How Does "Settled for Less" Affect Your Credit?

Settling an account may give you temporary relief from a debt problem, but you could have a longer, more serious problem: bad credit. However, it usually is not the notation of a settled account that affects your credit but the events leading up to it. You need to take action early to prevent an account from turning toxic to your credit score.

Identification

In pure numbers, settling an account takes 45 to 65 points off of a FICO credit score of 680, according to Ellen Cannon of Bankrate. Negative items harm credit scores more as a person's score rises. For example, for a person with a credit score of 780, a settled account on their credit history damages their FICO rating 105 to 125 points.

Considerations

The reporting of a settled account usually does far less damage than 45 points. Creditors rarely settle an account until you have missed several payments. A payment late by three months takes 70 to 135 points off of a FICO score and is almost as bad as a bankruptcy--not counting other accounts on which you may have defaulted. Thus, by the time the creditor settles your account, your credit score already likely is trashed.

Credit Reporting Time Limit

Any missed payments and settled accounts stay on your credit report for seven years and 180 days after the date of initial delinquency. The date of initial delinquency is the first time you miss a payment leading up to the charge off. This is different from the date of last activity. The date of last activity can change, such as when a creditor sells an account to a collection agency, without affecting the federal credit reporting time limit.

Tip

Find a credit counselor, preferably from a non-profit organization such as the National Foundation for Credit Counseling, to help you weigh your options on the defaulted account. Settling an account, for instance, may be better for your credit than filing for bankruptcy but not as ideal for your credit score as paying it in full. The creditor, for instance, may delay payments on the account and make other concessions that let the creditor report as current, if you repay the entire debt.

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Beacon Credit Reporting

Your credit score is based upon the data contained within your credit report. Lenders and other creditors often report your credit information to credit bureaus. Consumers have three different FICO scores, one from each bureau: Equifax, TransUnion and Experian. It's important to understand how credit reporting affects your BEACON credit score from Equifax.

Identification

In 1989, FICO and Equifax introduced the FICO credit score under the name BEACON, a trademark of Equifax. The BEACON score is simply the brand name for your Equifax FICO score, and nowadays most people refer to it as an Equifax FICO score instead of a BEACON score. The score is based upon the data contained in your Equifax credit report. The BEACON score does not include data from other bureaus. Each bureau uses its own proprietary scoring model to determine your credit score.

Significance

Your FICO score can range from 300 to 850. The higher your FICO score, the better your credit is. According to MyFICO.com, 35 percent of that score is based upon how promptly you pay your bills, 30 percent is the amount of debt that you have, 15 percent is the length of your credit history, 10 percent is the types of credit that you have and the final 10 percent is the level of new credit that you've applied for recently.

Consideration

Since your FICO score is based upon data in your credit report, knowing what's in your credit report is important. Under the Fair and Accurate Credit Transactions Act (FACTA), once a year you can order one free copy of your credit report from the Annual Credit Report website. There you can request just your Equifax report or one from each bureau, including TransUnion and Experian. The website gives you a phone number and address if you'd rather order the report by phone or mail instead.

Prevention/Solution

Errors on your credit report can negatively impact your credit score. According to Bankrate, one way to improve your FICO score is to correct any mistakes on it. The Fair Credit Reporting Act (FCRA) gives you the right to dispute mistakes in your report. You can file a dispute online at the credit bureau's website, by mail or phone. The bureau then has up to 30 days to investigate the dispute and correct the error or inaccuracy.

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How Can People See Their Credit Score?

Although people refer to their credit score in the singular, there are many different types. Each of the main credit reporting agencies calculates its own score according to the information it holds about you. Your credit score is not a fixed figure, but fluctuates as you take out more credit or make repayments. You can improve your score by changing the way in which you handle credit.

Definition

When referring to your credit score, most lenders mean the system developed by the Fair Isaac Corporation and known as the FICO score. This number is calculated from various sources and affects how much credit you can get and what you pay for it. It is also used by landlords and utility companies to decide whether to accept your application or the amount of deposit to require from you.

Features

The FICO credit score is a figure between 350 and 850. A score greater than 700 is considered good. The two biggest factors in calculating your score are your payment history and the amounts you owe. Approximately 35 percent of your score is based on your payment history and 30 percent on the total credit you hold. The length of your credit history makes up 15 percent of your score, another 10 percent comes from new credit and the final 10 percent is calculated based on the types of credit you use.

Free Reports

You can obtain a free credit report once every 12 months from each of the main consumer credit reporting companies. Apply online on the Annual Credit Report website or request a report from them by mail. The Annual Credit Report Request Service is the official central site for the Equifax, Experian and TransUnion credit agencies.

Paid Reports

Monitor your credit score during the year by obtaining reports from the three main agencies every four months. Read through the reports carefully and notify any errors to the agency and to the creditor. As of December 2010, each credit bureau charges between $8 and $10 for a report that includes your FICO score.

Warning

Be aware that some companies that offer a free or low-cost credit report and FICO score on their website automatically enroll you in a trial membership of their paid service. If you do not cancel the membership within the trial period, they will charge your credit card each month.

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Does Not Paying Your Utility Bill Affect Your Credit?

Many people move from one residence to another and forget to pay a final utility bill or simply do not have the funds to pay a utility bill at some point. Although most people realize that not paying a loan or credit card payment can negatively impact a credit score, many do not realize that leaving that utility bill unpaid can also end up lowering your score.

Credit Scores

Your credit score, or FICO score, is comprised of three scores assigned to you by the three major credit reporting agencies: Experian, TransUnion and Equifax. Your FICO score can impact everything from your ability to secure a mortgage to whether you are offered a job or approved to rent an apartment. Your FICO score is based on how long you have used credit, what type of credit you have used and your payment history, as well as on the amounts you owe and whether you have recently acquired new credit.

Utility Companies

Whether a utility company reports your payment history to the credit bureaus will vary from one company to the next. Large utility companies are more likely to report than smaller companies. Any company that chooses to report to a credit bureau must pay a fee for using the reporting service. For this reason, not all utility companies choose to report customer payment history. The only way to know for sure whether your specific utility company reports to a credit bureau is to ask.

Collections and Judgments

Although not all utility companies regularly report to a credit bureau, an unpaid bill is likely to be reported by either a collection agency or a court. Most utility companies turn over unpaid bills to a collection agency for collection if the account remains unpaid after a certain period of time. Collection agencies almost always report to at least one credit bureau. The utility company may also choose to file a lawsuit against you in small claims court, or in a general civil court, for the unpaid bill. If a court enters a judgment against you for the unpaid bill, the judgment becomes a public record which is also reported to the credit bureaus. Therefore, even if your utility company does not regularly report to a credit bureau, the unpaid bill will, in most cases, eventually be reported by either a collection agency or a court.

How to Check

If you are concerned that an unpaid utility bill has been reported to one of the credit bureaus, you can check your credit report one time per year free of charge on the annualcreditreport.com website. This is made possible through federal law, and the annualcreditreport.com website is the only website officially sanctioned to provide this service. There are, however, a number of other companies that can provide a report for a fee.

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Can Being an Authorized User Negatively Affect My Credit Score?

Becoming an authorized user is one of the best ways to own a credit card because you do not have a legal responsibility to repay the balance and it can be positive for your credit history. On the downside, being an authorized may negatively affect your credit rating and ability to gain credit if the primary borrower mishandles the account.

In the balance

Being an authorized user can negatively affect your credit score because you and the primary borrower share the history on the account, so missed payments by the primary borrower damage your credit rating, too. Missed payments can take more than 135 points off of your credit score and stay on your report for seven years, according to Les Christie of CNN. On-time payments improve your credit rating.

Debt-to-Income Ratio

Lenders will probably include the balance on an authorized account in your debt-to-income ratio. Debt-to-income (DTI) ratio is your monthly debt obligations divided by monthly income. Lenders usually do not offer credit when a DTI exceeds 35 to 50 percent with the new loan included. The creditor may have special rules for authorized accounts, such as only including them when the primary borrower is a relative or spouse.

Alternative

Unless you completely trust the primary borrower to pay the credit card bill on time, you should avoid becoming an authorized user. You can probably get a credit card on your own so you can control the payments on the account. For example, secured credit cards have very high approval rates because the lender requires a security deposit against the credit limit. Retail and gas station credit cards also have high approval rates but hefty annual fees and high interest rates.

Make it Temporary

If an authorized account is your only option for obtaining credit and building a credit history, use the account until you build enough history so that you can obtain an unsecured credit card on your own. You can ask the primary borrower to contact the creditor and have it remove you as an authorized user. Follow that up by checking your credit reports for the authorized account for free from Annual Credit Report. You can ask the credit bureaus to remove you as an authorized user when you no longer have your name on the account.

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How to Fix Showing Up Deceased on Your Credit Report

Inaccuracies are far too common on credit reports, according to various studies cited by the Motley Fool. While most inaccuracies relate to late payments and accounts that don't actually belong to you, sometimes the credit reporting agencies mistakenly list your status as deceased. This makes it almost impossible for you to get loans. Fix this mistake by contacting the credit reporting agencies.

Instructions

1

Order free copies of your credit reports through annualcreditreport.com. Obtain a report from all three major credit agencies because they don't always contain the same information. The three agencies are Equifax, Experian and TransUnion. It's possible that only one or two of the three list you as a deceased person.

2

Write a letter to each credit agency that lists your status as deceased to explain that you would like the information about your death removed. Include a copy of your report and circle your deceased status. Also enclose copies of your personal documents, such as your birth certificate and your drivers license.

3

Send the letter and the documents by certified mail and request a receipt confirmation. Keep a copy of the letter and the documents for your record. The credit reporting agency will investigate the matter within 30 days and forward the corrected information to the business that reported your death. The information provider will then investigate the matter and contact you.

4

Send a letter and any requested documents to the source of the information to get the company to change the false detail. If your dispute is successful, the credit bureau will provide you with the written investigation results and a free copy of your report.

5

Contact a local media company about your problem if any one credit agency does not change your deceased status. The credit agency will likely respond quickly to avoid bad publicity.

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Should You Pay to Increase Your Credit Score?

The fastest way to increase your credit score is to pay off outstanding balances on credit cards and loans. Increasing your credit score is all about making payments on time to creditors consistently and communicating with them when you can't pay your bills.

Pay Off Your Balances

Paying off your balances in full is the quickest and most effective way to increase your credit score.

Creditors like to see debtors keep their balances far below their maximum credit limit. If you can't pay off your entire balance, paying off enough of your balance to stay below 30 percent of your credit limit can help increase your credit score, according to MSN Money.

Pay Off Cards and Eliminate Them

Having five credit card accounts with $200 each will hurt your credit score more than having one credit card with a $1,000 balance, according to Smart Money. Credit bureaus view consumers with multiple lines of open credit riskier than those with one or two lines of credit. If you have a lot of credit cards, pay them off and only keep one or two accounts open. Having fewer lines of credit can help increase your credit score.

Communicate with Creditors

If you can't pay your bills on time, it's important to communicate with your creditors so they don't send your bills to a collection agency. If one of your debts is sent to a collection agency, it will significantly lower your credit score, according to Smart Money. If you can't pay a bill on time, tell your creditors that you plan on sending your payment in as soon as possible. Sending in your payment a few days late is better than ignoring your creditors entirely.

Pay on Time

Making your monthly payment on time helps increase your credit score. Making late payments is one of the main causes of a low credit score. Even if you only send your payment in a few days late, it can significantly increase your credit score. Myfico.com suggests setting up payment reminders with your creditors to avoid making late payments. The longer you pay your bills on time without making a late payment, the more your credit score will increase, according to Myfico.com.

Pay Off Installment Loans

Paying off installment loans can help raise your credit score, but it doesn't help nearly as much as paying off revolving accounts such as credit cards, according to MSN Money.

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