07
Nov 2012

Credit Guidance – Should I Pay Charged Off Accounts?

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Until the recent economic meltdown, large charge offs on credit histories were a fairly rare occurrence. With the economy still struggling to regain its footing, this is changing rapidly, and more people will be facing the necessity of dealing with charge offs on their credit histories. Everyone who obtains a charged off account on their credit history wonders “Should I pay charged off accounts?”

Charge offs are one of the worst entries that can be made on a credit report, and are the leading reason for being denied credit in the future. This is because unlike a late account or an account in collections, by declaring a charge off the debt issuer is letting future creditors know that no payment was collected on the debt. This makes lending to a person with charge offs on their credit history

Should I Pay Charged Off Accounts

less desirable, since future creditors will fear the risk that the debtor will force them into a charge off situation.

Checking your credit report regularly is the best way to spot charge offs reported in error; you certainly don’t want a charge off you don’t owe to impact your creditworthiness. But what happens if you know you really do owe the debt, and now you’re stuck in a charge off situation?

Frequent Misunderstandings about Charge Offs

Charge offs are usually reported after six months of non-payment. If even a token amount is paid during that time, the creditor will typically restart the six month count down. After a charge off is reported, there are several things that can happen to that debt – but it won’t just disappear. Don’t fall for these common mistaken assumptions about charge offs.

  • “After a charge off, you no longer owe the debt.” The fact is, even after the debt is charged off, the debtor owes the debt. A charge off is a declaration that the creditor did not receive payment for six months.
  • “Once a debt is charged off, they won’t collect.” Actually, even if a debt is charged off, the creditor has the right to collect, or to assign the right to collect to someone else. What’s happening here? Frequently, creditors will sell your debt to a third party collection agency, sometimes for pennies on the dollar. The third party then can collect the whole amount; this is why many collection firms are so aggressive.
  • “After seven years, a charge off disappears from your report.” If no updates to the debt are made within seven years, depending on the type of debt the mark on your credit may fade. But if a third party is trying to collect, they may continually update your report to keep the debt active, meaning it can remain visible to all until the debt is paid. Paying off charged off accounts is the only way to guarantee that the debt will eventually be removed from your credit history.

Paying Off Charged Accounts

For those wondering “Does paying off charge offs help your credit?” lenders’ increased willingness to work with you is one way that your credit will benefit from paying off such an account. Additionally, paying off a charged off account will ensure that eventually, the debt will be too old to be considered relevant to your credit profile. If the debt is constantly updated by an aggressive collector, this will not be the case.

Paying off charged off debt makes financial sense in the long term. Although an initial charge off immediately impacts your credit score and overall credit risk profile, charge offs that remain unpaid can cause further damage to your score. A paid off charge off, on the other hand, can improve your score, although it will take time for your score to return to what it was before the charge off was reported.

Now you are definitely asking, “So, should I pay charged off accounts?” In short, the answer is yes, you should pay off a charged off account. However, if you’re in financial straits, you don’t want to risk getting another charge off from a creditor you can’t repay because you spent the money you had fixing the charge off.

Ask the creditor handling the charge off for repayment terms that you can afford on a schedule you know you can meet. Settlement, in which you pay less than the original debt owed, is also an option; just be aware that a note will be made on your credit report that the debt was settled and not collected in full. The important thing is paying off whatever you can so that your credit can recover quickly.

Categories: Credit Reports Tags: , , ,
23
Jan 2012

What Are The Different Types of Credit Scores?

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What Are The Different Types of Credit scoresNot all credit scores are created equal, not even close. Did you know there are actually different types of credit scores?

Here are the 5 most popular types…

1. FICO

Hands down, FICO is the most popular type of credit score. It was first launched in 1958 and today, well over 90% of the largest lenders use it. All of the best credit cards and loans will take into account your FICO score when reviewing your application.

The FICO range is 300 to 850, but rarely will you find someone near the bottom or top. To put things in perspective, only 2% of Americans have a score between 300 and 499. And to be above 800 puts you in top 13%. The median is reportedly 723.

2. VantageScore

The credit bureaus have to pay Fair Isaac (the owners of FICO) to use their formula. So for that reason, they decided to join forces a few years ago and come up with another type of credit score – the VantageScore – but so far it hasn’t gained much traction.

It runs on a 500 to 990 scale and every 100 points corresponds to a different letter grade; 500 to 600 = F, 601 to 700 = D, 701-900 = C, 801 to 900 = B, and 901 or higher = A. This helps you gauge quite easily how good (or bad) your score is, unlike FICO which doesn’t have a neat breakdown like that.

But does the VantageScore matter? Well it is used by some lenders, but the estimated market share has been pegged at less than 10%. So while it may be a good way to see where you stand, it definitely is not a replacement for knowing your FICO score.

3. PLUS Score

You know those annoying commercials for FreeCreditScore.com? Well, they give you the Experian PLUS Score. If you look in the fine print on their website, you will see this:

Yep that’s right… the PLUS Score isn’t even used by lenders! So I would take it with a grain of salt.

Its scale runs from 330 to 830 which is somewhat similar to FICO, but because this type of credit score model is different, there’s no way to use it for an apples-to-apples comparison with FICO.

4. TransUnion TransRisk Score

Like Experian, the credit bureau TransUnion also decided to develop their own scoring model. They call it the TransRisk score and it runs on a 300 to 850 range. Sure, that is the same as the FICO range, but again you have to remember we are dealing with a totally different formula hear. So just because you have a 730 TransRisk, it doesn’t mean your FICO would be 730, too.

Just like the PLUS Score, this one is yet another so called “educational score.” So when you apply for a credit card or mortgage, the lender won’t give diddly-squat about what your TransRisk number is. The only places that use this are some websites which sell or offer credit scores directly to consumers.

5. Community Empower (CE) Score

Rounding out this list of credit score types is yet another which you will encounter on a few personal finance sites, but lenders rarely use it (Wikipedia says it’s also licensed to banks, but I don’t know of any which use it).

It runs on a 350 to 850 range and probably the most well-known site that uses it is Quizzle.com.

Rather than tying it to credit card offers, you will see this score mostly associated with mortgages. Why? Because the creators for this type of credit score – CE Analytics – use it for Community Empower, a lease-to-own program that is their bread and butter business.

Are You Mixing Them Up?

I have found that on my site CreditCardForum, many people erroneously use these scoring types interchangeably. Obviously that’s a bad thing, since they all use different formulas.

For example, someone might post a comment about the US Airways MasterCard and say “I got denied with an 800 credit score.” This confuses people reading it, because it probably would be assumed that was in reference to an 800 FICO. When in actuality, the poster was referencing an 800 VantageScore… which indeed might not be good enough to qualify for a US Airways MasterCard (nor many other airline credit cards).

So when you check your credit score, not only do you need to know what type you are getting, but you also need to know what types other people are talking about on the forums and blogs. Since there are only two websites which sell FICO to consumers (MyFICO.com and Equifax.com) there’s a good chance the score you are getting is something different.

This guest article was written by Mike, who eats, breathes and sleeps credit on his website. Not only is he constantly updating CreditCardForum.com’s “best credit cards” list, but also stays busy covering topics relating to credit scoring, debt, and other personal finance matters on there.

Categories: Credit Reports
11
Jan 2012

Where To Get Free Credit Monitoring At No Cost To You

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Want free credit monitoring?

I recently received an email from Credit Karma saying that they are now offering a free credit monitoring service on top of their free credit score program.  So in this article I’m going to give you all the details and why you should do this.

Features

With the free credit monitoring services you are going to get a bunch of great tools to help you manage and protect your credit from getting trashed.

  • Email Alerts – First off, as member you will receive proactive email alerts anytime their is a significant change with your credit.  On top of that it will also inform you if you if you are going to be delinquent on a bill or debt that you owe on to help prevent you from destroying your credit.
  • Identity and  Credit Theft Protection –  With Credit Karma they will constantly watch over your credit for any suspicious activity and let you know as soon as something happens.  So if someone decides to open a new credit card in your name without your consent you will be notified immediately.
  • It’s Fee Free Always – As a subscriber with Credit Karma you don’t have to worry every paying for it.  Their are no trial based subscriptions to worry about or a free program and a paid program to upgrade to.  The reason this program is free of charge is because Credit Karma makes their money by selling products on their site such as credit cards, savings accounts, and auto insurance.

How To Get Started

To get started follow my 3 simple steps.

Step 1: Sign up for Credit Karma.  To get started sign up for a free Credit Karma Account.  This will enable you to get your free score and simulator.  To learn more about these features check out my Credit Karma Review here.

Step2: Sign up for free credit monitoring.  Once signed up for an account click on My Profile in the upper right corner.  From there scroll down and click on Credit Monitoring Services.  From there you just have to click the little box to allow them to email you on any changes on your credit report.

Step 3: Relax.  Finally, in the last step you can relax.  Now that your credit and identity are being monitored you can rest asured you won’t get hacked, scammed, or have your identity stolen.

One Final Thought…

As a final thought I would like to mention about this free credit monitoring services is that this program only monitors your credit and identity. It doesn’t fix it if something does happen to you, and their is a big difference between the two.

With this free credit monitoring service they are just merely informing that something my be wrong with your credit and identity.  Fixing the issue will be up to you.

For example, if someone hacks your credit card numbers and tries to open a new account Credit Card account they will not stop them, they will only inform you that someone has done this to you.

So have you signed up for the free credit monitoring service through Credit Karma?  Feel free to share you thoughts, comments, tips, and questions below.

Cheers!

Categories: Credit Reports
10
Oct 2011

How To Freeze Your Credit Report In 3 Easy Steps

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how-to-freeze-your-creditA few years back a close family member of mine was checking out at a local Walmart.  As she packed up here things and left about a half hour later she got a phone call from her credit card provider explaining she had some recent transactions on her card from Las Vages, Sweden, and countless other places around the globe.

From here they stopped all further transactions because her identity had been obviously stolen.  So in this article I’m going to give you a simple way to prevent this from happening you by showing you how to freeze your credit report.

What Is A Credit Freeze

Before I get into the how part of this article you may be wondering what is a credit freeze?  To put it simply, it’s a way to prevent people from opening any new credit in your name.

For example, if someone were to obtain your name, address, date of birth, and your social security number they could easily open a new credit card in your name.  Then these criminals will typically stake out your place waiting for the card to show up in your mailbox.  Once they have the card it will be to late because the next thing you will get is a bill in the mail, and the crimials will be long gone.

However, when you freeze your credit report it doesn’t protect you from all identity theft.  If  someone were to obtain your credit card information they could use it since it is already an existing line of credit, however if they wanted to increase the amount of credit they would not be able to do so.

So now that we know what a credit freeze is let’s see how do you freeze your credit.

Step 1: Guidelines and Fees

In order to freeze your credit you will have freeze it with all 3 credit bureaus, and you will typically have to pay a fee around $3 to $10 to each of the credit bureaus, however if you’re a victim of identity theft you will typically be able to freeze your credit for free.   Below is a clip of what the fees are for Ohio.

feesohio_credit_freeze_fees

If you would like to see what the fees are in your state you can check that out here.

Step 2: Complete The Online Application

Once you’ve determined your states guidelines and and fees on how to put a freeze on your credit report the next step is to complete the sign up application.  Their are two ways fill out the application. The first option is to sign up through certified mail , however this can take some time to do.  That’s why I suggest the second option, complete the online application.  Below is a link to each of the 3 bureaus freeze applications.

Once you get to the application page you will see a form pop up that will ask for some basic information.  The picture below is what the basic sign up form will look like.

freeze_infoStep 3: Place A Freeze And Confirm

Once you’ve filled out the application you will need to select and confirm that you would like to place a credit freeze on your account.  At this point you will also receive a 10 digit security PIN number through the mail.  Once you have this done rinse and repeat with the other 2 credit bureaus.

I know this sounds to simple to be true but that’s it.

How To Thaw Your Credit

Finally, at some point you may want to thaw your credit so you can apply for credit or get a loan.  To do this you will need a few things.  The first thing you will need to decide is whether you want to permanently remove the freeze or temporaily remove it.

For a temporary removal you will need these things.

  • Your 10 digit security PIN which you were given when you instated the freeze.
  • You will need a date range in which the freeze will be lifted.  Not all states will allow this.
  • Information of the third party who will be accessing your credit info.

For a permanent removal you will need 2 things.

  • Your 10 digit security PIN which you were given when you instated the freeze.
  • 2 forms of identification.

To instate a thaw on your credit you can do that here.

Final Thoughts…

As a final thought on how to freeze your credit consider the reasons before you do it.  If you are going to apply for a loan or new credit card it may not be a good idea to freeze your credit since you will need to access it on a regular basis.  On top of that it will cost you a lot in fees as well.

So what are you’re thoughts?  Feel free to share your questions, thoughts and comments below.

Categories: Credit Reports Tags: , , , , , ,
19
Sep 2011

Excellent Credit Score – 8 Factors That Make Up A Great Score

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In my last article I talked about how to fix a bad credit score, so in this article I’m going to go a step further and cover what makes up an excellent credit score and show the 8 main factors that determine what your score will be. So if you’re someone who wants to understand just how your credit score and report works this article is for you.

What Is Considered An Excellent Credit Score

When it comes down to it their are all kinds of different scoring models for determining someones credit.  In fact the 3 main credit bureaus, Equifax, Experian, and Transunion all have different ways of determining your score and the weighting that is given to a specific area of your score.

However a typical score will range from as low as 300 to as high as 850, and depending on the range of your score it could determine how lenders might perceive you.  For example, the picture below show where my current credit score falls in the overall picture.

excellent_credit_score

If you notice in the picture above a credit score falls in 5 general areas.

  • A which is a score of 750 to 850.
  • B which is a score of 700 to 750.
  • C which is a score of  625 to 700.
  • D which is a score of 575 to 625.
  • F which is a score of 300 to 575.

So now that we know the range a score my be within lets cover the factors that determine that score in a little more detail.

Factor 1: Open Credit Card Utilization

Weight Factor:  High

Open credit card utilization determines as a percentage how much of your credit is being used on a monthly basis.  This percentage is determined by dividing the total amount of credit card debt you currently have by the available credit.  The higher this percentage the more it will damage your credit score.   Below is a picture of my current scoring in this area.

credit_card_utilizationI actually score well in this area, but if you would divide $849 by $8000 you would see that I only use around 11% of my total credit limit which is very good.  Take some time to figure yours out now.

Factor 2: The Average Age Of Your Open Credit Lines

Weight Factor: Medium

Age plays a very important role in your credit rating.  Think about it if you have an older credit line they could make the assumption that you can handle your credit decently.  To determine your average credit age simply total up the age of each open credit line and divide by the total number of open credit lines over the total age.  Below is a picture of what mine looks like.

average_age_of_open_credit_linesIn my case I’m pushing 7 years on my age which is fairly good.  If you look at the chart above and you have an average age of 8 years or more you would be scoring really well in this area.  In my case I score a B in this area but in a few years by just letting age do it’s thing I will improve my scores.

Factor 3:  Percent Of On Time Payments

Weight Factor: High

Making your payments on time can make or break your credit score.  In fact when I worked in financial services I worked with a loan officer who explained it as the kiss of death.  The reason being because it only takes one time to miss a payment and it can have a huge effect on your score.  Below is a picture of mine.

percent_of_on_time_paymentsBy looking at the picture above it’s easy to tell why I have an excellent credit score with 100% of all my payments made on time.  In fact if I were to miss 1% of my payment which would be 1 payment in my case it would have a significant effect on my score, that’s why making all of your payments on time is so important.

Factor 4: Total Accounts

Weight Factor: Low

By now you’re starting to get a good idea of what’s an excellent credit score and factors that are not but we are now only just half way through on the factors that determine your score.  When it comes to the total accounts that you carry creditors will usually give those that have more accounts a better score since it show other lenders are willing to grant credit.  I don’t typically agree with this since some people prefer to pay everything in cash and it’s usually these people who get burned playing by the rules and can’t get a loan as a result.  To prove my point look at how I rank in this area.

total_accountsI actually rank very poorly in this area because I only have two accounts.  Now I could open more accounts but I choose not to because I don’t want to open myself up to the possibility of more debt.  Good thing for me though that it carries a very low weight factor because I’m not planning on changing this any time soon.  I should also mention if you have a similar problem with this like I do you could try upping the amount of credit on a current credit line.  I’ve found this to be a nice fix.

Factor 5: Hard Credit Inquires

Weight Factor: Low

A hard credit inquiry is typically only ever placed on your credit report when you apply for credit, such as a credit card, or loan of some sort.  I should also mention that when you check your credit score with an online site such as  Annual Credit Report that it is considered a soft inquiry and has not effect on your score what so ever.  Below is a picture of mine.

hard_credit_inquiriesIn the chart above you can see I don’t have any inquiries at this time however I’m currently in the process of buying a new house and this will actually have a small negative effect on my score as a result. However it’s a necessary evil if I want to buy a new house.

Factor 6: Derogatory Marks

Weight Factor: High

These are marks that count very high against your credit such as bankruptcy, tax liens, and foreclosure.  In fact these marks can take anywhere from 7 to 15 years to have removed from you credit score, and some marks can stay on indefinably. For example, if you had a tax lien against you and you didn’t pay it off that mark could remain on your report until you pay it off.  Below is picture of my marks.

derogatory_marksObviously, I don’t have any issues in this area but by having  just one mark in this area it could significantly lower my score, so take my advice stay way from these type of marks and you will save yourself a ton of financial hardship.

Factor 7:  Total  Debt

Weight Factor: High

The last 2 factors I’m going to cover in this article are not necessarily going to be scored in your credit report, however the total debt you carry plays a big factor if you want to get a loan for any reason.  Having to much debt shows lenders that you may not be able to pay it off and may not be able to handle any more debt.  In my case I have very little debt, check out the chart below.

total_debtI should also mention paying down your debt in full is one of the quickest ways to improving your score.  To learn more about how to do this check out my 8 Step Debt Plan.

Factor 8: Debt To Income Ratio

Weight Factor: High

The final factor to consider is your debt to income ratio.  This is a ratio that determines how much of your monthly income goes towards debt payments.  For example if you earned $5000 a month and had a total of $1500 in debt payments a month you would have a debt to income ratio of  30%.  Below is what my debt to income ratio looks like.

debt_to_income_ratio

The lower your debt to income ratio the better but if you want to have the best chance of getting approved for a loan try to get your debt to income ratio down to at least 36% or less.

Questions or Comments?

Now that you know what is an excellent credit score do you have any questions or comments to add?  Is their anything that should be added or do you have a question about your own credit score?  You credit is very important so take the time to check your report now.

Categories: Credit Reports Tags: , , , ,
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