Dec 29, 2008

Available Credit to Debt Ratio: What it Means to Your Credit Score

Most people understand the basic premise behind building or maintaining a good credit score: pay the bills on time, every month, consistently. Miss a payment, or default on a loan or credit card, and your credit history will reflect that negative information and lower your credit score. However, there are many other factors involved when it comes to determining your actual credit score, and not all of them have to do with whether or not you pay your bills on time each month. Your available credit to debt ratio is a big factor when it comes to figuring up your credit score. Your available credit to debt ratio can impact your score based upon not only your spending habits, but your debt-management plan as well.

Your available credit to debt ratio is, simply put, the amount of debt you currently carry, divided by the amount of your available credit. For example, if you have a credit card with a $1000 limit and you carry a $500 balance, your available credit to debt ratio is 50%. The lower this ratio, the better your credit score will be. Ideally, you should aim for a total credit to debt ratio of 30% or less. A high ratio will negatively impact your credit score even if you make all of your payments on time. This is because people who use most or all of their available credit are seen as having a higher risk of default.

It may seem as though the answer to improving your credit to debt ratio is to open more credit card accounts. In reality, opening multiple accounts in a short period of time will negatively impact your score. Your best option, if you have been making payments on time regularly to your credit card company, is to call and ask for a modest increase to your credit limit. This helps in two ways – first of all, it is an increased limit on a card that has a successful payment history. Secondly, it increases your overall available credit, which will lower your available credit to debt ratio, improving your credit score.

By the same token, if you have credit cards that you have paid off recently, don’t cancel them. The available credit on those cards still counts as part of your available credit to debt ratio. If you’re worried that you might be tempted to spend, take the cards out of your wallet and put them in a safe place that isn’t easily accessible for impulse purchases. Every six months or so, you may want to use the cards for a small purchase such as dinner or a movie, in order to keep the accounts from being canceled due to inactivity. Be sure to pay the full balance on the card when it comes due, in order to keep your debt ratio down.

Another way to improve the available credit to debt ratio is to pay more than your minimum balance each month. Besides being an excellent financial advice, paying more will free up more of your credit, and lower your available credit to debt ratio. One word of caution, however: if you have several credit cards with very high limits that you are not using, and that carry no balance, you may want to ask to have the limits lowered temporarily if you are in the market for a car or other large purchase. Some companies see an excessive amount of unused credit as potential debt, and may be reluctant to loan funds in that instance. In most cases, however, this credit will not work against you, but for you as you continue to build a solid credit history that will keep your credit score climbing.

Posted in available credit to debt ratio, building credit, credit, credit history, credit scores, improve credit scores | No Comments »



Dec 14, 2008

Cutting Through the Confusion: Statute of Limitations vs. The Reporting Period on Credit Items

When it comes to understanding your credit score and credit reporting, there are a lot of terms to remember. Because of this, sometimes it’s easy to get confused when it comes to knowing your rights and how to manage your credit repair efforts. Two of the most commonly confused concepts in credit repair and credit reporting are the statute of limitations on collecting debt, and the reporting period on credit terms. While these are two separate, non-related concepts, getting the two confused can potentially cause problems with your credit score.

Understanding the Statute of Limitations

Simply put, the statute of limitations for any debt is the length of time a creditor has to bring legal action against you in order to collect the debt. This date varies from state to state, and may be anywhere from three to ten years, and depending on the type of debt. In some instances, such as a domestic judgment, the statute of limitations may be even longer – up to 20 years. However, once this date has passed, if a creditor tries to sue you to collect the debt, you have the means to successfully defend against having to make payments.

An important thing to remember is that the statute of limitations runs out at a set period of time after the last missed payment or activity on the account. This means that if your account is past the statute of limitations, but you make a payment, you’ve reset the clock, and will have to wait another 3 – 10 years for the collection period to expire. In some states, just the promise to make a payment can reset the statute of limitations, whether or not you actually follow through on the payment itself. In the meanwhile, your creditor will be able to legally sue you over the debt and attempt to recover not only what you owe, but interest as well.

Calculating the Statute of Limitations:

1. Add six months to the last date of activity on the account (payment or otherwise).

2. Add the number of years for your state’s statute of limitations.

3. After this date, your creditors can no longer successfully file suit, as long as you can prove that the statute of limitations has expired.

Example:

1. You opened an account in May of 2000, and stopped making payments on June 3rd, 2001. Add six months to June 3rd for a date of December 3rd, 2001.

2. Your state’s statute of limitations is 4 years. Add 4 years to December 3rd.

3. Your creditors can no longer sue you for payment of that debt after December 3, 2005.

Understanding the Credit Reporting Period

By contrast, the credit reporting period only states how long the record will remain on your credit report, regardless of the actual time left on the statute of limitations. In most cases, after seven years, the debt will be removed from your credit report, whether or not you actually paid the debt. Here is where things can be confusing: Say the statute of limitations is 3 years in your state, and your debt is 4 years old, with no account activity in the last 4 years. This means that the statute of limitations has passed, even though the debt is still listed on your credit report.

Debt collectors may contact you and try to get you to make a payment on this debt to have it removed from your account, but even if you don’t pay anything, the debt will be removed in another three years. However, if you make a payment on that account, and renew the statute of limitations, the debt may also be relisted as a new debt – so any missed payments will once again have a negative impact on your credit score.

If you’re confused about the statute of limitations and the credit reporting period, you aren’t alone. There are several credit repair services that can help you, and that will offer sound advice of when it’s prudent to pay the bill and when it’s more prudent to just sit tight. Getting professional advice may help you to avoid unnecessary problems with your credit score.

Posted in credit, credit reporting, credit scores, debt collection, statute of limitations | No Comments »



Dec 7, 2008

Three Reasons to Clean Up Your Problem Credit Now

With the current financial crisis blanketing the United States, many people are wisely trimming down their spending and holding off on unnecessary purchases. If you’re one of the millions of people looking more closely at your bottom line and you also have problem credit, you may wonder if credit repair services are worth your hard-earned dollar. While everyone’s situation is unique, there are three good reasons that you might want to consider credit repair a necessary expense rather than a costly luxury.

Reason Number One: You are Moving or Plan to Move in the Near Future

If you’re planning on moving into a new apartment, problem credit can often cause unforeseen difficulties and increased expenses. Most apartment managers now run credit reports when you fill out an application for a new apartment. This can mean that you’ll be turned down for rent in more reputable apartment complexes, leaving your options for suitable living arrangements limited at best. If you are accepted into the apartment complex, be prepared to pay a higher deposit than most renters – and you may or may not get your deposit returned at the end of the lease period, depending on the terms.

Poor credit scores can also cause difficulties with your utilities. Electric companies, gas companies and phone companies almost always check your credit history, and a poor credit score can mean deposits upwards of $200 or more. This can quickly add up to an unaffordable expense if you’re trying to move for financial or budgetary reasons. If you don’t have the cash on hand to pay the exorbitant amount charged for deposits and connection fees, you may find you can’t afford to move at all, since utilities are a large part of what makes any residence livable. And if you do manage to pay the deposits, don’t expect a refund; some companies will apply the deposit to your balance after several months of payment. Others will hold the deposit as security against your final bill. But rarely will a utility company issue a refund check for a deposit, unless you are turning off the service and have a positive balance.

Reason Number Two: You Plan to Look for a New Job

Unemployment is at an all-time high, and new jobs with decent benefits are becoming more scarce throughout the country. If you are one of the many recently unemployed due to company layoffs and closings, a poor credit score may put you at the bottom of the pile when it comes to job applicants.

More and more, employers are looking at the credit of potential employees when making hiring decisions. Poor credit may put you out of the running for a new job, even if you are highly qualified in other ways. Of particular concern, if you work in management or finance, a poor credit score may be seen as a direct reflection of how well you would manage company funds.

If your current position requires a security clearance, you may find yourself suddenly out of job if your credit scores fall too low and you are classed as a security risk.

Job seekers can give themselves an extra advantage with a clean credit history and strong credit score. Whether accurate or not, your credit history is seen as a gauge of how trustworthy, responsible, and reliable you will be in your new position. If you take the time to clean up your credit score before you start your job search, you may find more opportunities for employment.

Reason Number Three: You Plan to Buy a House/Refinance Your Mortgage

While the banks are not doling out home loans at the levels seen earlier in the year, home buying could prove an attractive option for those who could not afford home prices seen just a few months ago. With the housing markets weakening, many first-time buyers could be in for an attractive first mortgage if they have good credit scores. Interest rates are low, and with foreclosures on the rise, a couple with an average income for their area may be able to afford a larger or nicer home than they would have when the housing market was booming.

If you’re currently a homeowner and thinking of refinancing, having a good credit score can see your mortgage payments drop dramatically, saving you thousands of dollars over the life of the loan. While not everyone can qualify for refinancing, having a good credit score means that you’ll have more options than most people who are looking to downsize their mortgage payments in the long-term.

Those who have problem credit are not likely to find a home loan available for any price in the current market. With so many lending companies burned with the so-called ’sub-prime’ lending spree, the market for loans available to buyers with less than perfect credit has diminished dramatically. So even if you have the income for a new home, a poor credit history may prove to be an insurmountable barrier to the American dream.

There are many reasons to consider credit repair as a solution to your current credit score problems, but if you fall into one of the above categories, you may want to take a closer look at procuring credit repair sooner, rather than later. With the amount of money you save in reduced deposits, increased job security, and lower interest rates, the amount you spend on credit repair services will be a drop in the bucket, comparatively.

Posted in credit, credit history, credit repair services, credit scores, refinancing, sub-prime | No Comments »