affect my credit score?

How to Establish Credit for the First Time

Reader Question: I am saving up to buy a house next year, and I keep hearing how important it is to establish good credit when applying for a mortgage loan. I have not used credit cards in the past, but I have paid rent for many years. Is that enough to establish credit for myself, and if not what should I do?

We answered a similar question just a few days ago, so I would start by reading that response. In fact, now that I look at it, the previous question is identical to yours. Click the hyperlink to read that person's question.

Since we have covered this question before, I'll focus on what I feel is the most important part of this concept. I'll tell you how to establish credit the right way, without getting yourself into debt in the process.

But first, let me clear up some terminology for the benefit of other readers. When I refer to establishing credit in this context, I'm talking about building a history of good credit behavior. This behavior will show up in your credit reports and scores, and it's used one of the things mortgage lenders use when considering you for a loan. So it's not enough to establish a credit history in general -- in particular, you should focus on establishing a good credit history. That's the key to all of this, and it will unlock a lot of financial doors for you in the future.

So how do you do it?

If you have been paying rent for a while, as you've indicated, you are well on your way to establishing a good credit score ... especially if you've been responsible about paying your rent on time. The same goes for paying utilities (phone, electric, etc.) or anything else that requires regular payments.

Obtaining a credit card can also help you establish a history for yourself. If you refer to the FICO scoring chart we have on our website, you'll see that your payment history accounts for a large chunk of your overall credit score. In particular, this refers to your history of making credit card payments. When you make these payments on a regular basis over time, and you avoid missing payments, you can establish a good score for yourself. Of course, the other things mentioned above also play a role, but your payment history is a big slice of the pie.

Here's the most important thing you should take away from this lesson. The key is to use your credit card responsibly and sparingly. The last thing you want to do is rack up a huge balance on your card, because that can lead to debt problems (among other things).

So the best way to establish credit for the first time through the use of a credit card is to (A) make small purchases from time to time and (B) pay the balance off each month. Do this over time, and you will eventually have a history of being financially responsible. This is exactly what lenders like to see. It shows them that you can use credit responsibly, and that you can manage your debt.

Hope that helps. Good luck.

Can a Business Credit Card Affect My Personal Credit Score?

Reader Question: Can a business credit card affect your personal credit score?

There are two answers to this question -- yes and no.

If you are the owner of the business and have applied for a credit card to use for business purposes, the issuing card company will pull your personal credit report. They use this as a factor when making a decision to extend credit to your business. This means that the payment history for the card will be reported on your personal credit.

If you work for a company who has issued you a credit card to use for business expenses, the company's principals (owners) will be responsible for the credit and payment history for your card. Some companies will ask employees to apply directly for their cards, even though they are for business purposes. This will show up as an inquiry on your report -- which, by itself, is not necessarily a big deal. But it's something you should be aware of.

Here are some tidbits I gathered from the Internet:

• "Moreover, your small-business credit card will be noted on your personal credit reports. (Meaning those provided by Experian, Transunion and Equifax.) A few late payments could seriously damage your personal credit score..." -Source: SmartMoney.com
• "Misuse of a corporate credit card can also show up on a credit history, potentially damaging the credit of the employee whose name appears on the card." -Source: CreditCards.com
• If you're a sole proprietor or a business owner with fewer than 20 employees, your personal and business credit scores are closely linked in the eyes of banks and other potential lenders. -Source: Entrepreneur.com

Related: The Best Credit Card Offers We've Found

Debt Management Program - Qualifying for FHA Loan

Reader Question: Does going through a Debt Management Program with CCCS help you qualify for an FHA loan quicker?

For the information of all readers, CCCS stands for Consumer Credit Counseling Services, a company that counsels consumers on financial issues such as debt management, credit score improvement, housing, etc.

As for your question about FHA loans, it might be best to address that question to the folks at CCCS. Aside from the basics, I'm not familiar with their counseling services. So let me speak about debt-management counseling services in general, as they related to mortgage qualification.

By itself, your participation in such a program will not increase your chances of getting a mortgage loan, whether it's an FHA loan or any other type of financing. But the direct results of the counseling program may help you qualify easier. For example, if your debt-management counseling with CCCS helps you reduce your debt, then you will have a more favorable debt-to-income ratio. By extension, this could help you qualify for a mortgage under the FHA home loan program.

Another scenario would be a counseling program designed to improve a person's credit score. The mere enrollment and completion of that program would not help much toward mortgage qualification. But the direct results of the program might help. If the counseling services helped you to increase your score, then by extension it would also increase your chances of getting qualified for a loan.

I took a quick look at the CCCS website after receiving your question, and it seems they have some kind of program designed to help people qualify for mortgages. It's apparently aimed at people who have been through their debt-management program in the past. I don't know much about it, so I won't comment further. But it might be worth a look for you.

Hope that helps.

Removing Unpaid Medical Bills from Credit Report Before 7 Years

Reader Question: Can past-due medical bills be removed from you report before 7 years?

A lot of people have been asking about unpaid medical bills lately. Sadly, it's indicative of a common problem in this country. With the rising costs of health care and pitiful state of our insurance companies, a lot of Americans are unable to pay their medical bills.

In a previous Q&A session hyperlinked above, I told a reader that unpaid medical bills can be sent to collection like any other type of bill. They can also be reported to the credit reporting agencies and could subsequently lower your overall credit score as a result (though not as much as unpaid credit card debt would hurt your score).

And this brings us up to your question: Can past-due medical bills be removed from a report before seven years?

The short answer is that, yes, it's possible. But it's also unlikely, unless you have a good reason to dispute the negative item.

For the benefit of all readers, let me explain the seven year thing. The Fair Credit Reporting Act (FCRA) is a federal law in the U.S. that sets guidelines on how consumer credit information can be maintained and reported. In other words, it's the law that governs the three reporting agencies -- TransUnion, Experian and Equifax.

According to this law, most negative information can only be maintained on your credit report for up to seven years. A bankruptcy filing can stay on there longer, for a period of up to ten years. But most things, such as unpaid medical bills, have to come off your credit report after seven years (usually from the date the account was reported to the credit bureaus).

So is it possible to have unpaid medical bills or other negative items removed before the seven-year window has lapsed? Yes. In the case of errors, you can dispute the negative item with the reporting agency who produced that particular report. Also, if there's a duplicate entry on your credit report, you can typically dispute that to have it corrected.

But what if the negative information is legitimate and accurate? What if you really do have unpaid medical bills in your past? In this case, it's much harder to have them removed from your credit report before the seven years is up ... unless there are some kind of extenuating circumstances involved. I will leave that topic to the lawyers though.

One way you might have the account removed from your report is by paying what you owe. If you paid all of your unpaid bills and then requested that the credit reporting agency remove the item, they may very well do it. If you contact the hospital or the collection agency who represents them, you might even be able to work out a reduced payment plan. It's fairly common for creditors to accept a settlement that's less than the full amount owed.

Hope that helps. Good luck.

Related article:

• How do overdue medical bills affect my credit score?

Do hospital bills affect credit scores?

Reader Question: Do hospital bills affect your credit scores?

Yes, they affect your score like any other type of bills. If you have an overdue hospital balance that is sent to collection (and is therefore reported to the credit reporting agencies as well), it will lower your score like any other form of collections.

I just checked the blog's search tool and found a similar question from last month. So I won't repeat it all here. Check out this Q&A session: Overdue Medical Bills and Credit Scores

If you fail to pay your hospital bills, it will show up in the "Account History" section of your credit report. Your scores are based on the information within these reports, so the overdue bills will have a negative impact on your credit score as well. And it could be a significant reduction, depending on other factors. Check out the FICO score chart we put together and you'll see that payment history is the largest single chunk of your score.

If you are already past due on your hospital bills, it may not be too late. You could still avoid having the account sent to collection. Many hospital billing departments operate under a 30 / 60 / 90 rule of thumb. They send a late notice after 30 days, then a stronger one after 60 days, and if the bills are not paid after 90 days they'll report it to the credit reporting agencies.

Don't take the 90-day thing as gospel though -- it's just a rule of thumb. They could very well report the unpaid hospital bills after 30 days, if they wanted to. And it could affect your credit score shortly after that.

Related articles:

• How will missing car payments affect my credit score?
• A similar article on overdue medical bills