How can this be possible? The Fair Isaac Corporation, the company that determines your FICO scores, has fairly determined that the most recent accounts on your credit count towards your scores the most. The older the account is on your credit report the less it factors in to your scores and a lot of times when you pay off a debt you make the account current. The only problem is that the credit bureaus still report the account as negative, but now instead of being old, it’s brand new like it just happened. It will stay on your credit report for 7 more years. This can damage your credit scores drastically.

Before you consider paying off an old debt on your credit report, you may want to contact the creditor in writing. Tell them of your good intentions and ask them if they will agree to delete the account from your credit reports if you settle your debt (lots of times for much less than you owe). Get their agreement in writing!

You must be careful when contacting creditors though. Arranging a payment plan or even inquiring about an old debt can restart the statute of limitations in some states, allowing creditors to sue you. Simply contacting a creditor about a past-due account can renew its interest in trying to collect, leading to harassment and hardball tactics.

Some debt collectors will actually refuse to delete the account from your credit reports, even if you pay. Others will pretend they are “not allowed” to. That is obviously not true.

Even worse, some unethical collection agencies may promise to upgrade how your debt appears on your credit report in exchange for payment, then not follow through or make matters worse by making the debt seem more recent than it is.

So, what should you do if they won’t agree to delete it? Simple – don’t pay it. Wait until the end of 7 years for it to come off of your report. It’s really not hurting your scores that much anyway and the older it gets, the less it factors in.

Instead of paying them off, work to get new positive accounts reporting on your credit report. As the old negative accounts become less relevant, the new positive accounts become more relevant and increase your credit scores.

Remember to always monitor your credit reports to make sure that unethical collection agencies don’t purposely re-age your accounts. It’s illegal, but it still happens quite often. Check your state’s collection laws to see how long a collector can collect on your debt. Once the debt is past the statute of limitations, they can no longer legally collect on that debt.

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First of all, it’s all about profit. Creditors want to keep you in what is called the “subprime gap”. It’s the most profitable place to keep you. They want your credit rating to be high enough for you to be able to get a loan and not default on it, but low enough for you to pay their highest interest rates.

Perhaps the following passage from the bible explains it best:

“The rich rule over the poor, and the borrower is servant to the lender.” – Proverbs 22:7

The Credit Scoring System

It is so incredibly important in this day and age to understand “the credit game” and exactly what’s going on. Many of the people who fail to understand this will simply be left behind. The credit scoring system is designed for one purpose and one purpose only and that is to maximize creditor profits. Debt collectors and the credit reporting agencies are also making plenty of money from the game as well, they just happen to be on the sidelines watching the “system” they’ve designed.

The credit reporting system was not designed with the consumer in mind and it is corrupt because of who profits most from it. For years, consumer advocate groups have lobbied for reform. Finally, in 2004 Congress approved changes to the Fair Credit Reporting Act that placed new procedural requirements on the credit bureaus.

Some decent changes have been made in the law, but these changes have accomplished very little in terms of accuracy of information. Despite plenty of lawsuits and a record number of complaints to the Federal Trade Commission, regulators are just not enforcing the new laws.

The whole credit scoring system is still unfair because consumers are guilty until proven innocent. Credit bureaus are still re-aging accounts. They still refuse to re-investigate accounts that have been “previously verified”. They still reinsert deleted accounts without notifying the consumer as required by law. They still refuse to investigate inquiries. They still allow debt collectors to place hard inquiries on credit reports when the inquiry should be a harmless account review. (This alone can lower your score up to 50 points.)

Did you know that the FTC refers consumer complaints to credit reporting agencies? That’s right. When you complain to the FTC about Equifax, Trans Union of Experian, they forward your complaint right back to them. The agencies will review the complaints and report the results to the FTC. Some believe it improves the odds of getting an inaccurate account deleted considerably. I believe the disputes should have been taken seriously without having to complain to the FTC.

Winning the “Credit Game”

It’s an educational process. But, it’s important to learn as much as you can about how the system works. For those of you with bad credit, it starts with repairing and rebuilding your credit. Do whatever it takes to get out and stay out of the subprime gap! You don’t have to be a servant to your creditors the rest of your life.

When you’re ready to get out of the subprime gap check out The Credit Secrets Bible. If you have any questions or comments, please feel free to stop by the credit repair forums where help is always available. Membership is free!

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New FICO Rules May Affect Millions
By Vicki Lee Parker

Monday, June 18, 2007

In September, the FICO credit-scoring system is set to undergo a major overhaul. Fair Isaac Corp., the Minneapolis company that creates the formula used to calculate the score, is downplaying the change, saying it won’t have much of an effect.

I beg to differ. Any change in the way that scores are decided affects millions.

Forty of the top 50 financial institutions in the country rely on FICO scores to determine whether to approve a loan and what rate to charge. Retailers, landlords, insurance companies, employers and utilities also use it to decide how to do business with you, or if they should.

Because Fair Isaac doesn’t want rivals to copy its formula, it isn’t giving out many details about the changes, but spokesman Chris Watts did say this:

Fair Isaac divides the population into 10 segments based on credit history and applies a different formula to each. Eight segments include people with good credit and two are for people with serious problems.

Under the new system, the population will be divided into 12 segments: eight for people with good credit and four for people with bad credit. That could result in a slight change up or down in many scores.

“This new system will give lenders more dependable scores for those higher-risk consumers and those who have little history,” Watts said.

Now, that’s not really a bad thing if your credit is pretty good, but if you’re on the margin or trying to establish your credit, it could mean trouble. Because businesses interpret scores differently, a slight change could be the deciding factor in whether a landlord decides to rent to you or whether your bank decides to increase the interest rate on your mortgage or home-equity loan.

For example, according to Fair Isaac’s Web site (MyFICO.com), the difference between a score of 620 to 659 and one in the range of 660 to 699 can result in a $163 difference in the monthly payment on a 30-year mortgage.

Watts conceded that certain groups will feel the effect far more than others. People with thin credit histories or poor credit will likely see their score jump or drop significantly, he said.

As it goes with most changes, there are some people who are going to be hurt through no fault of their own.

One adjustment to the current credit scoring system will be to stop giving credit points to people who are authorized users on someone else’s credit card.

That change will affect about 30 percent of people with credit reports, or about 60 million consumers, said John Ulzheimer, president of educational services for Credit.com and a former manager for Equifax and Fair Isaac.

That change is going to affect young adults trying to establish credit by attaching themselves to their parents’ credit cards; spouses — mostly women — who are authorized users on the family credit card; and people who are trying to re-establish credit by coat-tailing a family member’s good credit history.

Fair Isaac has closed this loophole because the lending industry has complained about abuses and said the loophole was distorting borrowers’ true credit risk.

So what can consumers do?

First, those who became authorized users to help build up credit should consider switching to a joint account. That will allow the joint member to continue to reap the benefits of the primary cardholder’s strong credit history.

However, that option poses more risks to the primary holder of the credit card. For example, if an authorized user abuses the card, the primary cardholder simply has to make a phone call to revoke the user’s card. But it’s not as easy to remove a joint user. The primary cardholder would have to close the account and open a new one to remove the user from the account.

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If you’re just starting out, you have a once-in-a-lifetime opportunity to build a credit history the right way. Here’s what to do, and what to avoid.

Check Your Credit Report

You’ll first want to see what, if anything, lenders are saying about you. That kind of information is contained in your credit report at each of the three major bureaus: Equifax, Experian and Trans Union.

Credit reports are used to create your credit score and help lenders decide whether to grant you credit based on your credit payment history. Most lenders will just go by your credit scores, but they also may look at the report itself, as may the landlords, employers and insurance companies who use credit to evaluate applicants.

Can you have a credit report if you’ve never had credit? Maybe.

Somebody else’s information could be mixed in with your report, either through a credit bureau mistake or because of identity theft; i.e. someone using your personal information to open bogus accounts. Statistics show that 70 percent of credit reports contain serious errors that might cause consumers to be denied credit cards, car loans and even mortgages.

If that’s happened to you, you’ll need to clean up your credit report before trying to apply for new accounts. The good news is that the Fair Credit Reporting Act requires credit reporting agencies to fix these mistakes. But it takes your diligence to make sure it happens.

Establish Checking and Savings Accounts

Here’s a basic step that’s sometimes overlooked by people seeking credit. Lenders see these accounts as signs of stability.

Opening checking and savings account is also one of the few things you can do as a minor to start building a financial history. While you can’t get a credit card in your own name until you’re 18 and can be legally held to a contract, many banks have no problem letting you open an account.

Not all banks will. If your bank doesn’t, you need to either look around for another bank or consider opening a joint account with an adult. Credit unions are usually the most lenient and have the best rates.

Understand the Basics of Credit Scoring

You need to know that the two most important factors in your score are:

• Whether you pay your bills on time.
• How much of your available credit you actually use.

It’s essential that you pay all your bills on time, all the time. Set up automatic payments or reminder systems so that you’re never, ever late. All it takes is a single missed payment to trash your credit score — and it can take seven years for the effects to completely disappear.

You also don’t want to max out any of your credit cards, or even get close. Keeping your credit use to less than 30% of your credit limits will help you get the best possible credit score and should help keep you from getting over your head in debt, as well.

You don’t need to carry a balance on a credit card to have a good credit score. Paying your bill off in full is the best way to keep your finances in shape and build your credit at the same time.

Authorized Users

The fastest way to establish a credit history can be to “borrow” another’s record, either by being added to a credit card as an “authorized” or joint user or by getting someone to co-sign a loan for you.

Having a co-signer can allow you to qualify for loans you might not otherwise get. The loan will show up on your credit report and, if you pay it off responsibly, will help boost your credit score. If you default, however, you won’t be the only one who suffers. The co-signer has basically promised to make good on this account, so any delinquencies will show up on her credit report as well.

Being added as an “authorized user” has its risks, for you as well as the person giving you access to the card. If your father makes you an authorized user of his credit card, for example, his history with that account can be imported to your credit bureau file, giving you an instant credit record. If he has handled the account well, that reflects well on you. But if he hasn’t, his mistakes would also become yours. Any late payments or other problems could make it harder for you to get future credit than if you’d established your history without help.

Some credit issuers won’t report authorized users to the credit bureaus, particularly if the user is not married to the original card holder. If the point is to give you a credit history, the person who’s adding you as an authorized user should call the issuer and ask how (or if) your status as a user will be reported.

Apply for a Secured Credit Card

If you can’t get a regular credit card, apply for the secured version. These require you to deposit money with a lender; your credit limit is usually equal to the deposit.

You’ll want to screen your card issuer carefully. To be frank, there are a lot of bad guys in this particular niche of the credit world. Some charge outrageous application or annual fees and punitively high interest rates.

Your credit union, if you have one, is a good place to start looking for a secured card.

Ideally, the card you pick would:

• Have no application fee and a low annual fee
• Convert to a regular, unsecured credit card after 12 to 18 months of on-time payments
• Be reported to all three credit bureaus.

If the issuer doesn’t report to the credit bureaus, the card won’t help build your credit history.

Get a Finance Company Card

Gas companies and department stores that issue charge cards typically use finance companies, rather than major banks, to handle the transactions. These cards don’t do as much for your credit score as a bank card (Visa, MasterCard, Discover, etc.), but they’re usually easier to get.

Again, don’t go overboard. One or two of these cards is enough. If you get many more, you may find that later in your life these accounts could prevent you from getting the highest possible credit score. That’s not a reason to avoid them completely, because right now they’ll do you some good.

Get an Installment Loan

To get the best credit score, you need a mix of different credit types including revolving accounts (credit cards, lines of credit) and installment accounts (auto loans, personal loans, mortgages).

Once you’ve had and used plastic responsibly for a year or so, consider applying for a small installment loan from your credit union or bank. Keeping the duration short — no more than a year or two — will help you build credit while limiting the amount of interest you pay.

Use Revolving Accounts Lightly, but Regularly

For a credit score to be generated, you have to have had credit for at least six months, with at least one of your accounts updated in the past six months. Using your cards regularly should ensure that your report is updated regularly. It also will keep the lender interested in you as a customer. If you get a credit card and never use it, the issuer could cancel the account.

Just remember the credit tips mentioned earlier:

• Don’t charge more than 30% of the card’s limit.
• Don’t charge more than you can pay off in a month. As mentioned earlier, you don’t have to pay interest on a credit card to get a good credit score, and it’s a smart financial habit to pay off your credit cards in full each month.
• Make sure you pay the bill, and all your other bills, on time.

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