Scenario 2: Stacy has fallen behind on some of her bills over the years, including some charge-offs. She gets a raise at her job, and starts paying off all of her bills, starting with the oldest ones first. Stacy is dismayed to find out that her credit scores have dropped significantly, despite the new ‘paid’ status on all of her old, previously-unpaid accounts. She is unable to open any new credit accounts, and despite having paid down her debts, she finds that her credit scores remain low for some time.

Both Brenda and Stacy paid their debts, so why did Brenda’s credit scores improve while Stacy’s got worse? The simple answer is: Time. Brenda’s debts were only a few months past-due, while Stacy’s debt was years past due. Because new negative information harms your credit scores, paying off a lot of old charge-offs can initially put your credit scores into a tailspin. Even though Brenda’s medical bill was written off after a few months, the relative newness of the negative information had already done its damage to her scores. Stacy’s old charge-offs, however, were impacting her credit scores much less before they were paid in full.

How late is too late to pay down a debt? Generally speaking, the closer a debt is to being dropped from your credit report, the less likely it is to help you if you pay it off now. That doesn’t mean you shouldn’t pay off the debt – but you may want to wait until the item has dropped from your credit report if you want to avoid damaging your credit scores. In general, any revolving debt that is a few months past due should be taken care of first. Open accounts take precedence over your old charge-offs.

If you do decide to pay on a charged-off account, make sure that you only pay the original creditor. While debt collectors may be the ones contacting you about the debt, not all debt collection agencies are reputable. If you pay off the original creditor, there is less chance that your good-faith payment will be mishandled. In some instances, very old debt may have been bought and sold by multiple debt collectors – paying the original creditor ensures that you have a verifiable means of proving that the debt has been satisfied.

Charge-offs can be tricky business. No one wants to leave a debt unpaid, but if a credit item is about to be removed from your credit report, it may be best to wait before you pay. If you do decide to pay sooner, contact the creditor directly and let them know that you’d like to work out an arrangement that will help minimize the impact to your credit scores. Make sure you check on your credit report again after the payment has cleared to be sure that it accurately reflects the status of the debt. The worst thing you can do is pay off a bill and have the payment go unreported, so always be vigilant and check your report regularly.

1. Charge-offs

While at first glance charge-offs may look like you no longer owe creditor, in reality the creditor has deemed your debt to be a “lost cause” and has written off the debt or sold it to a debt collector. Typically, this only happens after several missed payments — anywhere from 3 to 6 months of nonpayment could land you with charge-off on your credit report.

Charge-offs are particularly damaging because they indicate that you are either unable or unwilling to pay off a debt, and are unwilling to work with creditors to find suitable payment arrangements. If your debt is sold to a debt collector, they too may place a negative item on your credit report, resulting in two negatives for one unpaid bill.

2. Maxed Out Credit Limits

Even if you pay your bills on time and avoid charge-offs and debt collectors, maxing out your credit cards will make it difficult for you to obtain new credit in the future. Having a high debt-to-available-credit ratio can take several points off of your credit score. Additionally, many lenders hesitate to extend credit to someone who is already maxed out, even if you are current with all of your bills.

If your cards are at their limit or close to it, work on paying down the balance. You should carry a balance of less than 30% of your credit limit from month to month in order to keep your credit scores healthy.

3. Lack of Credit or “Thin” Credit

If you’ve closed your old, unused credit card accounts, you may find it more difficult to open new accounts in the future. Likewise, if you’ve never had credit, expect to have less favorable financing terms than someone who has already established his or her credit. Because credit scores rank you on your credit history, having little or no credit accounts can mean that you will get turned down for many forms of credit because you don’t have a payment history that creditors can use to gauge your risk.

If you need to establish or reestablish your credit, a secured credit card may be one way for you to build a positive payment history while still taking advantage of favorable credit terms. Keep in mind that student loan repayment can also count, so if you have student loans, paying them off can contribute to establishing a positive payment history as well.

There are no easy answers when it comes to obtaining the best credit score possible. If you are having problems with negative credit and low credit scores and you can’t resolve the issue on your own, the next step may be to seek help from a professional credit repair company. A reputable credit repair service can help you to evaluate remove listings on your credit report. Negative items that aren’t accurate can be disputed, which will significantly raise your credit scores if you are able to have them removed.

If you want to help your teenager build a solid credit history and high credit scores, it’s important to establish responsible spending habits from the start. A joint credit card account can help your teen learn to manage debt responsibly, while taking advantage of your credit history to provide lower rates and better terms.  However, opening a joint account with your teen has an impact on your credit scores as well. The new line of credit, as well as your teen’s spending habits will be reflected on your credit report.  Here are a few tips to make sure that your teen’s new credit card doesn’t spell disaster for your credit scores:

1. Set up-front expectations. Owning a credit card is a big responsibility. Make certain your teenager knows when it’s ok to make a purchase, and what types of purchases are acceptable. Agree upon a set spending limit per month – ideally no more than 10-20% of the total credit limit.

2. Enforce limits. Once you’ve set up purchasing limits, make certain that your teen sticks to those limits by reviewing purchase history and balance information regularly. If you find that your teen is regularly spending more than the agreed-upon amount, you may need to place tighter controls on the use of the card.

3. Use automatic payments. Don’t give your teen the chance to miss a payment. Set up automatic payments that debit directly from his or her checking account, and follow up to be sure that payments are received on time. One missed payment can lower your credit rating as well as your child’s, so it’s important to stay on top of payments from the very beginning.

4. Set up alerts. Many credit cards have an option for email alerts if the balance on the card goes over a certain amount. If your son or daughter is in college far away, these alerts can help you to keep track of your child’s spending before it gets out of hand.

5. Review spending habits. Go over the monthly statements with your teenager for accuracy, and to be certain that your teen is using the card responsibly. Teach your teenager to compare the charges on the statement with receipts and records for the month to minimize the chance for fraudulent charges.

By taking the time to educate your teenager about responsible credit-use, you can ensure that his or her credit scores are well-established along with solid financial habits. This will be especially helpful when it’s time to establish credit in his or her own name, and will give you peace of mind when it comes to your teen’s fiscal responsibility.

1. Check your credit report and credit scores. People who know they have poor credit may only know because they’ve been recently turned down for new credit. If that applies to you, get your credit report sooner rather than later. Being turned down for credit entitles you to a free copy of your credit report, even if you’ve already received your credit report in the past year. By getting the most recent version of your credit report and scores, you’ll know exactly where you stand. Start off by disputing any inaccuracies that you see – inaccurate items on your credit report can significantly damage your scores.

2. List your debts from smallest to largest. By itemizing your debts, it will help you to focus on paying down your debts more efficiently. If most of your debts are nearly the same value – $1000 on one credit card and $1500 on another, for instance – then list your debts by interest rate instead.

3. Pay off the smallest debt (or the one with the highest interest rate) first. By getting rid of debts in a targeted fashion, you can improve your credit scores more quickly as you eliminate your debt obligations one at a time. Use the money you spent towards paying down the first debt as an additional payment to pay off the next, and you will be able to get out of debt even faster.

4. Don’t forget to reward yourself along the way. Getting out of debt and improving credit scores is hard work. Whenever you meet one of your goals, set aside a reasonable reward to celebrate your hard work. Whether it’s saving for a vacation, a special night out, or some other treat, make sure that it fits with your current budget and savings goals.

5. Remember that not all debt is bad. Some debts are actually seen as good debt by lenders. In general, if you have borrowed to purchase something that will increase in value, this debt is seen as positive by lenders. Student loans, traditional mortgages, and money borrowed to grow your business all fall into this category. That doesn’t mean that you shouldn’t repay these debts – on the contrary, paying off good debt can only increase your net worth in the future.

Paying down debt and paying on time are two of the most powerful techniques for raising credit scores. If you’re having difficulties with tackling your debt and getting your credit on track, talk to a reputable credit repair agency, and work with a professional to raise your credit scores one step at a time.

1. Keep a Spending Journal. Often, it’s not the big purchases that can cause problems, but instead, several small purchases that add up. Fast food, movie rentals, and other little conveniences we take for granted can quickly add up. By keeping a diary of exactly what you spend on a daily basis, you can track precisely where your money goes when you make these ‘unseen’ purchases. Once you understand your own spending habits, you’ll be better prepared to stick to your financial goals when temptation arises.

2. Create a Budget. This goes hand-in-hand with your spending journal. In order to control your spending, you have to set reasonable limits. Look at your bills and see where you can cut back, as well as areas that you may need to spend more in order to reach your goals – putting away more money into your health savings account may be useful if you are planning to have a major procedure, and want to avoid maxing out a credit card, for instance.

3. Prioritize. When you are setting goals for improving your credit, prioritize what’s most important. Getting current on everything at once may not be possible, but you can decide to get current and stay current on those cards that are charging the highest fees, for example. Once you’ve met one goal, move on to the next – credit repair is a dynamic process, and as long as you are willing to move forward, you will see positive results.

4. Make a Wish List. Don’t forget to reward yourself (within reason) as your credit scores improve. Try to think of ways to treat yourself that won’t put you back into debt. Save up for a well-deserved vacation, or treat yourself to dinner and a movie twice a month. The trick here is to find something that will motivate you, without breaking the bank.

5. Automate Your Bill Pay. If you find that you are often charged late-fees because you forget the payment due date, why not pay automatically through your bank? Most banks now offer online bill pay as well, so avoiding late fees and the damage to your credit scores can be as simple as a click of the mouse.

6. Keep Track of Your Progress. Don’t forget to check your credit report and scores to gauge your progress after several months. Everyone gets one credit report per year for free – and people in some states get 2, so check your local regulations. Make sure that companies are reporting your timely payments accurately, and don’t forget that you can dispute inaccurate information on your report. If you need help with the process, work with a reputable credit repair agency to get the job done.

The ‘trick’ to credit repair is in knowing that it is an ongoing process. As you move towards your financial goals, always be willing to incorporate ways that will make it easier for you to succeed.

Under the new credit card regulations, companies are forbidden to change interest rates on pre-existing balances for fixed-rate credit cards. However, many credit card companies are switching to variable rate cards for most of their customers. This means that as the prime interest rate rises, so will the amount of interest you pay on your credit cards. This ultimately leads to higher balances which are harder to pay off, and in turn can damage your credit score by causing you to utilize more of your available credit limit than you normally would.

If your credit card company switches you from a fixed-rate credit card to one with a variable interest rate, you can reject the change. However, in most cases this means that your credit card will be canceled at the end of the current agreement cycle. When this happens, if you’re still carrying a balance on the credit card your credit scores will drop due to the fact that your credit report will show a balance higher than your available limit on that card.

When dealing with a credit card that has been switched to a variable interest rate, it’s generally in your best interest to continue making payments until you have paid the balance of that credit card entirely. Then, if you decide to cancel the card you can do so without having as much of a negative effect on your credit report. Currently, because interest rates are generally low, you may even be able to save money versus your fixed interest rate, assuming you can pay the card off in only a few months.

Another option which may help you to keep your credit scores healthy is to pay off the variable rate card, and then use it for purchases that you can pay in full each month. This will help to prevent any reduction in your credit limits, as well as avoid ‘inactivity’ penalties that some banks have begun to assess. If you have credit cards that you haven’t used in several months, now is the time to do so. Make a small charge to keep the account active, and pay it off as soon as possible. Otherwise, you run the risk of owing fees due to inactivity, which can pile up and cause late payments and higher interest rates overall.

Regardless of whether you decide to keep the account or close it, the important thing to remember is to keep the account open until the entire balance is paid off. In this way, you’ll avoid a major hit to your credit scores, which will save you money on any new credit that you apply for.

However, some borrowers are discovering that these mortgage readjustments and loan modifications are having a detrimental effect to their credit scores. This is because loan modifications are reported as partial payments, and may even be reported as late payments by lenders. Under the Credit Data Industry Association rules, loan modifications are typically reported as a partial payment, which can lower your credit score 50 to 100 points, or more, depending upon your particular situation.

Unfortunately, lenders are not required to tell you that they will report your loan modifications as a partial payment or a late payment. You may not find out about the damage to your credit scores until you attempt to apply for new credit or see lower limits on the credit that you are to have. Even if you make all agreed-upon payments under the new loan modification consistently on time, you may find that your credit report shows you as delinquent with regards to your mortgage payments. The only way to correct this is to contact the lender directly — the credit bureaus have no control over how your loan modifications are reported to them.

So what can you do to protect your good credit score if you need to have your mortgage modified? Your best option is to speak directly with the lender and find out how your loan modifications will be reported. By working directly with your lender upfront, you may be able to avoid the damage to your credit scores. If you are already taking advantage of a loan modification, it’s in your best interests to check your credit report and be sure that your timely payments are being ported accurately by your lender. If your bank has a policy of reporting loan modifications in a manner that is detrimental to your credit scores, you may wish to try to negotiate more equitable terms for your particular situation. Some banks are willing to work on a case-by-case basis with borrowers, so you may be able to get your credit report adjusted if you speak directly with the lender.

A final option is to place a notation on your credit report, detailing your situation. While this may not make a big difference in your actual credit scores, lenders who pull your credit report will have a more accurate picture of your current financial situation, as well as an understanding of your commitment to pay your creditors on time. By being aware of the potential damage to your credit scores before you enter a loan modification agreement, you can take steps to minimize the negative effects.

Most, if not all, of these offers are scams — you pay the money and you receive nothing in return. The most famous of these “no FICO” credit card companies is a known scam, and the Attorney General has made an arrest in connection to the fraudulent credit scheme.  London Exchange, based out of Santa Ana California, has allegedly scammed consumers out of hundreds of thousands of dollars. The owner of this company is currently under arrest; however, there are no details about whether or not the consumers who were scammed can expect to see any of their money returned.

However, even if some of these “no FICO” arrangements are legitimate, they do nothing to help you improve your credit score, and in fact may only cause more financial troubles down the line. Because you essentially sign an agreement to be responsible for the trade line, you could be held responsible for other individuals’ payments on the same trade line. So if one individual on the agreement racks up debt and then defaults, everyone else using the trade line may then be charged and held accountable for that default.

Assuming that everyone pays as agreed and no one defaults on the trade line, there are still problems – namely, that all of your timely payments are doing nothing to improve your credit scores, or help you to reestablish a solid history of repayment on your credit report. The bank issuing the trade line does not report these payments to the credit bureaus, as the credit is never applied for in your name. While some individuals may see this as a benefit, due to the fact that it will not show up as a financial obligation when someone pulls the credit report, it still must be listed on any applications for new credit, and failure to do so could be considered fraud.

Credit troubles are becoming more common in the current economy, as individuals who may have had excellent credit scores in the past struggle with unemployment, rising housing costs, and other financial issues. As credit limits are lowered even for individuals with an excellent history of repayment, and people continue to look for alternative methods of financing, one can expect these types of scams to continue. Your best option when it comes to evaluating any potential extension of credit is to be vigilant with your research, and to turn down any offer of credit that requires high fees up front.

Source: http://ag.ca.gov/newsalerts/release.php?id=1813

Last Minute Interest Rate Hikes – Many credit card companies sent out notifications detailing higher interest rates and other terms in advance of the new credit card laws. Some of these notifications may be confusing to consumers, due to the fact that the listed changes may not take effect for several months. Here’s the bottom line: if you received a notice of a change to your credit card’s terms before August 20th, you only have 15 days to opt out, even if the proposed changes don’t take effect until months later. Don’t wait to take action, and be sure to read the fine print in order to avoid having your account closed, or assessed additional fees.

Changes to Minimum Payments – Some credit card companies are also raising the amount you have to pay each month if you carry a balance – up to 5% from the typical 2-2.5% seen in years past. While you can’t always opt out of these changes, in some cases you may have the option to write in and retain your old rates. Be careful with this option, however, as some companies will close your account if you opt out of their new terms.

Increased Penalties for Late-fees and Over-limit Fees – While these types of penalties are easy to avoid if you pay your bills on time and stay within budget, credit card companies are also reducing consumers’ credit limits without providing any notice. Because the credit card companies aren’t required to inform you about changes to your credit limit, you could rack up over-the-limit fees without realizing it until your statement arrives in the mail. Your best defense against this is to sign up for alerts that will let you know when you are approaching your limit, coupled with regular vigilance through online access or customer service, so that you always know your limit before you go shopping.

Another way to avoid paying extra: Opt out of over-limit purchasing altogether.  Companies are now required to allow you to do this, but you will have your credit card declined for any purchase if that purchase would take you over the limit. If you typically keep your balances low, but aren’t sure about your credit limit, this is one way to avoid getting hit with additional fees.

Most credit card companies allow for automatic payment of your bill, either in full or the minimum balance, monthly. By taking advantage of these programs, you can eliminate the chance that you’ll be charged a late-payment fee on your accounts as well. Just keep track of your due dates and be certain that you have the funds readily available to cover the automatic bank draft, or you could wind up paying just as much, or more, in overdraft fees from your bank.

While changes in interest rates require a notice, these reductions to your credit limit can come without warning, leaving many uninformed about the reduced limits until they receive their monthly statement. Reductions of hundreds or thousands of dollars are not uncommon, and can really put a dent in your credit score, regardless of how responsible you are when it comes to making on-time payments each month. What’s worse, you may be hit with over-the-limit fees on newly reduced balances, when your original spending was well-within your old credit limit.

Many consumers are surprised to realize that unlike interest rate changes, changes made to the credit limit can be done at any time, without informing the consumer. This means that even if you have a $1000 credit limit today, there is nothing stopping the credit card company from lowering that limit to $800, or even $500 tomorrow. The only way to stay informed is to check your account information regularly. If your credit card company offers online access to your account, it may be helpful to check your credit limit in this way.

Another option is to set up an alert that will send you an email or text message when you are approaching your credit limit, but this may not be as helpful in terms of saving your credit. Why? The ratio of how much you spend on your cards, versus your available credit limit is a factor in calculating your credit scores. If you wait until you are only a few hundred dollars away from your limit to set an alert, the damage to your credit score may already be done. While you will avoid any sneaky over-limit fees, you won’t be able to prevent the hit to your credit score that comes from over-utilization of available credit.

If one credit card company reduces your balance, others may follow suit as your available-credit-to-debt ratios will now categorize you as a higher risk. While the logical option would seem to be avoiding the use of your credit cards altogether, this choice can backfire, as many credit card companies are actively closing accounts that do not have any activity after a few months. Your best option is to continue using your cards, and pay off the balances each month if at all possible. This will keep you from having an account closed for inactivity, and it will also keep you from being targeted for credit limit reductions due to carrying a balance each month.

While there is no law that requires your credit card company to keep you informed about your credit limit, you can remain informed by keeping a close eye on your balances, either online or via customer service. Don’t let surprise credit limit reductions derail your good credit – set up alerts, check your balance regularly, and pay off as much as you can to avoid unpleasant repercussions.