Content of the material
- What is a Collection Account?
- How to Dispute Incorrect Records?
- Will Paying the Minimum on My Cards Improve My Credit Score?
- How Many Points Does A Derogatory Account Affect Your Score?
- Dont worry, heres what to do!
- Do you know your debt free date?
- Why Did My Credit Score Go Down When Nothing Changed?
- Your Credit Utilization Has Changed
- Something Was Recorded On Your Credit Report
- Something Fell Off Your Credit Report
- There Has Been A Recent Inquiry On Your Report
- An Account Has Closed
- How to improve your score when you have a default
- Take control of your monthly outgoings
- Use credit building-cards
- Tidy up your finances
- Try to settle any outstanding debts
- The bottom line about building credit fast
- Add utility and phone payments to your credit report
- How much will this action impact your credit score?
- Impact of identity theft on your credit report
- How to remove negative items related to identity theft
- What To Consider When Your Credit Score Changes
- How to Avoid Defaulting on Loans in the Future
- The Bottom Line
What is a Collection Account?
When you fail to make payments, your creditor will call or send you letters to remind you of your debt. Collections happen if you haven’t paid your bill for 90 days or more. The creditor may decide to sell your account to a debt buyer or transfer it to a collection agency. Once this happens, you still have to make payments.
But this time, you won’t be dealing with the original creditor but the debt buyer or the collections agency. Some debt collectors are persistent, but they still have to respect your rights. If you believe you’re being harassed, know what your rights are by checking out the Federal Trade Commission’s website.
Any type of debt can go into collections, including credit card loans, student loans, guaranteed no credit check loans and car loans. Generally, you’ll know if your account has been moved to the collection because the debt collector will get in touch with you. But the best way to verify if you have one is to check your credit report by getting a copy from the three national credit bureaus: Experian, TransUnion, and Equifax. You are entitled to receive one free copy each year.
How to Dispute Incorrect Records?
Checking your credit report annually by requesting a free copy of your credit report is important in building, repairing, or maintaining your credit score. Review it regularly to make sure that all the information it contains is accurate. In case you spot any inaccuracies, you have to file a dispute right away.
Send a dispute letter and copies of documents that support your claim to the credit reporting bureau. Under the FCRA, the credit bureaus have to correct incomplete or inaccurate information in your credit report. So, they have to conduct an investigation within 30 days about your claim and get back to you with the results.
The credit reporting agency will loop in the company that provided the information about your reported inaccuracy. The latter will review your complaint and report back to the credit reporting company. If the item is indeed incorrect, all credit reporting agencies will be informed so necessary corrections can be made. After that, you should no longer see the incorrect item in your credit report.
Will Paying the Minimum on My Cards Improve My Credit Score?
No. This is a widespread myth. You need to pay at least the minimum payment due on your credit card every month so that your cards have an on-time payment history. You do not have to pay a single cent in interest to improve your credit score. In fact, paying your credit card balances in full every month will have the greatest positive impact on your score, because it will improve your credit utilization percentage.
How Many Points Does A Derogatory Account Affect Your Score?
It depends on the severity of the derogatory mark. Tax liens, bankruptcies, and foreclosures have a more significant impact on your score than a late payment.
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Why Did My Credit Score Go Down When Nothing Changed?
Sometimes your score does change based on factors outside of your control, but most times your behavior influences your score in ways that may not be obvious.
Let’s take a look at the factors that influence your score and a few reasons as to why it might change even when you don’t think you’ve changed your behavior.
Your Credit Utilization Has Changed
Your credit utilization ratio is the amount you owe on your credit card relative to your credit limit. It influences your credit score, so a change in either of the two can cause your score to adjust.
Have you charged more on your credit card lately? If so, your credit utilization may have increased, which can negatively impact your score. Typically, having less than a 30% credit utilization (i.e., spending $300 or less if your credit limit is $1,000) can keep your credit in top shape.
Check to see if your credit card company has increased or decreased your total limit. Often credit card companies will tell you if you’re eligible for a change in credit limit, but they could alter it without you knowing. If your spending habits remained the same, an increase in your credit limit would decrease your credit utilization ratio, which can positively impact your score. A decrease in your credit limit would increase your utilization ratio – thus, your score could go down.
Something Was Recorded On Your Credit Report
Think back on your payment history – have you missed a credit card payment in the last few months? Were there any bills that you may have missed in previous months?
Missed payments are typically not reported to the credit bureaus until they’re at least 30 days late, so your score won’t be impacted until after that time. Your score will be hurt by a payment that’s more than 30 days late, but a delinquency, referring to a payment that is over 30 days late, can devastate your score.
Derogatory marks such as tax liens, charge-offs, collections, foreclosures or bankruptcies have drastic impacts on your credit too, and it may take weeks or months for them to show up on your report. If you’ve experienced any of these, it may take time for your score to change.
Something Fell Off Your Credit Report
Thankfully, missed payments and derogatory marks won’t stay on your credit report forever. The greater the age of those marks on your credit score, the less impact they have, so you may see your score recover over time while your behavior is kept consistent.
Late payments over 30 days will remain on your credit report for 7 years, while derogatory marks like bankruptcy can remain on your report for up to 10 years. Over time your score will recover, and once these marks fall off your credit report, you may see an instant boost in score.
There Has Been A Recent Inquiry On Your Report
If you’ve recently applied for a credit card or loan, the lender has probably pulled your credit report. This is considered a hard inquiry, occurring when a lender checks your credit to determine if they want to lend you money. These will temporarily lower your score.
An Account Has Closed
When you pay off a loan, your credit score could be negatively affected. This is because your credit history is shortened, and roughly 10% of your score is based on how old your accounts are. If you’ve paid off a loan in the past few months, you may just now be seeing your score go down.
Your score could be negatively impacted by a closed credit card, too. Not only is your credit history shortened, but your credit limit would also decrease and your credit utilization ratio would be impacted.
Often you’ll be the one authorizing a credit card to close, but card companies can close them without your knowledge. The Equal Credit Opportunity Act (ECOA) allows creditors to close a card due to inactivity, delinquency or default with no notice. If they close an account for any other reason, they only have to give you 30 days’ notice after closing the account, so you could have a closed credit card that you don’t even know about.
How to improve your score when you have a default
There are still lenders willing to lend to those with defaults – different lenders have different criteria to mark your Credit Report against. While mainstream lenders might consider the presence of defaults as too risky, there are specialist (sub-prime) lenders set up to cater for this end of the market. Making payments on time to these lenders can be a strong start in getting your Credit Score back to where it should be.
Take control of your monthly outgoings
Managing your credit accounts is key to moving forward – rather than worrying about one default dropping off, the focus should be on ensuring that all of your current payments are made like clockwork each month. This will show lenders that you now have a more responsible attitude towards borrowing.
Use credit building-cards
When looking to build up your Credit History, a ‘credit-building’ credit card can help to show that you are now a more responsible bet when it comes to lending. Simply use it for small purchases and then ensure you pay the balance in full every month to prevent yourself from incurring high interest charges, and it will soon help to demonstrate that you are able to manage your finances.
Tidy up your finances
When ‘tidying up’ your Credit Report, there is always a risk that an unpaid default can potentially lead to further court action by the lender or debt collector. If you know that the default is staying on your Credit Report anyway for the six-year period, you may think “what’s the point of paying it?” It’s important to remember that while a default remains unpaid, the creditor may take court action to reclaim the funds. A County Court Judgment (CCJ) will have an even more severe impact on your Credit Score than a default.
Try to settle any outstanding debts
Not only do some mainstream lenders lend to those with settled or older debts (which is particularly important if you are looking for something like a mortgage), but settling the debt also prevents continued chasing from debt collectors, or the possibility of further action being taken against you. If you have an unpaid default you may have heard of it being ‘statute barred’ after six years, when the debt can no longer be pursued through the courts. Even if a debt is statute barred, it is still owed to the lender.
The bottom line about building credit fast
When you’re working to fix your credit, it takes good behavior over time. However, lowering your utilization rate by paying down existing debt, getting a new credit card or requesting a credit line increase on an existing card can provide the quickest credit score boost.
Any late payments and debts sent to collection should be handled promptly — otherwise, they’ll just cause more pain once they hit your credit reports. It’s also wise to review your credit reports on a regular basis. in order to spot errors that might be dragging down your credit score.
Knowing what actions to take that can help improve your credit score and being a responsible borrower can boost your chances of increasing your credit score by 100 points or even more.
Add utility and phone payments to your credit report
Typically, payments such as utility and cellphone bills won’t be reported to the credit bureaus, unless you default on them. However, Experian offers a free online tool called Experian Boost, aimed at helping those with low credit scores or thin credit files build credit history. With it, you may be able to get credit for paying your utilities and phone bill — even your Netflix subscription — on time.
Note that using Experian Boost will improve your credit score generated from Experian data. However, if a lender is looking at your score generated from Equifax or TransUnion data, the additional sources of payment history won’t be taken into account.
There are also services that allow rent payments to be reported to one or more of the credit bureaus, but they may charge a fee. For example, RentReporters feeds your rental history to TransUnion and Equifax; however, there’s a $94.95 setup fee and a $9.95 monthly fee.
How much will this action impact your credit score?
The average consumer saw their FICO Score 8 increase by 12 points using Experian Boost, according to Experian.
When it comes to getting your rent reported, some RentReporters customers have seen their credit scores improve by 35 to 50 points in as few as 10 days, according to the company.
Impact of identity theft on your credit report
Identity theft — when someone steals your personal information and uses it to open new financial accounts — can wreak havoc on your credit. These new accounts show up on your credit record and hurt your score, especially if they’re delinquent or if the identity thief applied for several in a short amount of time.
Cleaning up your credit after identity theft can take anywhere from several months to years. The longer it takes you to realize someone stole your identity, the more difficult it will be to undo the damage. This is why keeping a close eye on your report and learning how to protect yourself from identity theft will help you to keep your information safe.
How to remove negative items related to identity theft
If you believe you’ve been a victim of identity fraud, file a dispute with the Federal Trade Commission (FTC) online at IdentityTheft.gov or by phone at 1-877-438-4338. You should also file a police report.
To prevent further damage to your credit history, these are the steps you should take:
- Notify the incident to Transunion, Experian and Equifax through phone or mail
- Place a security freeze and fraud alert on your credit report
- Request a copy of your credit report through AnnualCreditReport.com
- Look out for unauthorized transactions or new accounts that don’t belong to you
- Contact creditors to close compromised accounts
- Consider subscribing to an identity theft protection or credit monitoring service
What To Consider When Your Credit Score Changes
The next time your credit score changes, ask yourself the following questions:
- Have you spent more or less money this month compared to previous months?If so, your credit utilization ratio may have changed.
- Did you miss a payment in the past few months?If so, you could have a delinquent payment that’s hurting your score.
- Did a missed payment or derogatory mark from several years ago fall off your credit report?If so, your credit score may be going up.
- Have you applied for credit?An inquiry may have been placed on your report, which can negatively impact it.
- Have you recently paid off a loan or closed a credit card?If so, your credit history may have been impacted.
After looking closer, you may find something has changed that could influence your credit score that you weren’t initially aware of. The best way to monitor changes in your score is to check your credit report monthly, so you’re up to date on all the changes that impact your score.
How to Avoid Defaulting on Loans in the Future
Even if you can’t keep up on a bill payment, there may be ways to prevent default. If you’re proactive in exploring your options, you could potentially avoid the fees, damage to your credit, or loss of property that can happen as a result of default.
Here are some preventive measures to consider:
- Reach out to your lender. Communicate with your creditor before you fall behind. Your lender may be more flexible if you reach out while your account is still in good standing, and you could potentially work out a modified repayment plan that fits your budget and prevents you from falling behind.
- Ask about deferment. If you can’t afford to pay much, or anything toward your debt, ask your lender about getting payments temporarily deferred or even suspended through a forbearance plan.
- Consolidate debt. If your credit is in good standing, or if it improved since you took on your debt, you may be able to consolidate your debt and avoid falling behind by taking out a new loan with more affordable payments. You can use Experian CreditMatch™ to find a debt consolidation loan that works for you.
The Bottom Line
Improving your credit score is a good goal to have, especially if you’re planning to either apply for a loan to make a major purchase, such as a new car or home, or qualify for one of the best rewards cards available. It can take several weeks, and sometimes several months, to see a noticeable impact on your score when you start taking steps to turn it around.
You may even require the aid of one of the best credit repair companies to remove some of those negative marks. But the sooner you begin working to improve your credit, the sooner you will see results.