Not Using Your Credit Cards Can Lower Your Scores

In the topsy turvy world of credit crunches, avoiding using your credit card seems to be one of the smarter moves you can make in 2009. No usage equals no debt. No debt equals no interest. No interest equals… well, you get my point. But it will probably surprise you to hear that many credit card issuers are proactively closing credit card accounts on millions of their customers simply because they aren’t using their cards. This illogical strategy seems to imply that they don’t want to do business with inactive cardholders any longer. Here’s exactly what’s going on and why...Please sign up or login to see the rest of this page.

Debt and Collection Agencies

With more and more ...Please sign up or login to see the link... going delinquent, it’s not a surprise that debt collection companies are finding themselves very busy these days. These friendly people are the ones who call your house, your job, your house, your friends, your house, your family, and your house trying to convince you to do what you weren’t willing or able to do for your lender, which was to open your checkbook.

In this episode of Credit Myth Busters we’re going to focus on five little-known facts about collections:

1. Re-aging is illegal – don’t let it happen to you! Re-aging is the process (yes, the illegal process) whereby a collector updates the “date assigned” of a collection to fool the credit bureaus into thinking it’s more recent than it actually is. This causes the collection to remain on your credit reports longer than the seven years allowed by the Fair Credit Reporting Act. Some collectors do this intentionally and some do it accidentally. Regardless, you need to make sure that the collection doesn’t stay on your credit files any longer than the listing of the original delinquent account.

2. The collection will not disappear immediately. A collection that has been paid or settled does not get removed from your credit reports right away. Rather, it will reflect as “Paid” instead of “Delinquent”, but it will still drop off seven years after the original delinquent date. There’s talk about a law that will require the removal of medical collections once they’re paid, but that’s not in place as of now. And any other collections for things like unpaid utilities, traffic tickets, and when you stiffed the Domino’s delivery guy for those 9 Meat Lover pizzas stay on your credit reports even after you’ve made good on the debt.

3. Your ...Please sign up or login to see the link... will not immediately increase after paying off a collection account. This is probably the most prevalent myth about collections: Many of us make the assumption that paying a collection will lead to an increase in your score. This is not a guarantee, and even if your score does go up, it won’t go up by much. According to the scoring criteria, what’s more important is the fact that you went to collections in the first place, not the balance of the collection itself. If this is the case, then why should you ever pay your collections? Continue to number 4…
 
4. It’s wise to pay or settle or you might be faced with a lawsuit. Many consumer advocates advise that you ignore the collection calls and letters. In fact, I attended a presentation in Atlanta made by an extremely well-known personal finance celebrity, and he told the audience that you should avoid collectors like the plague. I looked at my partner in Creducation, Deanna, and we both simultaneously made the “Oh no, he didn’t” face. In reality, you’re much better off working with the collector to settle the account or pay it off. The more you owe, the more likely the collection companies will pursue the debt into court to compel you to pay. That could mean garnishment of wages or a judgment against you.

5. Payment plan options are limited, and at best they will only get you a little more time. Collectors might be sneaky, but they’re not stupid. If you’re willing to pay them, they’re going to try and get as much out of you as they can in as short a period as they can. Here’s another reason why they don’t like payment plans: Why would they agree to a drawn out payment plan when you couldn’t honor your payment plan with the original creditor? The best you’ll get is two or three months. If you find one willing to offer a longer payment plan, TAKE IT!!

Errors on Your Credit Report: Should You Sue

Imagine this scenario… You discover errors on your credit reports by one or more of your lenders. You challenge them and ask the credit bureaus to correct or remove them. Thirty days later the credit bureaus send you a reply confirming that what they have on file is accurate and it will not be removed or changed. They also direct you to contact your lender if you have any further questions regarding that allegedly incorrect credit reporting. You take the same course of action with the lenders reporting the incorrect information and, again, you are unsuccessful in getting the items corrected.

The scenario just described happens thousands of times every week. And while the Fair Credit Reporting Act is designed to protect consumers from credit bureau and lender negligence, the number of valid challenges to credit report data is not decreasing. Unfortunately, the number of challenges that result in credit reporting data being amended in favor of the consumer pale in comparison to the number that remain the same.

At this point the consumer has two very simple options; they can either live with the erroneous information until the state or Federal credit reporting statute of limitations expires, normally seven years, or they can escalate their efforts to have their credit reports corrected by filing a lawsuit.

Many experts are predicting that 2009 will yield an increase in consumer credit lawsuits due, in part, to consumers feeling the sting of increasingly difficult access to credit because of the credit crunch and a willingness to incur the costs of litigation to restore their good credit standing. “To some people it’s an investment, do the math. If it costs you $20,000 in legal costs to force a lender or credit bureau to remove an inaccurate collection and the removal allows you to qualify for a mortgage interest rate that saves you $100,000, you tell me, was that a wise investment?

In fact, it’s possible that you’ll recover all of your legal costs as part of a settlement if your case is strong. It seems logical that the credit bureaus would not prefer a jury determine punitive damages in a case where they have sold credit reports to a lender that contained inaccurate information, but there is also a risk that the judge will grant only a portion or none of your Attorneys fees and then you’re out that part of the money. The trade off for the credit reporting industry is legal fees and a controlled settlement amount, versus the unknown of taking the case to trial where the odds are not certain that at least one of the members of the jury has not had a similar experience with a credit bureau or lender.

The credit bureaus are sued hundreds of times each year with the majority of those lawsuits being filed in Georgia, California and Illinois. “It’s not a coincidence that the filings are disproportionate to those states given that’s where the three national credit reporting agencies are based”, says John Ulzheimer, President of Consumer Education at ...Please sign up or login to see the link... and the Owner of ...Please sign up or login to see the link..., a consumer credit expert witness referral service. The credit bureaus also maintain insurance against such lawsuits so the costs can be limited to premiums and deductibles in many cases. Having said that, it’s certainly not a comfortable feeling knowing that you’re about to go to war with a company large enough to easily absorb the cost of litigation. “It’s a rounding error to them and you better be prepared”, states Ulzheimer.

So how do you know if you’re prepared to sue your lender or one of the credit bureaus? Here’s a checklist. If you can’t answer yes to each of these then litigation may not be for you.

1. Have you documented all of your calls with the lender and credit bureau? This means every conversation you’ve had with them since you started your attempts to have the errors corrected. This can be as simple as a handwritten summary of the conversation with dates and names.

2. Have you attempted to have the item corrected using the standard protocols? You can’t simply file a lawsuit against the credit bureau without giving them the opportunity to correct their error. Be sure that you’ve exhausted your rights to challenge credit report items as defined in the Fair Credit Reporting Act.

3. Have you suffered any damages due to the incorrect item? If not, then think twice about filing a lawsuit. Damages can be credit declinations, credit approvals with disadvantaged rates, higher insurance premiums, or the loss of a job due to credit report pre-employment screening. Can you document these things?

4. Can you tie the damages to the incorrect item? Are there other seriously negative items on your credit reports that are completely accurate that can be blamed for your damages?

5. Do you have copies of your credit reports and FICO scores and can you put together a chronology of credit reports and scores? If you can’t, then you can subpoena the credit bureaus for archived credit reports and scores, although they will object profusely.

6. Are you absolutely certain that what’s being reported is incorrect? Before you file a lawsuit you need to do a reality check. If the items are accurate but simply not to your liking, save your money.

7. Does your case have a chance? An expert witness can assess this for you before you spend a dime on a lawyer and can give you an honest assessment of your chances for success and ways to better prepare for litigation.

Credit Alert

Most people have never checked their credit score. They have always used credit wisely and have probably never been denied a loan. Long story short, they have never really had a good reason to worry about their credit score.

They do now.

Why? Because banks are systematically lowering credit limits on credit cards and HELOCS, even for borrowers with spotless credit records.

So when they receive notification from their bank of a drop in their available credit, they usually don’t think too much about it at first. They say to themselves that they had no plans to max out their credit cards anyway. And besides, they just got their HELOC as a financial safety net or they only used it to finance a new car at better rates with a nice tax deduction.

But what the banks aren’t telling them is the negative impact lowering their credit limits will have on their credit score.

As soon as a borrower’s credit limit is lowered, it changes their Credit Utilization Rate, (CUR), which is a major component of their credit score. Credit Utilization Rates are calculated by dividing outstanding loan balances by the amount of credit available.

For example, if a borrower has $10,000 in credit card debt with an available credit limit of $40,000, their Credit Utilization Rate is 25%. But if their credit limit drops to $10,000, their CUR leaps to 100%.

The same thing happens when a bank freezes a HELOC.

As a result, millions of people who have never worried about their credit scores and who have spotless records are getting a rude surprise the next time they apply for a loan.

That’s what Michael Isroff believes happened to him. He had a mortgage on his condominium in Chicago, plus a home equity line of credit with a balance of $12,000. This spring, National City froze his HELOC which had a credit limit of $100,000. National City wrote in a letter that Isroff wouldn’t be allowed to borrow any more against his home’s equity, and he would have to pay off the balance over time. In effect, his credit limit was reduced from $100,000 to the $12,000 that he owed.

Like most people, he didn’t think too much about it at the time because he didn’t really need it, it was just nice to have.

But when he went to refinance, his mortgage broker told him there was a problem. The best programs and rates were only available to borrowers with a credit score above 720 and he was two points short. He didn’t know it then, but his credit score dropped overnight from 760 to 718.

And he’s not alone.

There are millions of borrower’s just like him who are going to need help repairing their credit to purchase a home, rent a decent apartment, buy a new car, get insurance, buy a cell phone or even just get a good job

How Medical Collections Can Hurt Your Credit

We all know that ignoring our credit card bills will most likely lead to collections. We also know that if we break a lease and skip out on the last months rent, this too could lead to collections. What if we don’t pay a utility or phone bill for several months? Not only would we end up with no power or phone service, but you guessed it, we’d probably end up with collections as well. What we don’t expect is inefficient communication between our doctors and our insurance company damaging our credit and credit scores.

Between uninsured Americans and the bureaucratic red tape between large healthcare companies and insurance providers, medical collections have become increasingly common in consumer credit reports. The problem is that a lot of consumers believe that medical collections are overlooked or excluded from their credit and credit scores. Unfortunately, medical collections are no different than other types of collections and can wreak havoc on your credit scores just as easily. The most frustrating thing with medical collections is that in most cases the consumer isn’t the cause, yet they end up paying the price as though it were.

One reason for the large misconception about medical collections is due to how some industries view them. While medical collections hurt your credit scores just as badly as other collections, most industries don’t view medical collections as negatively as other collections. The mortgage industry in particular, will frown on unpaid collections but tend to overlook or turn a blind eye on unpaid medical collections. Even FHA guidelines aren’t overly concerned with medical collections when determining a consumer’s eligibility for a mortgage loan. This begs the question, “why do credit scoring models view medical collections the same way they view non-medical collections?” There are a couple of reasons:

So what does this mean to you and how can you keep this from happening? This is a tough one because there’s really no easy answer. The best option would be to avoid medical collections if at all possible. This may mean paying for medical debts until your insurance company processes the claim and pays the bill. The problem with this solution is that not everyone has the funds to do so. Another option might be charging the services to a credit card but this too can cause problems because higher utilization on your credit cards can cause your credit scores to fall.

In this case there’s just not a simple solution. Until the credit industry makes changes to flaws in the system, consumers with medical collections caused by insurance company incompetence will continue to suffer from poor credit scores.

Credit Mix : 10% of Your Credit Score

In previous newsletters I have written about Payment History-35%, Amount of Revolving Debt-30% and Length of Credit File-15%. This week I will address the Mix of Credit -10%. Generally, Mix of Credit is determined by what types of accounts and how many of each type of account are on your credit report. The mix of accounts include all past and current accounts, not just your current and open accounts.

Identity Theft

1. Make sure you’re using a secure server when accessing the Internet.  Cyber hackers can get into your system and steal critical personal and financial information.

Boost Your Credit Score: Age of Credit File

Average Age of Credit File 15%   

In previous newsletters I have talked about the two main components of your credit score: Payment History 35% and Debt Utilization 30%. While the Average Age of your credit file is lessor known , it is still an important component in helping you build your credit.

FICO: The Only Score That Matters

Credit Utilization ( Revolving Debt)

Managing Revolving Debt Can Make A Big Impact on Your Score: Debt Utilization 30%  

If you want to improve your credit score , the revolving debt ratio is an important tool and an area to rack up points  and increase credit worthiness. The best way to maximize credit is to have 3 to 5 credit cards or revolving tradelines. The reason for having multiple cards is simple, debt sharing. Shared debt among all accounts lowers the ratio and results in a higher credit score. By sharing debt among different cards you will generally pay less in interest.

Now let’s look at an example of how sharing debt can lower a debt ratio. John has $ 5,000 in total debt and he has two credit cards with different limits. The first card has a $ 5,000 limit and the second card has a $ 10,000 limit. Assuming John is unable to pay off the total  $5,000 debt, John would get the most benefit to his score by maintaining a 33% debt utilization rate, by placing $1,667 (1/3) of the debt on the card with a $ 5,000 limit and the remainder of $ 3,333 on the card with the $ 10,000 limit. If John were to only have 1 credit card with a $ 5,000 limit , he would be 100% utilized and thus would lower his credit score. 

  The general rule when it comes to debt utilization is to be at least at 50% , this generally will not hurt nor help your credit score. Essentially anything over 50% will lower your score and being 100% utilized can temporally ruin a credit score. Ideally your debt utilization should be 20% or less to gain the full scoring benefit from debt utilization.

 A lower credit score can be detrimental when it comes to getting a loan with the lowest interest rate.

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