Feb 26, 2009

How Taxes Can Affect Your Credit Score

Tax season is already upon us and for many this time of year can bring increased anxiety as taxpayers try to figure out ways to minimize their tax obligation while still maintaining financial responsibility and integrity. For some, particularly those who owe back taxes, this time of year is a reminder of the potential consequences and pitfalls that can occur when money is owed to the IRS.

Not paying your taxes on time can have a devastating effect on your credit score. In some estimates, your credit score can drop more than 20 points from a single tax lien. And any tax lien on your credit report will remain there for up to fifteen years. Even if you manage to pay off the taxes you owe, the lien will remain on your credit report for 7 years.

Thankfully, there are some things you can do that can minimize the chances of a tax lien on your credit report. The IRS has taken several steps to help people who owe back taxes, and this year, they are offering options for individuals who may be at risk of tax liens and default:

Flexible Payment Options – if you’ve been making payments regularly, but have suffered a financial hardship, the IRS may be able to allow you to skip a payment, or have a reduced monthly payment without suspending your installment plan.

Collection Action Postponement – if you haven’t been able to pay, the IRS may be able to suspend collection actions if you aren’t able to pay for economic hardship reasons. If the economic situation has recently occurred, you may not have to provide documentation for the initial postponement.

Prevention of Defaults – if you have an Offer in Compromise (OIC) with the IRS and cannot make the payment terms, the IRS will work with you to avoid default and collection activity on your tax obligation. However, you must contact the IRS as soon as possible when the economic hardship occurs.

Because your wages can be garnished for back taxes, failure to pay could also affect your ability to pay other bills, leading to a downward spiral in your credit scores that can prove difficult, if not impossible to correct. With so much at stake, it is essential to handle all tax matters in a timely fashion. Even if you know you won’t be able to pay up front, contacting the IRS sooner rather than later will give you time to make arrangements that can help you to maintain financial integrity.

If you file taxes this year and discover you owe more than you can pay, don’t panic – you can still make arrangements and save your credit score in the process. Contact the IRS and discuss payment arrangements as soon as possible after filing, even if you can’t pay the whole amount. By working with the IRS from the beginning, you can avoid a costly lien and preserve your good credit. The worst thing to do in this situation is attempting to avoid the issue, or putting it off until it’s too late to reverse the collection process. By remaining vigilant with regards to your financial situation, and taking advantage of the proposed compromises offered by the IRS, you can avoid having your taxes negatively impact your credit score, regardless of your ability to pay.

Posted in IRS, back taxes, credit, credit reports, credit scores, tax season | No Comments »



Feb 22, 2009

Credit Repair and Job Loss

In the current economy, credit repair can prove more challenging than ever, especially if there is a job loss involved. Many people feel overwhelmed at their inability to pay creditors in this situation, sometimes leading to attempted avoidance of the issue entirely. This can only worsen the situation as creditors report these delinquencies to the credit bureaus, damaging your credit score and making finding a new job that much more difficult. However, there are some steps you can take, even if you have lost your job, to minimize the damage that could be done to your credit score. The key is to be proactive in your dealings with your current creditors, rather than seeking to avoid contact. Honest and open communication with your creditors in this instance can be very helpful in reducing the chances of a delinquent report on your credit score. Here are a few tips to help you deal with creditors and remain afloat if you’ve lost your job:

• Use Unemployment Pay Wisely – if you qualify for unemployment, you may be tempted to try to maintain your current lifestyle for as long as possible while searching for a new job. This strategy may not be in your best interests, as unemployment generally does not pay as much as your typical wage. If you do not have savings to fall back on during this time, your best choice is to scale back on what you spend as much as is reasonably possible. Also remember, you’ll need to continue your job search in order to qualify for unemployment, so be certain to keep records of the places to which you’ve applied.

• Prioritize Debt – if you are unemployed and cannot pay all of your bills, it may be time to prioritize. Pay essential bills first, such as the mortgage, electricity, and grocery bills. Bills for expenses such as the telephone or cable television may have to wait, however, you should always keep your creditors informed of the situation before collection notices start arriving.

• Reduce Financial Obligations – drawing from the example above, if you do have cable service, you may wish to cancel it until you have found employment. Likewise, you may wish to cut back on other non-essentials as well. Sometimes, these companies will let you ‘freeze’ an account rather than closing it. This lets the company keep your information on file for when you decide to reactivate the service. However, keep in mind that there may still be fees involved if you go this route.

• Negotiate with Creditors – once you’ve prioritized your debt and eliminated or minimized non-essential financial obligations, you should contact your creditors in order to negotiate payment arrangements that are more favorable to you. Some utility companies may offer you an extended time period in which to pay. Likewise, the bank may extend your payment options on your mortgage, or offer a revised payment schedule until you find a new job. If you show good faith in your intentions to pay, you may be able to avoid having your debts reported to the credit bureau even if you are technically late with some payments.

Avoid the temptation to try to pay for everything with credit cards while you look for your next job. While some emergency purchases may be necessary, paying off all of your bills with your credit cards may only get you into deeper financial trouble if you remain unemployed for longer than a few months. As interest on the charges build, you will likely end up paying far more than if you simply negotiate new terms with your current creditors up front. By taking a proactive stance with your finances, you can reduce the damage to your credit score, and maintain your financial health while seeking new employment.

Posted in credit, credit cards, credit scores, debt, job loss | No Comments »



Feb 16, 2009

Good Debt vs. Bad Debt: How to Balance Your Credit

Most people realize that the amount of debt they carry directly affects their credit score in terms of whether or not they are seen as a good credit risk. But potential lenders also take into consideration the type of debt you carry when making a judgment call about whether or not to extend credit to you. Having the wrong balance of credit types can mean a significantly lower score, and that can lead to higher interest rates, lower credit limits, and in some cases, denied credit applications.

Good Debt

The term ‘good’ debt applies to almost any type of credit or loan that helps you to make tangible progress in some way. They may be secured loans, such as for a mortgage or a car loan, or they may be unsecured, as in the case of student loans. In all cases, however, this type of debt demonstrates a commitment, or responsibility that is directly correlated to responsible lending habits. By having a mortgage, you demonstrate stability. Student loans are generally seen as a good thing, as higher education often yields a better job, and thus, an individual who is better capable of paying off his or her debts.

However, you should be careful with this kind of debt, just as you would any other. Falling behind on a mortgage in today’s financial climate can lead to foreclosure and a black mark on your credit report. Student loans that are unpaid will go into default, leaving you unable to further finance your education, along with other detrimental effects, not the least of which being the damage to your credit score.

Bad Debt

So-called ‘bad’ debt isn’t necessarily bad, but like all forms of credit, it should be used in strict moderation. Bad credit encompasses things like credit cards, store credit, and revolving accounts that can be used for purchases of less than essential items. While credit cards are not bad in and of themselves, carrying too many credit cards or too much of a balance on your credit cards can cause your credit score to dip dramatically.

The best advice when it comes to credit cards and store credit is to only use what you need and to keep your balances as low as possible. In this way, you demonstrate responsible credit consumption, and your credit score won’t take a hit from having too much debt on unsecured credit cards.

The Balance

Ideally, you should have a good mix of secured and unsecured credit, which demonstrates both stability and responsible credit consumption habits. As much as 10% of your credit score can be determined by the type of credit you have, so be careful not to open a lot of credit card accounts, especially if you don’t have a mortgage or car loan to offset the difference. You should also avoid going the other route – avoiding credit cards entirely and paying only with cash or debit. If you don’t have any payment history with unsecured loans, some lenders may be reluctant to extend credit on favorable terms.

In general, when considering new credit, ask yourself if you really need it, or if it’s just going to be one more credit card to add to the pile. Taking advantage of a low interest rate to pay down a few balances is more than acceptable, but opening an account just for an introductory discount on purchases might not be – especially if you don’t really need the items you would purchase. Keep your financial goals in sight, and you can take full advantage of both types of credit, while still improving your credit score.

Posted in bad debt, credit, credit cards, credit scores, good debt, student loans | No Comments »



Feb 7, 2009

Joint Accounts and Your Credit Report: When They Can Help

In the current credit crisis facing the nation, some consumers are looking at creative ways to help boost their credit score in an attempt to qualify for necessary credit. Using joint accounts as a means to prop up your credit score may help, but there are definite pitfalls to consider before making the decision to try this option.

Applying for joint accounts or having a cosigner is nothing new in the world of credit. Generally speaking, the idea is that you benefit from the cosigner’s good credit in order to qualify for your loan. Or, in the case of joint accounts, you share the account with a person whose credit is in good standing. In both of these instances, the aim is to give you access to immediate credit, either in terms of a car loan or credit card account, which you then use to build on your own good credit. This can be effective over the long term, assuming that payments are made on time and the account is kept in good standing.

However, with the current credit freeze in place, trying to build credit in this way can prove difficult, as lenders are reluctant to extend new credit in many instances, and FICO may no longer take into consideration authorized users on an account. Because of this, some individuals are looking at joint accounts in a different light. Rather than using a cosigner to help secure a new line of credit, some individuals ask a relative or other trusted associate to add them to an already existing account that has a solid payment history and a low debt to available credit ratio.

This helps in two ways – the solid payment history on the account is now reflected on the individual’s credit report, which may improve the credit score. And the low debt to available credit ratio means that as the individual pays down his or her own debts, the credit score may improve more quickly. In return, the individual generally agrees not to have access to the account, other than in name only. Ideally, the account in question should have at least two years of solid payment history, and a debt to credit ratio of no more than 35%.

If you use this method to improve your credit score, you should be aware that all the standard caveats apply – and this can become particularly risky if the person whose account you are sharing falls behind on the payments. However, as an authorized user of the account, you may be able to remove yourself from the account in question if it goes beyond 30 days past due. This is different from cosigning a loan, in which case you would be fully responsible for the debt, regardless.

While careful use of joint accounts can improve your credit score, it does not take the place of making timely payments on your own accounts, and you may not see as much of a boost with this method as you would by hiring a credit repair company to assist you with removing erroneous information. However, if you don’t have much credit on your report, and you have a friend who is trustworthy and willing to help you with your situation, joint accounts can help to improve your credit score and help you to qualify for credit in your own name. Just remember to monitor your credit report regularly, and make certain that you are free to drop your name from the account without penalty when the time comes.

Posted in cosigner, credit, credit crisis, credit freeze, improve your credit score, joint accounts | No Comments »