Will a Collection Account for Just $50 Hurt My Credit?

Posts Tagged ‘Credit and Debt’

Will a Collection Account for Just $50 Hurt My Credit?

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Fortunately, there is one recent change to the world of credit scoring concerning small debts, which are sometimes called “nuisance” collection accounts. In August 2009, Fair Isaac rolled out to all three credit bureaus its newest general-purpose FICO score, dubbed FICO 08. With this new version of the credit score, FICO says its will disregard collection accounts and other dings on your credit file when the original balance owed was under $100.

“The logic there,” says FICO’s Tom Quinn, “is that for small dollar amounts, like a collection notice from a public library system, the (credit scoring) model will now bypass those and not consider those to be negative. Any kind of derogatory public information that’s less than $100” will be excluded, Quinn adds. This certainly has the potential to help boost your FICO score if it was impacted by such a blemish. But beware: amid the credit crunch, every single account you have, and every single financial transaction you engage in is being analyzed to determine your credit worthiness.

All Transactions – Large and Small – Matter Greatly Amid the Credit Crunch

Also, even with FICO saying it won’t use those small accounts in its scoring methodology, the debts nonetheless remain on your credit file, and some lenders may require that you resolve those issues or pay off those debts before approving you for a loan. More importantly, you should known that every transaction – large and small – matters greatly amid the current credit crunch. And when I say “every” transaction, I mean it.

Your Financial Habits Are Under Intense Scrutiny, Even if You Don’t Know It

Increasingly, retailers, credit reporting agencies, credit scoring companies, and of course banks and other lenders are watching every financial transaction you make. Made an online purchase to buy some shoes lately? Somebody tracked it. That’s why the next time you’re working at your computer – or simply surfing the web – you’ll see a pop-up or some advertisement featuring shoes. Ditto for school supplies, furniture, electronic gadgets, or anything else you purchase. But the scrutiny goes way beyond just watching what you buy, and then trying to sell you more of it. Retailers, lenders and credit-scoring firms are all capturing a wealth of data about your financial habits, both on and offline, in an effort to tell them who among us is the most credit-worthy – and who is the least.

You May Be Deemed “Risky” Based on What You Buy and Where You Shop

So what exactly are they watching? In a word: everything. They’re looking to see whether you accept credit card offers, online, in the mail or via telephone. They’re gauging whether or not you’re likely to take a balance transfer offer for the initial low interest rate – only to toss the card when the offer expires, or when a better deal comes along. They’re looking at the types of stores you frequent, and whether you spend money (that is, use your credit cards) at “risky” establishments, like bars, clubs and casinos.

They’re also poring over all manner of data regarding your housing, and that includes both renters and homeowners. For those of you who rent, they’re looking at whether you’ve consistently paid your rent or time, whether you’ve been delinquent, and whether you’ve ever been evicted. For homeowners, they’re looking at how much overall debt you have, whether or not your mortgage is a fixed-rate or adjustable loan, whether or not you have a home equity loan or line of credit, and if so, how much you typically tap and how often. If it seems as if the credit industry has got a spotlight on you, it’s because they do. But you don’t have to be blinded by it – or blind-sided – if you manage your financial affairs properly.

Your Credit Report is Constantly Being Updated

Again, when I say that every transaction counts, let me make something clear: I’m not just referring to business transactions that involve loans. Every transaction means just that – every economic exchange you make, every credit, loan or contract agreement you enter into, and every financial move of yours that can be documented – all of it matters greatly. Every single transaction counts. Do you think that your dealings with cell phone companies, water end electric services, and public utilities aren’t being monitored? Think again. About 100,000 organizations supply information to the credit reporting agencies.

These organizations include banks, lenders, collection agencies, credit card companies, leasing firms, utility companies and any other entity that extends credit or reports information about you. Even libraries have been known to rat on delinquent patrons to the credit bureaus for having an overdue library book! The same pattern holds true for various municipalities around the country; places like Chicago and New York City will report you to collection agencies in a hot minute to for failing to pay parking tickets or moving violations. And as cash-strapped cities try to cope with budget shortfalls and a tough economy, you don’t have to be Nostradamus to predict that many more cities will soon start using collection agents to pursue “small” debts due from local citizens.

The Convergence of the Credit Crunch, Technology and Big Brother Means You Must Be Careful Even With Small, Overdue Bills

Thus, transactions large and small take on greater importance amid the credit crunch because, in many ways, Big Brother isn’t merely looking over your shoulder these days. Big Brother now seems to be peeking into your laptop, using a skycam to watch where you go, accessing your Blackberry or iPhone, and placing wiretaps on your home and business phones too. OK, so maybe it’s not that bad. But you get my point. An incredible amount of information about your finances and money patterns is being captured, analyzed, and dissected in ways you probably never imagined. I predict that in the future, this trend will greatly increase – even for small bills.

Simple, little transactions that you may regard as minor or even big bills that you are disputing can all wind up having serious ramifications for your credit rating. That magazine subscription you ordered (even if it was just part of a sales promotion) can come back to haunt you if the $14.95 bill isn’t paid. Those music videos you’ve neglected to return (since forever) could land you on someone’s collection list. And even that hospital co-payment or medical debt that you’ve been sent a bill for yet again – for the umpteenth time after your insurer refused to pay – that too could ultimately damage your credit rating if left unattended.

How did Lynnette Khalfani-Cox erase $100,000 in debt in 3 years?

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Author: The Money Coach

In my book, Zero Debt, I explain how I got into debt (mainly via overspending), and also what it took to get me out of debt. To pay off my credit card bills, I used the exact same strategies I outlined in my book – getting a budget together, cutting back on frivolous spending (like vacations & dinners out), refinancing my auto loan, negotiating with my creditors for lower interest rates, doubling and tripling up on the minimum payments I was making, and using “windfalls” or “extra” money, like income tax checks and year-end bonuses from my job to pay off debt, etc.

Making Tough Choices

I also made some tough choices, like taking my two older kids out of private school and putting them in a less expensive private school. (They’re actually now in public school, and doing just great). After nearly 3 years of all this, I’d paid off $70,000 in credit card debt. Then in early 2004, my ex-husband and I sold some land we owned and used $30,000 to pay off the last $30,000 of credit card debt we owed.

In your question, you mentioned joining a debt management plan and taking on a second job. I know those were tough steps for you to take. But congratulations for doing so, because they will definitely help you become debt free faster. Lastly, I don’t know if you have a copy of Zero Debt. (The original version came out in late 2004; the updated, second edition of the book came out in 2009). In any event, in Day 25/Chapter 25 of Zero Debt, I also explained three different debt pay-off strategies that you can use to knock out credit card debt. (In my case, I used Strategy #2). Good luck in eliminating those credit card bills!

Should I pay off my debt or use my savings to buy a second home?

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Author: The Money Coach

Question: A subscriber to AskTheMoneyCoach.com asks: “I’m $14, 000.00 in debt yet I’m growing out of my home. I’ve got an expanding family. Should I pay off the debt first or save for a second home down payment?”

Answer: Go ahead and knock out that debt. The reason is that, and I assume when you say a second home you meant trading up to a second home because you already have an existing home. I assume you didn’t mean a second home as in a vacation home or a retirement home or an additional home to keep along with your principal residence.

But the reason you might as well go ahead now and knock out that debt is that, of course, the credit card debt, which I assume this is, the consumer debt as opposed to mortgage debt is higher rate debt. You’re paying interest on that and not getting any tax benefits from it like you would with your mortgage interest, of course.

But the fact is because we’re in the credit crunch to qualify when you try to go ahead and get a second home, a bigger home as you say you want, presumably it’s going to be a more expensive house, and so lenders are going to be looking very closely at the debt levels that you’re carrying.

They’re scrutinizing peoples’ debt to income ratios in a way that’s far more intense than had been done in years past. So if you can go into a new home, your second home, your upgraded bigger home, with zero debt showing in terms of your credit cards and consumer balances, that will make you so much more qualified for that mortgage. And you’ll have the peace of mind that comes with knowing “Oh, I got rid of this monkey that’s been on my back once and for all.”

So trust me, before you think about expanding, going to a second home, getting something bigger which will be more taxes, a bigger mortgage, probably higher maintenance costs and upkeep, and so forth and so on; not to mention the costs that come along with moving and perhaps getting new furnishings, et cetera, do yourself a favor and knock out that other consumer debt first.

How did Lynnette Khalfani-Cox erase $100,000 in debt in 3 years? (askamoneyexpert.com)
Lynnette Khalfani-Cox on The Daily Drum WHUR 96.3 Howard University Radio (askthemoneycoach.com)
How Much Does Your Credit Card Debt Cost You? (wisebread.com)
Give the gift of financial power, in the form of a good book (askamoneyexpert.com)

Here’s How to Get Your FICO Credit Score Free

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Author: The Money Coach

If you’ve ever seen any of your FICO credit scores in the past, chances are you paid for them, probably anywhere from $12 to $15.

Recently, however, myFICO.com (the consumer website of Fair Isaac, creator of the FICO score) introduced a new trial service that lets you get a free FICO score instantly online.

What’s the catch? You get the free credit score when you agree to a 10-day trial offer for FICO’s Score Watch product, a credit monitoring service. I don’t know how long this freebie will last. But in my opinion, this is a really good offer.

Although I’ve written extensively about the benefits of credit monitoring, if you don’t want it, just cancel the Score Watch service within 10 days, and you still get to see your FICO credit score immediately.

This is a particularly great freebie for anyone who hasn’t seen their FICO score in a while. And more than two-thirds of all adults in the U.S. haven’t seen their credit reports in the past year, with even fewer having checked their credit scores, according to the National Foundation for Credit Counseling.

Also, if you’re applying for a loan of any kind soon – like a mortgage, car loan, student loan, or even a credit card – you definitely should check your FICO score.

OK, now a few words about the fine print and other important details.

To get your free credit score, you must to go this myFICO free trial page and create an account that has your personal information and payment data. Even though you input this info now, you don’t get charged for anything until after 10 days. (Again, you can avoid all charges just by canceling before that time).

If you do decide to cancel within the 10-day window, myFICO has made it pretty easy to do so. For starters, they send you an email reminder three days before the trial ends to alert you to make a decision about the offer and whether you want to keep it or cancel it.

Also, myFICO provides this online form to make the cancellation process very quick.

Just select the option that says “I would like to cancel my product subscription” and then click on the Score Watch product.

Lastly, if you do decide keep Score Watch because you want ongoing credit monitoring (as I highly recommend), be aware that myFICO’s service requires a 3-month minimum subscription. The credit monitoring currently costs $12.95 per month.

As I stated in my book, Perfect Credit, I’ve actually used myFICO’s credit monitoring service for years, and it’s definitely been instrumental in helping me stay on top of my credit. I’m confident it can do the same for you.

6 Guidelines to Help You Maximize Your Credit Score (askthemoneycoach.com)
What Is the VantageScore and How is it Different from the FICO Credit Score? (askthemoneycoach.com)
What is the PLUS Score and Do I Need this Credit Score or Just My FICO Score? (askthemoneycoach.com)

Can You Bump Hard Inquiries Off Your Credit Report By Monitoring With Soft Inquiries?

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Author: The Money Coach

“Soft” inquiries – even lots of them – will not bump off or remove “hard” inquiries on your credit reports. This is because all inquiries stay on your credit report for two years, and hard inquiries count against you, for the purposes of calculating your FICO scores, for one year.

What Is the Difference Between a “Hard” and a “Soft” Inquiry?

A hard inquiry in your credit file is a record of any application for credit that you made. For example, if you seek a mortgage, student loan or car loan, or even if you apply for a credit card or perhaps request an increase in your current credit card limit, any of these actions can result in an inquiry on your Equifax, Experian or TransUnion credit files. Other business-related transactions can also produce inquiries: Among them: signing a cell phone contract, launching new service with a utility provider (like a local gas or electric company), filling out an apartment rental application, and – as even using a debit card to reserve or pay for a car rental. All of these activities generate inquiries that are known as “hard” pulls. By contrast, when you examine your own credit report, or when an existing creditor does a review of your credit files, those are called “soft” pulls, and they do not impact your credit score. So let’s say you use a credit monitoring service, and you review your credit report each month – or even weekly or daily. Those “soft” inquiries will be noted on your credit files, but they won’t hurt your FICO scores, and they won’t make your “hard” inquiries go away.

Don’t Allow Excessive Hard Inquiries of Your Credit Files

The American Bankers Association says a single inquiry can drop your credit score by 35 points. According to the formula used by Fair Isaac Corporation (the company that created FICO credit scores), inquiries account for 10% of your score. So think about it this way: If your FICO score is 680 points, inquiries account for 68 of those points. Obviously it’s not that simple, because different elements of FICO’s formula are weighted differently, based on a slew of considerations. And inquiries can have a greater or lesser impact on your score depending on the length of your credit history and other factors. Nevertheless, to minimize the impact of inquiries on your credit rating, only apply for credit when you truly need it. And if you have to shop around – say, for a mortgage or a new car loan – do so within a concentrated period of time. FICO executives say that multiple inquiries for auto financing or home loans are treated as a single inquiry, so long as the inquiries all occur within a 14-day period. The idea, according to FICO, is for them to avoid penalizing consumers for shopping around for the best rate.

Ask The Money Coach

Posts Tagged ‘Credit and Debt’