Does Paying Off a Collection Increase Your Credit Score?

One of the biggest questions that we see when people are trying to improve a bad credit score is this one:

Does paying off a collection increase your credit score?

The short answer to the question is yes, you can potentially see an increase of a few points or even more when you pay off an account that’s listed under collections on your credit report. And if that’s the only collection account on your credit report? Then your score could increase by more than just a few points.

For example, one of our clients has a single medical bill on her collections list. Every month for years, she’s made a small payment on the account, and slowly but surely she’s getting it paid off. Now, while there’s still a ways to go toward paying that account off, every few months she sees a slight increase in her credit score because that collections balance has decreased. In her case, I would full expect a larger jump in her credit score once that’s paid off, not only because it’s paid off, but because there is a good payment history to back up her efforts to settle that account.

But, if you’ve got several, or even quite a few collections accounts on your credit report, then you probably won’t see much, if any, of an increase in your score should you pay off one of the collection balances. It will likely take paying off several or even all of your collection accounts to see any real improvement in your credit score, especially if the balances are very high, very old, and show no real efforts to pay them off.  Still, don’t let that discourage you.  The only way to see real improvement in your credit score is to keep plodding forward, paying off accounts, and proving your creditworthiness.

January’s Financial Challenge

It’s January!  Yep, Christmas is over and all those bills are arriving in the mail or in your inbox. That means that it’s time to figure out how you are going to pay all those monthly payments!  Don’t worry, you’re not alone.  Most of us spend way more than we plan to every December, and as a result, most of us are trying to figure out exactly how to pay them all off sooner rather than later.  Let’s start by taking a long hard look at your finances.

Personally, I have a worksheet that I use every month to track both my overall monthly income and my non-discretionary expenses.   The income section lists regular (normal) monthly income as well as any additional income that I earn from any outside sources.  For example, if I get a bonus at work, or if I earn a few extra dollars for selling something, or even if I just get an unexpected refund on a bill that I may have overpaid, it goes into the additional income line.  Then, I total all my income.

Dropping down a couple of lines, I have a section for my bills.  Not only do I list the payee, but I also list the starting balance for the year, then the monthly payment amount, along with the amount paid each month (in a separate monthly column).  Finally, I add a column to update the monthly balance and a column to show me the year to date change in the total amount owed.  And, here’s the hard part… I total up ALL of my indebtedness (including the house and the car) to get a true picture of everything that I owe.  Yes, when you add in both the house and the car, well, it seems insurmountable.  But it’s my financial truth.  And I am focusing on all of it.  (You may find it easier to just list your credit cards.  It depends on what you’re working toward.)

Then, at the bottom of each column, take your total income and subtract your total expenses.  This should give you an amount that will be your discretionary spending each month. (For me, discretionary spending includes my grocery bill because that’s something that I can change by shopping smart, but it doesn’t include utilities because that’s pretty much set in stone – I just use an average amount and put it in the non-discretionary column.)   The higher the amount of discretionary spending money that you have, the better your bottom line.  Pretty simple, isn’t it?

Now that you have an overall financial picture, you can look at ways that you might be able to reduce these costs.  For example, is there a better cell phone plan for you?  Perhaps you may decide to change your cable subscription?  (I dropped my cable company, then signed up for a couple of streaming services, and saved over $70.00 per month.)  And most importantly, you can look at how quickly you can pay off some of those interest bearing accounts!   For me, seeing the balances of credit card bills decreasing on a regular basis is the best motivation there is for sticking to my financial plan.  But, this is also about you…

What’s your motivation?  Find it.  And then, start saving money!

 

 

 

Get a Fresh Start in the New Year

The start of a new year is also a great time to get a fresh start on your credit… in fact, once those Christmas bills start rolling in, many of us will be looking long and hard at all kinds of ways to cut expenses! Interest rate too high? Maybe it’s time for a different credit card with a low introductory rate! Too many open balances? Consolidate them into a personal loan! Want to pay off lots of small balances? Why not get a balance transfer card and combine all those little credit cards onto one credit card? Look for the one with the lowest interest rate, the best balance transfer terms, and the longest introductory period!

New Year’s is also a great time to do an overall review of your finances, too. Personally, I am beginning to gather the materials for my tax returns and I’m planning my budget for the new year, setting goals, studying where I can save money, etc., so this is the perfect time for me to do my annual review of my credit cards, credit lines, open balances, and so forth. It’s also the perfect time for me to decide if I need to transfer a balance, update a personal loan, or even refinance my house or car.

But what if your credit is not so good? What if you really need to work on your credit score? Well, the good news is, it’s also a great time to get a fresh start on your credit score! Let’s face it, most of us take a little hit on our credit score every December when we use those credit cards to do our Christmas shopping! So, most of us are looking to improve it after the holidays… Why not start working on yours right now?

Catalog Card Shopping for Christmas

You know, one of the biggest stress factors during the holiday season is trying to figure out how you’re going to afford to buy gifts for everyone on your list!  That’s why many of us use credit cards to do that all important Christmas shopping.  But if your credit is less than stellar?  Getting the credit that you need can be nearly impossible?

Fortunately, there are catalog credit card companies that work with those of us with less than perfect credit, especially at this time of year!

Not only will many of these companies extend credit when no one else will, but typically, catalog credit cards can help you to improve your credit in the long run… you see, just like regular credit card companies, catalog credit card providers also report to the major credit bureaus, so your available credit AND your payment history will reflect that the catalog creditor has extended credit to you and that you are making regular payments (or have paid in full).  And that information just might bump your credit score a few points.

Oh, and did I mention that most of these catalog companies have specials, coupons, and such at this time of year?

Check it out:

 

Changes in Credit Scoring

Over the past few years, there have been some changes in the way your credit score is calculated.  These changes can help if you’re planning to buy a home, in fact, these new rules may even help you get the credit score that you need to get that mortgage!  Even though your payment data, debts and court records will all still count, the new scoring model reflects some different weighting – in favor of the consumer. Score 9 rolled out this fall, and you may have already noticed a change in your score based on the new formula.

Four Changes to Credit Score Calculations

Rent:  If you rent your home or apartment and you pay on time, you may just get a boost to your credit score.  The new formula promises to weigh renting more heavily than the previous version. Paying on time every month could give you a boost – and a better relationship with your landlord.

Medical Collections: If your medical debt was weighing down your score, then the new model is great news for you. Medical and healthcare related debts will matter less than they have in the past, allowing consumers with otherwise good scores to be hurt less by high medical bills or overdue medical expenses. If your medical debts were impacting your ability to secure a residential mortgage, this change is very good news for you.

Trending Data: If you have a very slim credit portfolio, your data may be interpreted based on trends – the new scoring formula will use predictive models to determine your credit worthiness. This new technique will impact youthful consumers who have not yet established much credit and those with a long history of avoiding credit and choosing cash instead. If you have an established credit record, use credit cards or have a car loan, this change will not have much of an impact on your score.

More Even Scoring: One of the goals of the Score 9 model was to encourage lenders to upgrade to this new formula. While upgrading is not mandatory, it is definitely encouraged – and some lenders and credit reporting agencies are still using old scoring models.  As businesses continue to adapt, credit scores across major credit bureaus are expected to become more consistent, thereby making it easier to for a lender to get a clearer picture of your background and creditworthiness.

While these changes are expected to help most consumers, the best way to boost your credit score is to pay your bills on time and make sure your debt ratio remains low. If you are considering applying for a residential mortgage within the next year, a good credit score is a must. The right score will not only make approving your loan easier for your lender, but it could help you secure lower rates on your homeowner’s insurance as well. If you haven’t checked your score lately, it is time to review your credit report, you could be in for a nice surprise.

Simple Mistakes That Can Hurt Your Credit

Have you ever forgotten to pay a bill? Bounced a check? Believe it or not, simple everyday mistakes with your finances can affect your credit score. Read on for a few things that you might want to think twice about.

Bouncing a Check:  This will come as a surprise to many, but a bounced check may actually affect your credit score at some point.  And that is the key phrase:  At some point.   Just because your bank doesn’t send a report to the credit bureaus every month, doesn’t mean that it can’t or won’t do so, especially if you don’t pay it back promptly!  Failing to cover a bounced check can result in collection, civil, and even criminal charges – both from your bank and/or from the company that you paid with the check.

Too Many Credit Inquiries:  Whenever you apply for any type of credit card or loan, the potential lender performs an analysis known as a ‘Hard Credit’ inquiry so that they can review your complete credit report, determine your FICO credit score, and decide whether or not to extend credit to you.  Applying too frequently for any loan or new credit card can and will affect your credit score as the financial risk to potential lenders increases as your score drops, and statistical analysis has proved that having numerous new credit cards in a short time span is a bad indicator of an individual’s financial responsibility.

Late Payments:  Late payments can indicate unreliability, lack of funds, and irresponsibility in an individual.  And, since your payment history accounts for 35% of your credit score, one late payment can cause your score to drop significantly, especially if you are more than 30 days past due on the payment.  

Co-Signing a Loan:  Before co-signing any loan for a member of your family or a trusted friend, you will want to consider the effect that your involvement in another person’s finances could have on your own financial picture.  Co-signing for a credit with a very high balance could affect your utilization ratio, consequently causing a drop in your credit score.  And of course, as a guarantor, you take up the responsibility of ensuring full settlement of the loan by the borrower in accordance to the stated terms. A default or inconsistent loan servicing by the borrower lowers your credit score.

Remember, the benefits of good credit far outweigh the effort that it takes to build and maintain a good credit score, so take care to ensure that you don’t let a simple, little mistake ruin all your hard work!

What is a Bad Credit Score?

What’s your credit score?  Is it Excellent, Good, Fair, or Bad?   Is your credit score holding you back from home ownership, buying that new car, or even getting your dream job?

Although you wouldn’t think that it should, the definition of bad credit has actually changed over the course of the past decade or so.  What was once considered a good credit score is possibly now only fair and those with fair credit scores might even have fallen into the bad credit range.

Here are a few things to know about your credit score:

Bad credit varies from lender to lender.  For example, mortgage companies have very strict credit requirements while catalog cards have fairly lax requirements.  Mortgage lenders may consider anything under 640 as a bad credit score, but credit card companies may offer credit cards to people with credit scores lower than 600.  The interest rates may be substantially higher and there may be additional fees, but you can usually still get a credit card.

Generally a credit score below 500 is considered very bad credit and you may struggle to get any kind of credit if your score dips that low.  The sad part is, it could only take one late payment, one medical bill sent to collection, or at the worst, bankruptcy, to knock your score down considerably.  And it can take months and years to repair your credit after such an event.

During that time, you’ll likely pay nearly double the interest rate as compared to those with scores above 640. And this isn’t just your credit cards, it will also affect the interest rate on a new (or used) car, and potentially even your insurance rates.

Understanding how your credit score impacts your interest rates for loans and credit cards is an important step to rebuilding your credit.

After Bankruptcy, Remove Incorrect Info From Your Credit Report

Recently declared bankruptcy?  Want to rebuild your credit?  If so, it is essential that you monitor your credit report on a regular basis to ensure that all of the details remain correct. Even if you never intend on buying your own home or a brand new car, having a poor credit score will impact your life in so many other ways. Not only will a bad credit score cost you more for car insurance, or your monthly cell phone plan, but it can also cost you a great job. That alone makes it worth the time and effort it may take to clean up your credit report.

Granted, it’s easy to become so busy that you forget your credit, especially since it’s generally lowest right after you file bankruptcy, but that’s when you should be watching your score the closest!  And, when you find an inaccuracy, it’s the best time to fix it!   Otherwise, this incorrect information could very likely prevent you from rebuilding your credit and cost you even more MONEY.

Generally, the two years following a bankruptcy are actually the best times to begin to re-establish your credit.

Here are the correct steps to take.

  1. Review your credit report thoroughly and regularly. To do this DO NOT use an online company like Equifax in order to view your credit report. Why? You might lose certain rights in order to comply with that company’s own rules (each company is different). Instead, write to annualcreditreport.com and use the MAIL IN form to request your credit report.

Note: you MUST ask for your report in writing. Sure, it may seem archaic, but it’s the only really good way to get all of your credit information and not be taken advantage of by the credit reporting agencies.

  1. Once you have your report, take a good look at it. Since you have declared bankruptcy, all debts that can be cleared should be cleared. Next to any cleared debts the note ‘zero balance discharged in bankruptcy’ should appear. If there is anything else written — anything at all! — make sure to correct that detail. The above statement is the only one that should appear.

  2. If there is any wrong information on your credit report, write directly to the credit agency that has reported the wrong information. One again, it is very important that you do not take the easy road on this and email or call the credit reporting agency, this dispute must be submitted in writing. You cannot submit this information online or through an email because you may not be able to prove your case if they fail or refuse to remove the negative information. Why am I telling you to take the hard way? Evidence, that’s why. When I sue the credit reporting agencies, I need evidence. Without evidence, you do not have a case.

A Long Process

Again, it’s a lot simpler to ask for a credit report online and to submit things online, but this is not what we recommend. Even though it takes a while to submit information or ask for a credit report in writing, this is the absolute best way to go about this process. It’s important that you consider what you might be giving up when you gain information through any kind of private company, so keep this in mind when tempted to ask for credit rating details electronically.

A Qualified Bankruptcy Attorney Can Help

It might not seem like there’s a lot involved in declaring bankruptcy, but a good legal team can do a lot more than plead your case. When you select a bankruptcy lawyer, it’s important that the lawyer you choose helps you decide whether or not bankruptcy is actually the right course for you. In some cases bankruptcy is ideal, but in other cases it’s not the best solution.

What is Rapid Rescore?

If you read about the housing market a lot, or you’ve recently been house hunting, you might have heard of something called ‘rapid rescore.’  Essentially, this is a service that mortgage lenders provide to certain clients in order to immediately boost credit scores. The main goal of a Rapid Rescore being to make it easier to purchase a home.

In some instances, a Rapid Rescore can be a good thing, but it’s not a strategy for everyone. If you’re considering paying extra for this service (or just want to know more about it), here’s some detailed information to take into consideration prior to opting for this service.

Not A Clean Slate

If you have bad credit, buying into a Rapid Rescore service isn’t going to fix that bad credit. Here’s what it will do:

  • Update your credit immediately
  • Allow you to purchase a home with updated information

Here’s what a Rapid Rescore won’t do:

  • Fix any major credit problems
  • Help you gain credit approval if your credit is truly bad
  • Eliminate any bankruptcy notifications that might be listed on your credit report.

How It Works

  1. Corrected credit report information is updated (so, let’s say that you’ve recently paid off a credit card or two, and you opt for a Rapid Rescore. Instead of waiting months for that update to happen, the information is fixed immediately).

  2. The updated details are sent to the credit bureaus.

  3. The lender then asks for an updated score that reflects the new changes.

All of this happens within days, but it’s not a service that you can get on your own. This is a value added service that lenders provide to certain people.

Not For Everyone

A Rapid Rescore is a great tool if your credit report needs a small bump – 5-10 points max. But, it’s not a tool that will work (or even be offered) if you’ve missed payments or have bad credit. In order to fix those problems, you will have to fix your credit. Normally, it takes six months to one year to fix credit problems, so keep this in mind prior to shopping for a mortgage. If you see any problems on your credit report, we still recommend fixing those issues in writing.

Getting a higher credit score immediately can make a huge difference where interest is concerned, and for some people it might even mean getting a mortgage as compared to not getting approved at all.

Best Ways To Improve Your Credit Score

When you look at improving your credit score, you have to look at the big picture.  If you’ve had a bankruptcy, it can stay on your credit report for 10 years, even though your credit history typically only covers the past seven years.

While there are plenty of law firms and companies out there that claim to be able to repair your credit report in an instant, many of them are scams, and can actually hurt your credit.  Simply put, the best way to clean up your credit report is to work on it yourself.  There is no “magic” fix – it takes time and effort, but in the end, it’s worth it.

Here are a few simple steps to get you started, cut remember, this is not an easy, quick fix.  It’s more of a starting point to put yourself on the road to managing your credit successfully.

Step 1. Make All of Your Payments On Time & In Full

The best possible way to offset your bad credit, and the best and first step toward repairing your credit, is making all of your payments on time, every time, and to pay them in full every month. Not only will this first step keep you from falling into the vicious cycle of owing interest and penalties, it will also help you climb back out of debt.

Step 2. Reduce Your Debt

Look for ways to reduce your debt, whether it’s just paying things off slowly, enrolling in a debt counseling program, or joining a payment plan with creditors to whom you are the most in debt. Don’t allow your debt to continue climbing.  Instead, actively take steps to clear your debt, and you’ll be home free sooner than you think.

Step 3. Understand Your Limits

This is the third most important step to take throughout your financial life. If a credit card, or bill sounds too high for you, or out of your league, don’t do it!  Your two best friends here are your basic math skills and your instincts. If you foresee a problem in the future, there’s a good chance there will be. Only purchase things you can afford, –it sounds simple, but it’s harder than most people think.

Step 4. Periodically monitor your credit report

Negative information about late or missed payments can lower your overall credit score. Monitor your credit report for incorrect information and dispute it when necessary.