Will Paying Off Charge Offs & Collections Boost My Credit Score?

Financial experts, such as Steve Bucci of Bankrate, say that paying a charge-off or collection account does not affect your credit score, but in some circumstances it might. However, the effect on your credit score usually is negligible. Far more important to creditors is the fact that you paid a collection or charge-off.

Identification

The status on a charge-off or collection account -- paid or unpaid -- does not affect your credit score; the credit scoring model looks at all such accounts as a negative. However, the outstanding balance on these accounts can affect your score, because the FICO credit scoring model counts unpaid collections and charge-off accounts in the "amounts owed" variable. Your total amount of unpaid debt counts for 30 percent of your FICO score, so paying these accounts could significantly boost your credit score if they comprise most of your debt.

Other Benefits

Some creditors may focus more on your actual credit history than on your credit risk rating. If you pay off a collection or charge-off, your lender may consider you a better risk than what your credit score states, because paying an old debt shows you follow through on a commitment to pay back money your borrow. Settling the old debts also means the creditor cannot surprise you with a bank seizure, wage salary or other judgment that could impact your ability to repay future debt.

Considerations

You might do better to let a collection account or charge-off go unpaid if it is close to the federal credit reporting time limit. Both type of accounts can only stay on your credit report for seven years after the first delinquency. Even if you have several years left until the accounts fall off your report, the money you spend to repay the debts might benefit you more if you use it to keep current on other debts and prevent more defaults.

Tips

Dispute the negative accounts if you think there might be an error or the creditor or collections agency did not keep proper records. Creditors must report accurate information and be able to verify the facts they report to the major crediting bureaus. You can also try to settle for less than the full amount, but make sure to get a commitment in writing that the creditor will report the account as "paid as agreed" before remitting payment.

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How Do I Change My Credit Report?

If you apply for new credit, such as a mortgage, car loan, credit card, or other form, the lending agency will likely use your credit report as a deciding factor in whether you get the loan, or in determining your interest rate. Any errors on your credit report can harm your chances of receiving the credit you need. The Fair Credit Reporting Act requires that creditors and credit reporting agencies provide accurate information in these reports. Because of this, all three of the major credit reporting agencies allow consumers to request changes to errors in their personal credit reports.

Getting Your Credit Reports

Equifax, TransUnion and Experian are the three main credit reporting agencies. Some lenders may look at just one of these reports, some may look at two and some may look at all three. It is important that you obtain copies of all three reports since they can contain very different information. Without knowing which report your lender will pull, it's best to be prepared by having all three correct and ready to go. The websites of all three credit bureaus can be found in the Resources section below. Or, you may request all three of your credit reports from AnnualCreditReport.com for free once per year. Find a link in References.

Making Changes

Once you have all three of your credit reports, you will want to go over each one carefully. Check your address and contact information, employment history, account names and numbers, payment histories, and public records such as bankruptcies. If anything is in error, you can start the dispute process to get it cleared up.

The credit reporting bureaus provide ways to make disputes through their websites. But if your disputes are more complicated or you have documentation to share, it is better to handle the dispute through the mail. Here are the mailing addresses for handling disputes:

Equifax Information Services, LLC
P.O. Box 740256
Atlanta, GA 30374

Experian Credit Bureau
475 Anton Blvd.
Costa Mesa, CA 92626

TransUnion Consumer Solutions
P.O. Box 2000
Chester, PA 19022-2000

Write the credit reporting bureau a letter explaining the error or errors that you have found. Explain what account or other information is incorrect and also spell out what the correct information should be. If you have any written documentation that supports your position, include a copy of that documentation with the letter. Never send originals, as you will not get them back. You may also want to include a copy of your credit report with the error highlighted to make it easier for the person reviewing your claim to understand the nature of the problem.

Once the credit reporting bureau has your information, it has 30 days in which to conduct an investigation. The bureau will contact the creditor to clear up any misinformation. If your claims are correct or if the creditor does not respond within 30 days, the credit reporting agency will make the changes requested. At this point, the credit reporting bureau will send you a letter detailing the results of the investigation and what actions were taken.

If there are negative items on your credit report that are accurate, they will automatically be removed in seven years, or 10 years if it is a bankruptcy, from the time they occurred.

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How to Stop a Debt Collector's Hard Credit Pull

A hard credit pull is when a creditor identifies a problem with your account, namely a late or missed payment, and inquires about you via credit bureaus. When a debt collector shows up on your report, it is called a hard pull because it can negatively affect your credit score; meanwhile, a soft inquiry just checks the status of your other accounts. Though there is no guarantee that it will work, you can take steps to try to stop a debt collector from doing a hard credit pull.

Instructions

1

Contact the debt collector as soon as you receive a letter or have a discussion at the first call. In many cases, if the debt collector can't get in touch with you, he may resort to going to a credit bureau instead to find out how to reach you. Your credit report contains information about your most recent addresses and phone numbers. The debt collectors may also look to see if you have available credit lines to pay off the debt.

2

Collect information related to the debt from the bill collector and negotiate to come to a proposed settlement regarding the matter.

3

Request that as part of the settlement the debt collector agrees not to do a hard credit pull. If the collector already did a hard pull, ask him to remove the negative item as a condition of your settlement.

4

Get your agreement from the collector and the settlement details in writing. Abide by your side of the settlement arrangement to avoid having the debt collector report to credit bureaus in the future.

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How to Add Aged Trade Lines to Credit

Today's financial environment demands higher credit scores. Apartment rental, automobile insurance and cell phone companies look at applicants as a financial risk. The philosophy is how a person handles their credit may indicate how they handle other aspects of their life. Adding seasoned tradelines to your credit report is a legal way to raise your credit scores and add good payment history to your credit. Seasoned tradelines are credit accounts that have been active for several years. They should have low balances and excellent payment histories. (Credit card accounts work best). This is referred to as "piggy backing" in the credit industry.

Instructions

1

Talk with Mom, Dad or your spouse (or person most likely to assist you) to discuss them adding you as a user on one or more credit card accounts. Explain that adding you to the accounts (tradelines) as an authorized user allows the credit card company to report that credit card's payment history to your report. Have your report handy to show and discuss account tradelines and the score raising technique and benefits of adding you to these accounts. Explain that you will not have possession of or use of the accounts, all you want is the payment history of each card reported to your report.

2

Have a person who is adding you to credit card accounts call credit card companies to let them know he is adding you. There may be a form or written request required. Once the form is sent or the request is made, have him ask when the accounts will be reported to the credit bureaus.

3

Wait until 30 days past the date of reporting to credit bureaus and pull your personal credit reports to be sure the accounts are reported, and see how these have affected your credit scores. You can do this by going online to freecreditreport.com. Be aware that, despite the name, this service is not free. There is a charge for the scores.

4

Take good care of the credit accounts you have. The idea is to use the piggybacked accounts to boost scores to build more credit. Once your score is boosted, you can apply for more credit. Do this carefully.

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Do I Earn Credit With a Debit or a Savings Account?

Having a debit card or savings account shows financially responsibility, but won't improve a credit score, even though a debit card "looks" like a credit card. Opening a savings account or account linked to a debit card may boost your creditworthiness in the eyes of lenders. You could opt for a sort of "in between" card known as a "secured credit card."

Identification

Debit cards and savings accounts do not report to the credit bureaus, because they do not extend a line of credit, since you prepay for your purchases. A savings account could affect your credit score if you write a check for more than your balance and the bank sends the overdue bill to a collections agency.

Could Help You Get Credit

Creditors can and must consider nontraditional payment data when no traditional credit history exists. If you open a savings account with a bank, they will probably extend credit at some point in the future after you establish responsibility with the account. At the very least, keeping a savings account is a sound financial strategy and can prove stability to future lenders.

Banking History

Almost everything having to deal with payments has a consumer report. Banks use reports from ChexSystems. Use your savings or debit cards wisely, and banks are more likely to approve you for future accounts because you have a clean ChexSystems report. Having a bank account is important to improving your credit score in the future and meeting financial goals. Mortgage providers, for example, usually only accept checks for payment.

Tip

If you cannot find a lender willing to approve you for a unsecured credit card, consider a secured line, suggests Bank Rate. On a secured credit card, the lender requires a deposit against the limit, so there is little risk to the creditor, but he can still report payments to the credit rating agency. Shop around for secured cards. Some may charge excessive yearly fees, because secured cards are often used by people with no other option for building credit.

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What to Do About Credit Fraud

Credit card fraud affects millions of Americans each year, and the problem is so widespread that most credit card companies have departments dedicated exclusively to credit card fraud. If you own a credit card, it's important to understand what to do if you believe you've been victimized and how you can prevent credit card fraud.

Contact the Card Issuer

The first thing to do if you believe you are the victim of credit card fraud is to contact your credit card company. The majority of credit card companies have 24-hour hotlines that consumers can call to report a lost or stolen card. After you report a stolen or lost credit card, the maximum amount that you're liable for by law is only $50 per credit card, according to the Better Business Bureau. This makes it extremely important to contact your credit card company as soon as you believe you're the victim of credit card fraud.

Contact Credit Bureaus

If you see unauthorized activity on your credit report, contact your credit bureaus in writing. Send them a letter with a list of the activity on your credit report you believe is inaccurate. In addition, you may want to ask them to freeze your credit accounts. Freezing your credit accounts can be beneficial because it means that lenders can't review your credit history and prevents new lines of credit from being opened. However, bear in mind that unfreezing your credit accounts takes several days after you ask a credit bureau to freeze it.

Prevention

The Federal Trade Commission suggests avoiding lending your credit card to friends and avoiding leaving your card out in plain sight. In addition, you should always destroy carbon copies of credit card transactions and save receipts for all your transactions. If you save your receipts, disputing unauthorized transactions will be much easier later on. It's also important to make sure you don't sign blank receipts. Always draw a line through blank spaces above your total.

Review Your Monthly Statement

Wells Fargo suggests reviewing your monthly credit card statement each month and looking for unauthorized charges. If you don't review your statement each month, you might never find out that you're the victim of credit card fraud.

Online Safety

Never send your credit card number to another person or credit card company via email. Emails are usually not secure, according to Wells Fargo. In addition, you should always look for "secure transaction" symbols at the bottom of your web browser before shopping online. If you do not see "secure transaction" symbols, the website is probably not safe to shop on.

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Consumer Credit Index Definition

The consumer credit index includes the amount of credit Americans have, the amount they are using and their confidence in their financial situation. The consumer credit index changes daily with the economy and has ups and downs as with any other index.

Significance

The significance of the consumer credit index is that it provides a realistic view of the country's creditworthiness as a whole. For example, the consumer credit index shows how in debt Americans are, how the debt is being paid off, when consumers on average are late in paying their debt and the like. The consumer credit index acts like a microscope on Americans' credit profile.

Considerations

It's important to keep in mind the consumer credit index is based on research and the actual state of credit as a whole when the index is reported. When the index reports Americans are more in debt than ever, it simply means that never at a previous point in history has so much consumer debt existed as a whole, not that every single American is in debt.

Misconceptions

The consumer credit index is simply a measuring tool. It helps economists view the country and its financial status through the view of outstanding credit. Few people realize that by monitoring the credit index it's easier to predict recessions, economic stalls and other problems like slow growth. The consumer index is not about the average American as it is believed. Instead, it's about the average credit status of all American credit accounts.

Benefits

The benefits of the consumer credit index is that the country may be studied on the basis of its credit status and how it corresponds to the economy and the world.

Warning

As the country's credit index falls, this shows that Americans are struggling to keep up with their obligations. It's important to pay attention to the index so the government knows when it needs to intercede.

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