Saturday, February 4, 2012

Improving Credit Scores After Collections

Improve your credit scores
I keep getting questions from readers wanting to know how to improve their credit scores after collections show up on their credit reports. Because lets face it, paying off the collections doesn't remove them from your credit report nor does it improve your score. So what do you do?

Before I go into any depth here, I want to point something out: This is where I got my start. This is my home turf. Working as an activist for consumer rights against debt collectors came later. Credit – and making it better – is where it all began. Ah, the memories...

Anyway, back to the issue at hand. You have several options.

Option #1: Dispute Paid Collections With the Credit Bureaus

This is a very "maybe" course of action, but if you're working on cleaning up your credit anyway, it's worth a shot. Now, the legality of disputing accurate information is a gray area. I am not advising anyone to dispute accurate information on a credit report. If, however, you discover errors in the collection agency's trade line on your credit report – no matter how minor that error may be – disputing the information is an option.

In most cases, when a person disputes credit information, the credit bureaus contact the information furnisher (in this case, the bill collector) and say, "Hey, is this right?" and the information furnisher says, "Yep, sure is." and its game over for you. Is this ethical? Heck no, but its how the game is played. The advantage you have here is that, once the debt is paid, the collection agency really has no incentive to respond to the credit bureau's inquiry. If they don't respond within 30 days, the trade line vanishes and your credit improves.

Option #2: Pay Down Some Debt

Your credit score (and when I say "credit score" I mean "FICO score" because no other credit score matters) is made up of a variety of different things. One such factor is your debt-to-limit ratio. Some also refer to this as your credit utilization ratio. Basically, this ratio is the balance of how much revolving (credit card and HELOC) debt you owe compared to your limits on those accounts. The larger the gap, the better your credit score will be. For example, a person who has one credit card with a limit of $1000 and only owes $50 is in a lot better shape credit-wise than a person in the same situation who owes $500. If you can afford to pay down some of your credit card or HELOC debt, that will help you quite a bit.

It seems like everywhere I look, I see "experts" telling consumers to keep their credit card debt below 30%. Doing that will provide your credit with some measure of protection, but if you're trying to improve your credit scores, you need to go much lower. Ideally, a person hoping to improve his or her credit should carry a balance between 5% and 9% of the credit limit. It isn't necessary to pay the card or line of credit off each month.

Where did I get that number? Simple. I've spent years using my own credit as the guinea pig for my theories. In my experience, this is the ideal number.

Option #3: Become an Authorized User

This one won't work for everyone, but if you have an immediate family member with great credit and a credit card, its the way to go. Just ask your family member to add you on to his/her credit card account as an authorized user. The card information then appears on your credit report and – provided the primary card holder is an immediate family member – it factors into your scores. You can become an authorized user on any account, but it won't help your scores unless that person is someone whose card the credit bureaus can be reasonably certain you would actually use, like that of a parent or spouse.

Try to avoid secured credit cards if you can, and it should go without saying that you should pay all debts on time. I'd write more here, but I'm falling asleep at my desk...

Related Posts:

What to Do When a Collection Agency Validates Your Debt

Death of the Pay for Delete Agreement

Deleting Collections From Credit Reports With the "One-Two" Punch

6 comments:

  1. Hi Lee,

    I've been reading your articles, and I've learned a lot. This blog has probably been more helpful than anything I could find on the internet.

    Here's my situation. When I was in high school, I took out a few credit cards to help out during tough times. Eventually, I lost my job, and I could not make payments on them for a while. When I finally got a new job, the cards had all gone to debt collectors. I got the harassing calls and the notices, and eventually began ignoring them. Fast forward 4-5 years later, I am now almost finished with my undergrad degree, looking at apartments, and possibly making some larger purchases in the near future that will be requiring credit checks. However, my high school credit card debt is still there, and debt collectors are still sending me collection notices. It's not too much since each of the cards only allowed me a $500-$600 limit, and I finally have the funds to start paying them off. All of the collection agencies have sent me notices with settlement offers, but most of them have expired since they only gave me a few weeks to redeem them. Is it a good idea to begin paying these off at this point?

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  2. Chris,

    Thank you for the compliment. It's always good to know that someone out there is benefiting from this. That's the goal, after all.

    As far as the credit cards go, the collection notices on your credit report should be pretty old by now. They're due to fall off soon (plus, the older something is, the less impact it has on your credit score). If you have the money to spare, by all means, pay off the debt. If you're only doing it to make the debt collectors stop contacting you, you can accomplish that for free by sending cease and desist letters. Provided the SOL is up on the debts, you should not be in danger of a lawsuit. Once you make a payment, however, you open yourself up to that possibility b/c the SOL starts anew. This is something you should consider if you plan on paying a collector.

    Just for reference, settlement offers from collection agencies NEVER expire. Oh, they say they expire, but if they were ever willing to settle for that amount, they are still willing. Collection agencies put deadlines on things like that as a psychological tool. If the company can give the debtor a sense of urgency, they are more likely to get a payment.

    If it were me, I wouldn't pay them off until I had the lump sum in full. Making payments just opens you up to a whole world of trouble. If you decide to take any collector up on a settlement offer, get the settlement in writing and make sure the offer includes a statement agreeing not to sell or transfer the remaining unpaid balance. If you don't, the company WILL sell the unpaid portion to a new CA and this process will start anew.

    Best of luck to you in your endeavor. I hope it works out for you.

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  3. Hi Lee,
    I recently read your advice on improving your credit score, you advised on becoming an Authorized User with a family member.. My Day and I share the same name plus he has excellent credit (750) with low balances on his credit cards. based on this blog he has offered to make me an Authorized User... My Question before we proceed is I read were FICO put a stop to this... or since family member is that the exception...

    Robert

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  4. Credit recovery services are needed when the creditor is unable to focus on the issue.Debt recovery is the forte of such debt collection services which help us clearing the delinquent accounts on time.

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  5. It is my goal for this year to improve my credit score and avoid any chances that I might go to credit repair. This is something that could help me. Thanks for sharing.

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