Why Will Paying Off Collections Hurt Credit Scores

When you are trying to improve your credit score, you may think that paying off old collections will help. Think again. You may be surprised to learn that paying off old debt could hurt rather than help your credit score.

Misconceptions

If you are working to boost your FICO credit score, there are a number of steps you can take. Some are obvious, such as staying current on paying your bills. But others are not so clear and may be counter intuitive. You may know that your credit score is calculated by considering a number of factors. Your payment history and the amounts you owe make up 65 percent of your credit score. So, it is natural to think that if you pay off that old bill your credit score will improve. But it depends on when you pay off the debt.

Effects

According to the Fair Issac Corporation, which calculates FICO scores, there are two factors that it considers regarding collections. These are whether you have any collections on your credit report and the date they appeared on your credit report. When you pay an old debt, the credit bureau adjusts the date on the collection, making it a current event. In the FICO software's algorithm, current events are weighted more than older items.

FICO gives more importance to the entry of the original creditor compared to a collection agency. If enough time has elapsed and the account has been turned over to a collection agency, the original creditor may have reported a balance of zero. Fair Issac spokesman Craig Watts told MSN Money, "If the trade line balance is showing zero, you're not going to help your FICO score by paying off a collections account."

Considerations

You may feel a moral obligation to pay your old debts, but if you are trying to improve your credit score for a specific purpose, such as getting the best possible mortgage interest rate, you should wait until after you close or make the purchase to pay off the collection. If the collection is on a debt that you have disputed, or if you have some other reason why you believe you do not owe the money, you can do nothing and it will drop off your credit report seven years after the last activity on the account. So if the collection was reported in January 2006 and you continued to make payments on it until June 2006, it will come off your report in June 2013.

Either option will save you a lowered credit score and possibly thousands of dollars in increased interest payments than if you had chosen to pay off your old debt at the wrong time.

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If You Pay Your Rent Monthly Does it Affect Your Credit History?

Paying your rent on time used to do nothing for your credit history. It was only if you went seriously into arrears that your payments would show up on your credit report. But changes at one of the credit bureaus, Experian, mean you can now help your credit history by keeping current with your rent.

Defaults

The only information that used to be reported to the credit bureaus about rent payments was debts that went into collection. If you fell so far behind in your rent payments that your landlord called in a collection agency, this remained on your credit report as a black mark for seven years, probably along with the public record of your eviction.

Timely Payment

In June 2010, Experian acquired a specialized credit bureau called RentBureau that keeps records on more than seven million renters. This means the agency can now incorporate rent payments as an open account on the credit reports that it keeps. If you maintain current payments, this will be reflected positively in your credit history.

Which Landlords

Not all landlords are covered by Experian. If you rent from a large property management company, your payments are probably being reported. If you rent from a small private landlord who has just one or two rental units, it's likely that he isn't reporting your payments. Small landlords do have some resources to be able to report tenant rent histories, but it costs money, so they may only be motivated to do so if you are in default.

FICO Score

While your rent payments may now appear on your report, they can't yet affect your FICO score. Experian will factor your payments into its own proprietary score, the VantageScore, but FICO has not incorporated the new information into its scoring model. Since your FICO score is the one most often used by lenders and other financial institutions to assess your credit, your rental history won't yet help in this regard.

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National Credit Rating Agencies

Credit rating agencies are responsible for providing investors with information regarding corporation and organization creditworthiness. Credit rating agencies are different from the more widely known credit reporting agencies. While credit reporting agencies are responsible for compiling a wide variety of financial data necessary for loan decisions for individuals, credit rating agencies do the mathematical and statistical math involved in placing a number (rating) on an organization or corporation's credit history.

Standard & Poor

Standard and Poor's credit rating service was founded by Henry Varnum Poor in the late 1800s, after writing a book about the future of securities analysis and financial reporting. Over time, the company released corporate bond, municipal bond, and sovereign debt ratings. By 1966, Standard and Poor's became well-known through the S&P 500 for investor analysis and U.S. economic indicators.

Moody's Investor Service

John Moody was the founder of Moody's Investor Service. In 1900, he published a manual that contained statistics and other information regarding industrial stocks and bonds. In 1914, Moody's Investors Service began providing ratings for government bond markets. In the 1960s to present time, Moody's rates both paper and bank deposits, resulting in a highly-successful full-scale rating agency.

Fitch Ratings

The Fitch Publishing Company was founded by John Knowles Fitch in 1913. Using financial statistics in the investment industry, he produced a manual that outlined the AAA to D rating system that all the credit rating agencies use as their standard today. Fitch now operates subsidiaries that specialize in enterprise risk management as well as data services and industry training from the financial factor.

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Does a Mortgage Payment Made During the Grace Period Affect Credit Score?

Credit scores are determined based on the information your creditors provide to the credit reporting agencies. Creditors do not report your payments as late unless your payment is a minimum of 30 days late. If your creditor receives a payment during your grace period, it has no effect on your credit score. You should mail your payment at least two weeks before the grace period ends, however, to ensure it arrives on time.

Scoring

The exact method of scoring is proprietary information, but all three credit reporting agencies are believed to use the same basic algorithm to calculate the credit score. The difference in scores among the agencies usually is due to the information each agency has in your credit file. Some creditors report payment information to all three bureaus, while others only report to one or two. Prior to the mortgage crisis of 2008-2009, a credit score of 640 typically was enough to qualify for a conventional mortgage loan. In 2011, you usually need a minimum score of 680, and some lenders require a score of 720 or more.

Reports

The three major credit agencies in the United States are Experian, TransUnion and Equifax. Everyone should review his credit report at least once a year. Congress passed a law requiring that each agency allow you to review a copy of your credit report once a year. You can get a copy of your credit report by visiting the AnnualCreditReport website and requesting a copy from one of the agencies. If you wish, you can request one from a different agency every four months, so that you have an opportunity to review each report once a year. There is no charge for this service.

Repairing

When you review your report, you will find a form to send to the credit reporting agency requesting that it correct any errors. If you detect inaccuracies, gather any documentation you have regarding errors on your report, and send the information to the credit agency, along with a cover letter explaining the situation. If the credit reporting agency confirms that an error exists, you should receive a corrected copy of your credit report from the agency in 60 days or less. No law at the time of publication enables you to obtain a free copy of your credit score. If there are errors on your report, you should not pay to see your credit score until the agency corrects the error(s).

Considerations

One payment that is more than 30 days late can have a major impact or your credit score. The credit reporting bureaus will lower your credit score as soon as your creditor reports your late payment. Furthermore, it takes several months of prompt payments to bring your score back to its previous level. One late payment can prevent you from receiving a mortgage or vehicle loan. If possible, send in the minimum payment or more as soon as you receive your statement. If you wait until the last moment and the mail is delayed, the credit bureau will not be sympathetic.

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How Does Credit History Work?

The Past

Credit histories are collected and cataloged by the major credit reporting bureaus: TransUnion, Experian and Equifax. The process behind collecting the data is relatively simple; lenders report to the credit bureaus, and the bureaus in turn keep track of all the information. Every consumer who has ever applied for credit or been granted credit by a reporting lender has a credit history. The history lists pertinent information that is designed to assist potential lenders in deciding whether or not to grant you credit based on how you have treated credit in the past. Items listed on the credit report pertaining to your past include previous addresses you've lived at, previous accounts you've held and a listing of the credit you have applied for even if it was denied. Creditors look very closely at your credit history to see if you have a good record of making payments on time and have not overextended yourself financially.

The Present

Although credit histories are not exactly accurate right up to the very minute, the payment history is usually accurate within one or two payment periods. This is because the creditors report periodically on accounts instead of immediately as they are updated. When lenders look at your credit history, they get a quick glimpse at how you are dealing with credit right now. Do you have open accounts? Are you overextended with your credit? Have you been applying for a lot of credit recently? Most importantly, are all your accounts up to date? Your credit history won't list accounts like utilities or child support payments unless they are delinquent or court-ordered, but lenders can get a reliable image of how you handle your credit card and loan payments by looking at your credit history.

The Future

Using all the information on your credit history, lenders can make a fairly accurate assumption as to your creditworthiness--in other words, how likely you are to pay on time if the lender grants you credit. If you have a strong history of making payments in a timely manner and you do not max out your credit lines on a constant basis, then chances are you will continue along the path of making wise credit choices. While some lenders will review an entire credit history, others are concerned only with the credit score attached to the report. The score does tell lenders a lot about your odds of paying them back, and the higher your credit score, the more likely you will be able to obtain credit approvals in the future.

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How to Transfer Your Credit History to a Newly Assigned SSN

When you are assigned a new Social Security Number (SSN), your previous credit history will not automatically transfer. Credit history is not kept by the Social Security Administration. Instead, the three major credit bureaus, Experian, TransUnion and Equifax, keep their own records of your credit history. Therefore, to transfer your credit history you will need to notify each of the credit bureaus directly and provide evidence of your claim.

Instructions

1

Contact your current lenders and inform them of your newly assigned SSN. They should begin to report your credit under your new number.

2

Type a letter to the credit bureau, explaining that you have a new SSN. Keep the letter simple and to the point. List all previous numbers you had credit under and any previous names you used. Request that your account be listed in your new credit report.

3

Print four copies of the letter, one for each of the three credit bureaus and one for your own records. Sign the three copies for the credit bureaus.

4

Address one envelope to each credit bureau, affix a stamp and write your return address. The three credit bureau addresses are as follows:

Equifax

P.O. Box 740241

Atlanta, GA 30374

Experian

P.O. Box 2002

Allen, TX 75013

TransUnion

P.O. Box 1000

Chester, PA 19022

5

Make three copies of the document you received from the Social Security Administration informing you of your newly assigned SSN. Attach one to each letter and put each letter in an envelope. Mail the letters to the credit bureaus.

6

Wait a month or two and request a free copy of your credit report through AnnualCreditReport.com from each credit bureau. Verify that your credit history has been transferred by each credit bureau. If it has not, call the credit bureau in question to sort out the problem.

Equifax

1-800-685-1111

Experian

1-888-397-3742

TransUnion

1-800-888-4213

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How to Report Corrections to All the Credit Bureau Agencies

Errors on your credit report can lower your credit score and inhibit your ability to open new accounts. Fortunately, you are entitled to copies of your credit reports and can notify the credit bureaus of any corrections that are needed to remove erroneous information. You will need to check your reports from all of the bureaus and report any problems to each individual bureau to make sure they are corrected.

Instructions

1

Request a free copy of your credit report from all three of the main credit bureaus. Transunion, Equifax, and Experian must all provide you with one free copy upon your request on an annual basis. This allows you to check regularly for any needed corrections.

2

Go through each of your credit reports, making a note of any incorrect information. Make a list of what is wrong and the report(s) on which the errors appear.

3

Visit each credit bureau's website and fill out a dispute form for the incorrect items. You must report corrections separately to each of the three bureaus, even if the same mistake appears on all three of your reports. Each credit bureau is a separate company, and they do their investigations independently.

4

Request a second copy of your credit report from each bureau to which you reported corrections. Give them 60 days to investigate the problem and make corrections before requesting the new copy. If the information is not corrected, they are required to report the results of their investigation.

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