Sarah J. Lile; May 2006
Many of us find ourselves lost in a jungle of information about debt,
credit reports and credit scores. Although the credit scoring system can
be confusing, experts agree that consumers must strive to understand how
the system works in order to better manage their credit. One approach to
navigating through this jungle is understanding how certain decisions
might negatively impact credit scores.
Ignoring the pile of unpaid medical bills, parking tickets - and library
books
Yes, library books. More than 600 public libraries in the U.S. now turn
unpaid dues over to private collection agencies. Cities and courts often
hire collectors to track down overdue traffic violations. Doctors'
offices and medical laboratories turn over unpaid debt to collection
agencies. And many of those agencies regularly report overdue accounts
to at least one of the three major credit bureaus.
The bottom line: When a collections notice appears in the mail or when
an agent calls, inquire about the account and resolve it immediately.
Every state limits the time a creditor can sue you after an account
becomes delinquent. But be aware that in some states, when you enter
into a repayment plan with a creditor or acknowledge that a debt is
yours, you may unintentionally extend the statute of limitations. This
means that a creditor has more opportunity to sue for your delinquency,
which could impair your efforts to rehabilitate your credit. Once the
account is paid, send a letter to or call the source to request it be
removed from your record, but remember, whether it stays on your credit
report is also determined by your city's statute of limitations.
Settling accounts for less than you owe
Consumers should not always assume that settling old debts, by making an
agreement with the creditor to pay only a percentage of the debt, will
improve their credit score. Sometimes settling an account will cause a
drop in your score because the activity appears on your credit report as
recent and will be noted as "settled." The more recent the problem, the
more damage it can do to your credit report.
You may have a friend who bragged about the old debt that fell off his
credit report and bumped up his score. If negative marks on a credit
report disappear, usually after 7 years, a score could very well
improve. However, this is not always the case- the FICO scoring system
used by many agencies groups people by certain qualities, so some
people's scores might actually drop after the old debt disappears.
Also, be wary of debt consolidation services that offer an easy answer.
Choosing to consolidate your debt could cause you more financial strain.
Unless you stop racking up debt while you pay off your consolidation
loan, you could end up in a vicious cycle.
The bottom line: If you have old debt, the consequences of settling it
depend on your personal credit history. Some people feel an ethical
obligation to pay off all debts, and that is personal choice. As you
probably know, the wisest choice is to pay off recent debt as quickly as
possible. If you can, pay your old balances in full and don't close the
account.
Closing accounts
One of the most common credit-scoring myths is that open, unused
accounts are a detriment to the credit score. While preparing to apply
for a mortgage or car loan, some consumers will close old accounts in an
attempt to bump up their scores. When they discover that their scores
have dropped, they discover their mistake.
One factor used to calculate your credit score is the difference between
your used and unused credit. Closing accounts shrinks the total credit
available, resulting in a higher percentage of used available credit.
Furthermore, your credit score also tracks the length of your credit
history, so if you close accounts you opened ten years ago, you risk not
qualifying for new credit because of a seemingly short credit history.
The bottom line: If your credit score is lower than you would like it to
be, you can't stitch up the damage by closing accounts.
Many of us find ourselves lost in a jungle of information about debt,
credit reports and credit scores. Although the credit scoring system can
be confusing, experts agree that consumers must strive to understand how
the system works in order to better manage their credit. One approach to
navigating through this jungle is understanding how certain decisions
might negatively impact credit scores.
Ignoring the pile of unpaid medical bills, parking tickets - and library
books
Yes, library books. More than 600 public libraries in the U.S. now turn
unpaid dues over to private collection agencies. Cities and courts often
hire collectors to track down overdue traffic violations. Doctors'
offices and medical laboratories turn over unpaid debt to collection
agencies. And many of those agencies regularly report overdue accounts
to at least one of the three major credit bureaus.
The bottom line: When a collections notice appears in the mail or when
an agent calls, inquire about the account and resolve it immediately.
Every state limits the time a creditor can sue you after an account
becomes delinquent. But be aware that in some states, when you enter
into a repayment plan with a creditor or acknowledge that a debt is
yours, you may unintentionally extend the statute of limitations. This
means that a creditor has more opportunity to sue for your delinquency,
which could impair your efforts to rehabilitate your credit. Once the
account is paid, send a letter to or call the source to request it be
removed from your record, but remember, whether it stays on your credit
report is also determined by your city's statute of limitations.
Settling accounts for less than you owe
Consumers should not always assume that settling old debts, by making an
agreement with the creditor to pay only a percentage of the debt, will
improve their credit score. Sometimes settling an account will cause a
drop in your score because the activity appears on your credit report as
recent and will be noted as "settled." The more recent the problem, the
more damage it can do to your credit report.
You may have a friend who bragged about the old debt that fell off his
credit report and bumped up his score. If negative marks on a credit
report disappear, usually after 7 years, a score could very well
improve. However, this is not always the case- the FICO scoring system
used by many agencies groups people by certain qualities, so some
people's scores might actually drop after the old debt disappears.
Also, be wary of debt consolidation services that offer an easy answer.
Choosing to consolidate your debt could cause you more financial strain.
Unless you stop racking up debt while you pay off your consolidation
loan, you could end up in a vicious cycle.
The bottom line: If you have old debt, the consequences of settling it
depend on your personal credit history. Some people feel an ethical
obligation to pay off all debts, and that is personal choice. As you
probably know, the wisest choice is to pay off recent debt as quickly as
possible. If you can, pay your old balances in full and don't close the
account.
Closing accounts
One of the most common credit-scoring myths is that open, unused
accounts are a detriment to the credit score. While preparing to apply
for a mortgage or car loan, some consumers will close old accounts in an
attempt to bump up their scores. When they discover that their scores
have dropped, they discover their mistake.
One factor used to calculate your credit score is the difference between
your used and unused credit. Closing accounts shrinks the total credit
available, resulting in a higher percentage of used available credit.
Furthermore, your credit score also tracks the length of your credit
history, so if you close accounts you opened ten years ago, you risk not
qualifying for new credit because of a seemingly short credit history.
The bottom line: If your credit score is lower than you would like it to
be, you can't stitch up the damage by closing accounts.