Category: Credit Restoration

Angie Mohr, provided by

Investopedia June 1, 2011

If you have a low credit score and are working towards raising it, it seems to make sense to pay off all of your old delinquent debts. However, this strategy can sometimes backfire and drop your score further. Any credit score repair strategy should involve analyzing each debt and predicting how changes to it will affect your overall score.

Although the exact formula used by FICO is proprietary and not publicly-disclosed, it is estimated that approximately 35% of the score relates to your payment history and 30% to the amount you currently owe. Paying off old debt will not erase the impact that previous delinquent payments have already had on your credit score. Depending on the status of the debt, making payments on or paying off a charged-off debt can hurt in the currently-owed category.

Paying off a Delinquent Account
If a credit account is simply overdue and shows as outstanding debt, paying it off will improve your credit score, as will making any payments against it. You will not be able to eradicate the late payments that are showing, but returning the debt to current status and reducing the overall amount owed will both boost up the number.

Paying off a Charge-off
This is where payments can actually reduce your credit score rather than improve it. If you have an old debt on your credit report that has been charged off by the lender – meaning that they do not expect further payments – setting up a new payment plan can re-activate the debt and make it appear to be more current than it actually is. This is often the case with debt that has been turned over to a collection agency. The agency may register the debt with credit bureaus as new rather than reporting it against the written-off debt. As newer debt weighs more heavily on your credit report than older debt, your score can drop when you make an effort to pay this type of debt. This can also occur with paying out the debt entirely. While the payment will make the debt show as settled in full, it may show on your report as new debt. Regardless of how it shows on your report, ensure that the lender removes the charge-off status on your old debt and shows it as paid in full.

Settlements
If you choose to settle with a lender for less than the total owed, the arrangement will show on your credit report and may drop your score depending on how it is reported. Some lenders will simply mark it as paid, which has a positive affect on your score; however, if they show it as settled, your score may suffer. Although you can ask a lender how they will report the settlement while you are in negotiations with them, you ultimately have no control over how they will report it.

Payment Strategies
If you must juggle repayments of old debt, start with those debts that are still showing as delinquent. That will give you the biggest boost in the short-term. Carefully review older debt that shows as charged off. Before contacting the creditor or collection agency, check your state laws to see if the debt is statute-barred, meaning that it is too old for creditors to attempt further collection. If it is not statute-barred, even contacting the creditor can re-instate the debt as currently collectible, which can drop your score.

If the debt is due to drop off of your report in the next several months because it is almost seven years old, consider waiting until then to pay it, as it will have no affect on your score once it drops off. If the debt shows as written off but will still show on your credit report for longer than a few months, collect all of the funds together to completely pay it off before making contact with the lender. That way, you will potentially re-activate the debt but will also show payment in full which will minimize the damage to your score.

The Bottom Line
The best strategy in managing your credit score is to pay your obligations on time, every time. If you do get behind, though, how you manage your old outstanding debt can have a significant impact, either negatively or positively, on your score.

There is some confusion going on lately about the credit score range and about the credit scoring in general. We believe this is caused by the recent introduction of the VantageScore in addition to the FICO score that we are all used to as a ‘classic’ or common credit score. Let us outline the main differences between the two to clear up this confusion.

VantageScore range vs. FICO – score range

VantageScore range: 501-990
FICO range: 300-850

As you can see the two scores overlap but the range is quite different. This is where, we believe, the rumors about the existence of FICO scores over 900 are coming from. When presented with their credit scores by the lender, most people don’t pay attention on which brand that score is as most are not even aware that there is more than one.

VantageScore vs. FICO – letter grading

VantageScore: A to F
FICO: none

VantageScore number is associated with a letter grade. FICO doesn’t use letter grading.

VantageScore vs. FICO – score usage

Based on what we’re seeing when working with major lenders, only FICO score is used when obtaining Mortgage Loans. On some occasions, we’ve seen VantageScore being used to qualify consumers for Home Equity Line of Credit (HELOC) and Car Loans. So as of now, in order to get better interest rate when getting a new mortgage, concentrate on repairing your FICO score only.

VantageScore vs. FICO – consumer advantages

From what we understand by studying the White Papers, the VantageScore is more ‘relaxed’ than FICO in general. In our opinion, it is designed to better accommodate certain groups of consumers that FICO algorithm most likely will score very low. Indeed, the VantageScore should provide higher credit ratings to these consumers with thin credit history file:

– young adults just starting their careers
– recently divorced or widowed individuals with little or no credit in their own name
– newly arrived immigrants
– previous bankrupts
– people who shun the traditional banking system by choice

Using FICO, these would have made to be sub-prime mortgage candidates! In any case, simply based on the range comparison, your VantageScore will always be higher than your FICO score.

VantageScore vs. FICO – credit scoring model

With FICO, the three credit bureaus, Equifax, Experian and TransUnion, each uses its own Scoring Model when calculating the score, and applies it to its own data.
With VantageScore, the three credit bureaus use a collectively developed Scoring Model … but still apply it to each own data. “While there will still be some score variation with VantageScore due to differences in the data provided to the individual CRCs (credit reporting companies) for each consumer file, the gaps among the results generated via VantageScore are diminished because the credit scoring model itself and the underlying credit characteristics in the algorithm are the same at all three CRCs.”, as company explains.

VantageScore Score Consistency

Will there now be just one consistent score per consumer across the three Credit Agencies?
“No. While the three credit agencies, Equifax, Experian and TransUnion, can now generate scores using the same underlying credit scoring model, differences in the actual scores are to be expected because each agency maintains its own consumer credit files, which may vary. Consumers’ files at each credit agency can vary because credit grantors can choose which agency they provide consumer payment data.”, as according to company.

· 35% Payment history
· 35% Amounts owed
· 15% Length of credit history
· 10% New credit
· 10% Type of credit

– Stay away from small department store cards; they have a low limit and tend to bring down your overall score.
– You must use credit in order for it to report to the bureaus.
– If you do not use a card it may be cancelled by the bank – this WILL hurt your score.
– Never use more than ½ of your available credit line.
– Ask for line increases.

How Do They Calculate a Credit Score?
Different credit bureaus calculate your Fico or Beacon Score slightly different. Each credit bureau makes the score their own and gives it a different name. Equifax calls the score a Beacon Score, Experian calls it a Fair Isaac Score and Transunion calls it an Empirica Score. Every time something changes on your bureau, your score will change. A lot of information is used to calculate your score; however, there is no formula that has ever been given to the public. Lenders will look at your score along with your income and the kind of loan you are applying for to determine interest rates.

Improving Your Credit Score
Here are some suggestions on how you can begin making some changes.
· Pay your bills on time. This sounds simple, but this is the biggest thing you can do to keep your score high. Delinquent payments and collections have a major negative impact on your score.
· Keep your balances low on unsecured revolving debt like credit cards. High balances still owed can affect a score.
· The amount of unused credit is an important factor in calculating your score. You should only apply for credit you need.
· Make sure the information on your credit report is correct. If it is not, dispute it with the Bureau Company or lender directly.
· Removing negative accounts on your credit report has the biggest impact on your score.

Credit Repair – Some Common Questions And A Few Myths

How long does information remain on my report?
Generally negative things can stay on your credit for 7 to 10 years. But you can hire a professional credit repair service to do it for you.

Credit bureaus report credit information for a period of seven (7) years. Some states have special provisions for collections and paid liens. Chapter 7, Chapter 11 and Chapter 13 Bankruptcies are each reported for 10 years and the date is measured from the date of the filing.

Does paying off my bills repair my credit?
The credit reporting system doesn’t work that way. When you pay an old debt, the negative credit listing doesn’t disappear. In fact, it re-ages and the seven year clock begins again with that negative listing. The most ironic thing is that a paid, current negative listing is not any better than an unpaid negative listing.

How does a Credit Bureau make money?
A credit bureau is a commercial business. It makes money by selling your credit report to others. A person with bad credit means more business for them as such a person applies for credit about ten (10) times more than a person with good credit.

Why do Credit Bureaus not want me to use a Credit Repair Company?
The credit bureaus will tell you that it is easier and less expensive to do it yourself. While it may be true that you have the right to repair your credit yourself, many individuals do not have the time, experience and organizational savvy necessary to deal with bureaucracies. You must also spend hours of study to gain a working knowledge of the consumer laws available to you. Many who start repairing their credit turn to a credit repair company after months of work.

What can you take off of my credit bureau report? Aren’t these items impossible to remove?
We can take off unpaid collections, charge-offs, repossessions, bankruptcies, medical bills, foreclosures, tax liens, civil liens, judgments, student loans, credit card debt, inquiries, slow pays, old addresses and all incorrect names.

How does TRW Credit Group do this legally?
Disputing your credit report is your right. Credit restoration is as legal as pleading “not guilty” in a court of law. The Federal Trade Commission and The Consumer Credit Protection Act have enacted 100’s of regulations that the reporting and collection agencies have to adhere to in order for an item to remain on credit reports. The Fair Credit Reporting Act gives you the legal right to dispute items on your credit reports that may be inaccurate, out of date, incomplete or unverifiable.

We challenge the credit agencies how they posted the information. Are they in compliance with all of these laws? And more often than not, they are not in compliance and we have them remove the negative information.

How much does a low score cost you?
Having a low score can cost you thousands of dollars. The higher score you have, the lower interest rate you will have. The lower interest rate that you have… the less money you will pay!
$100,000 mortgage over 30 years

Home Loans
••       Category                       Interest Rate       Payment      Total Cost After 30 Yrs
••       Prime                               6.50%               $632            $228,625
••       Alternative A                    7.50%               $699            $251,715
••       Subprime                         10%                  $877            $315,925