Do-it-yourself credit repair isn’t impossible, but it’s more complicated than people may realize. Without detailed knowledge of how credit works, it’s easy to jump on solutions that are anything but. Here are a few common credit repair actions that can backfire. Be sure to understand the effect they’ll have on your credit before proceeding.
Swearing off credit
The only way to build and maintain a healthy credit score is to have and use credit products. A person who pays cash for everything and lives debt free may be financially wise – but has no credit file. If the goal is good credit, then credit products are a must. A better solution is to learn how to avoid debt, not credit, and understand what goes into a great credit score. High scores are not difficult to achieve, but it doesn’t happen by magic. Some effort and understanding are required.
Consumers who have felt the pain of overwhelming credit card debt understandably want to close the accounts once they’re paid off. But doing so can negatively affect the credit score in a number of ways.
First, some of the score depends on the average age of all accounts in the consumer’s file. Open accounts remain on the credit file indefinitely. Closed accounts go away after seven to ten years, depending on the account standing. Closure means the consumer eventually loses the benefit of a long-term, established account.
Secondly, part of the score depends on credit utilization as well as the amount of debt in relation to the amount of available credit. Closing accounts means the consumer immediately loses the benefit of available credit on that account. That may not matter much if the consumer never carries a balance. If the consumer does carry a balance, it could be problematic.
Here’s an example. If a consumer has five credit cards with a combined credit limit of $30,000 and carries a balance of $5,000, the overall utilization is about 17 percent. If three accounts are closed and the credit limit shrinks to $15,000, utilization goes up to 33 percent without a single penny having been added to the balance.
In another scenario, let’s say a consumer has only one credit card with a limit of $1,000, charges about $500 each month, and always pays it off by the due date. Surprisingly, credit utilization is not zero. It’s 50 percent.
That’s because the balance is reported when the statement cycle closes before the payment is due. The only way to maintain zero utilization is to pay off the charges before the balance is reported to the credit bureaus.
Leaving unused accounts open would help this consumer maintain a healthy, low overall utilization ratio, even without changing her charging habits.
Paying off collections
Whether to pay off a collections account really depends on an individual’s circumstances and – a moral obligation to pay your debts notwithstanding – it may not be the preferred course of action when it comes to your credit.
First, collections are not removed from the credit report once they are paid. They remain for the amount of time allowed by law: seven years plus 180 days from the date the account became delinquent, whether outstanding or paid off.
As far as the credit score is concerned, a paid collection account may or may not hurt. Older FICO scoring models dinged consumers for all collection accounts. The newest model, FICO 9, ignores paid collection accounts for the purpose of calculating your score. How do you know which FICO scoring model your lender will use? You don’t. The FICO scoring model costs money. Although FICO 9 brings this advantage to consumers (and also gives medical collection accounts less weight), the creditor you seek to do business with might not yet use the FICO 9 product. New version rollouts take years to saturate the market.
A few more things to know about collection accounts:
- Debt collectors are not legally allowed to change the date of the delinquency in order to lengthen the time the account remains on the consumer’s credit report, even if you make a partial payment on the debt. That said, in some states making a partial payment restarts the clock on the statute of limitations extending the time the creditor can legally pursue you for payment.
- Aging off the credit report does not relieve the consumer of legal responsibility for the debt
- Some lenders will deny an application for credit if they see an unpaid collection account on the credit report, but ignore it if it is paid.
- A collection account should only be listed on your credit report once. The original creditor and the debt collector to which it was sold, for example, cannot report the account separately.
Credit repair is a legal process that requires documentation. The more you have, the better your case.
- Take detailed notes of all phone conversations. When you talk to a creditor or collection agency, note the time, date, name and location of the person you speak with. Repeat back any facts or agreements to be sure you and the phone rep share the same understanding of the details. Write it all down.
- Keep proof of debts and payments. If you have statements that show the amount owed, keep them. Also keep a record of any full or partial payment you make, whether by check, money order or credit/debit card.
- Before you pay off a collection account, get proof from the creditor that the debt is valid.
- Send all letters by certified mail, return receipt requested. Many aspects of credit repair are limited to a short amount of time. For example, when you request validation of a debt, the entity must respond within thirty days.
- Keep a file. Paperwork should be organized in chronological order. This is also where you should keep copies of any correspondence.
The Bottom Line
As with most things in life, finding a qualified professional to help with you on your journey to instant approvals and better rates is the next best step. Otherwise, the process is somewhat trial and error or at least reinventing the wheel.
To speed up your success and avoid these costly mistakes, snag a copy of our Flawless Credit Guide. It includes step-by-step credit repair strategies, plus the tools you need to get the job done.