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As mentioned in a previous article (‘Your credit score and you’) debt to income ratio makes up 30 percent of your total credit score. The score is made up from your credit use. Debt to income can also affect the amount of what lenders would allow for your mortgage/household needs. The exact amount depends on the lender but a good way to look at it is to base the high end of your mortgage and other household needs (utility bills included) and fit it into 36% of your income. Something else that seems to be calculated into this bracket is how much of your available credit you are using.

If you are looking to raise your credit score quickly, you should pay down all of your credit accounts to 29% of use. At this point, the lender is no longer even looking at that account. It might as well be closed completely. From my experience, paying down this debt lowered the interest rate of my loan significantly and it only took about $1000 to pay down multiple credit cards to below 29%.

If you are just trying to get out of debt, you should pick your highest interest rate credit card and pay that off. Then take your minimum payment from that highest card and pay down your 2nd highest card with that money. Then continue to get rid of each of your card’s minimum payments and shuffle that into the next card. This is called “snowballing” your credit card debt. You also have the option of using an alternate option and pick your lowest balance card and working backwards. It’s up to you. If all your accounts have about the same interest rate, then you will probably feel more empowered by paying off the low card.

bankrate.com covers this in Credit Cards: Which debt to pay off first:

“The amount you owe doesn’t really matter when you’re paying an enormous amount of interest,” Sherry said. “Try to pay the highest interest rate ones first. Muster all the funds available and get the debt out of your life.”

They go on to say:

What about knocking off some low-balance bills first and eliminating a bill or two from that thick monthly pile? Experts respond: Go ahead, especially if it will give you the boost you need to stick with a pay-down plan.

Like they say in that article, none of it’s going to matter if you don’t stick to the plan. We’ll cover some budgeting thoughts in upcoming posts.

Collection agencies tend to be assigned accounts after the 90 day deliquent mark. You may have received phone calls or letters from these collection agencies bombarding you with dollar figures that you owe them. Generally we take them in by their word that they are collecting X amount of money for Company Y. But if I walked up to you on the street and said “Hey, I’m representing Company Y and you owe them $200. Please pay up.” Would you start writing a check? Of course not.

In the United States, we are protected by a law called the “Fair Debt Collection Practices Act.” (FDCPA)

The FDCPA defines the creditor as:

The term “creditor” means any person who offers or extends credit creating a debt or to whom a debt is owed, but such term does not include any person to the extent that he receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another.

That defined piece very specifically excludes collection agencies.

A debt collector is:

6) The term “debt collector” means any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another. Notwithstanding the exclusion provided by clause (F) of the last sentence of this paragraph, the term includes any creditor who, in the process of collecting his own debts, uses any name other than his own which would indicate that a third person is collecting or attempting to collect such debts. For the purpose of section 808(6), such term also includes any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement of security interests. The term does not include —

(A) any officer or employee of a creditor while, in the name of the creditor, collecting debts for such creditor;

(B) any person while acting as a debt collector for another person, both of whom are related by common ownership or affiliated by corporate control, if the person acting as a debt collector does so only for persons to whom it is so related or affiliated and if the principal business of such person is not the collection of debts;

(C) any officer or employee of the United States or any State to the extent that collecting or attempting to collect any debt is in the performance of his official duties;

(D) any person while serving or attempting to serve legal process on any other person in connection with the judicial enforcement of any debt;

(E) any nonprofit organization which, at the request of consumers, performs bona fide consumer credit counseling and assists consumers in the liquidation of their debts by receiving payments from such consumers and distributing such amounts to creditors; and

(F) any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity (i) is incidental to a bona fide fiduciary obligation or a bona fide escrow arrangement; (ii) concerns a debt which was originated by such person; (iii) concerns a debt which was not in default at the time it was obtained by such person; or (iv) concerns a debt obtained by such person as a secured party in a commercial credit transaction involving the creditor.

So these are the people that are responsible for collecting your debt. Notice how they aren’t the same thing? That means that you need to make sure that the debt collection agency actually represents the creditor. And they are responsible for proving it.

Based on the FDCPA, a collection agency has to provide you the amount of debt, the name of the creditor, a statement that says that if you don’t dispute the notice within 30 days then it will be assumed valid, a statement that says that if you notify them that the debt is dispute that they will obtain verification of the debt and mail it to you. And finally that they will send you within 30 days the name and address of the original creditor if different than the current creditor. These statements must be made within 5 days of initial communication with you, if it’s not included on the original notice. That’s why generally you will get a letter from a collection agency before they start calling you.

What does this mean to you?

If you receive a phone call from a collection agency before receiving anything in the mail, ask them for their name, agency name, address, and who they are collecting for. Tell them you request all further notification be sent by mail. If you haven’t received, the information above within 5 days, then you should send them a letter stating that they are in violation of the FDCPA and any further attempt at collecting the debt will be met with legal action. Pursuant to the FDCPA, any collection agency that is in violation of the Act can result with a fine of up to $1000.

If you get the statements within 5 days, then you should always follow up immediately by mail with a letter stating that you are disputing the information in the letter and request:

1) Proof that the collection agency owns the debt or has been assigned the debt. They have to show that they can collect money from you.

2) The complete payment history, starting with the creditor. There is a requirement established in Fields v Wilber Law Firm (see the full court opinion at FindLaw

3) Copy of the original signed agreement or application.

The FTC has written an opinion stating that an agency cannot report a debt to the credit bureaus that have not been validated. See here

If they do not provide you with that information, they are in violation of the FDCPA and are subject to a civil lawsuit.

There is much much more that the FDCPA and the FCRA (Fair Credit Reporting Act) that we will be bringing to you in the future.

So a couple years ago, I filed bankruptcy. I was way past where I could have recovered from it, but didn’t have a whole lot of information on how I could have recovered from it anyway. That’s part of the reasoning for starting this site. Over these past couple of years I have been working on recovering my credit score. Part of that task is watching your credit report very carefully. So I started looking for a site that updates that information every month.

About a year and a half ago, I subscribed to the site mycreditkeeper.com - it was the only site that I could find that allowed me to check my actual full report every month. A lot of my research relied on watching what my credit score did and how each account was updated/added to that report.

Functionality:

mycreditkeeper.com is relatively easy to use. You sign up for an account with all of your pertinent information (including SSN#) and then order your 3 bureau report. The report is easy to maneuver around to read and compare the 3 different bureaus. “Reordering” the report every month is strange, because it asks you for your credit card information everytime. In small print it says you don’t have to enter it, and it’s not charged every month, but it asks for it anyway.

Accuracy:

For these last couple of years, I had been attempting to get my credit to a specific bracket in order to get an average rate for a mortgage. That was one of the big reasons for getting my report every month. A few months back, I started working with a mortgage broker, who pulled my credit. Now, I thought I knew exactly where I was I had pulled the report from mycreditkeeper.com the day before. In fact, I made it a point of telling him in advance exactly what my credit score was the day before. I knew that I hadn’t spent any money on credit and had made all of my payments on time. I assumed that my score would be higher than what I knew. Well when he pulled the report, my score was at a average of about 22 points lower. Now that’s the difference between getting approved for a loan and getting a terrible loan.

So I was jonesing for a reason from mycreditkeeper on why they were telling me my credit was so high and why my mortgage broker saw something different. I sent them an email:

Original Message Follows:
————————

I have recently had my credit pulled for a mortgage, over the past year
I have been paying for your service to monitor when my score reached a
certain point. I passed that mark this last month according to your
system. My credit score was pulled the day after I renewed it with your
service and my mid score is off by 19 points. I verified another service
and my credit score matched the same as the scores my broker pulled.

I’d like to have an explanation on why the scores are off by that much and also be
reimbursed for at least the last month of service that I paid for.
Without an acceptable reason for the inaccuracy, I will be forced to
cancel this service.
————————

A few days later, I received this:

Original Reply Follows:
———————-
Dear [me],

Thank you for taking the time to email us at CreditKeeper.

I am sorry for any inconvenience experienced regarding the credit score
you have received from us. Please be advised that the credit score from
credit bureaus is known as a FICO score, while ours is not. The
difference in the scores is how they are calculated. Our score is
calculated by a wide range of information that looks at the last year
and a half of activity of your information, whereas the FICO score is
generally calculated by the last 6 months of activity. Most likely
these scores will be similar.

If you have any additional questions, please do not hesitate to contact
our office by email at anytime.

Thank you,

Karen, Your CreditKeeper Representative.
———————-

No, thank you, Karen.

While mycreditkeeper.com advertises that you get your credit score - that score is not your FICO score. They don’t call it a FICO score, but they say very specifically that the score is calculated from your credit report. Well, so is your FICO score. The scores generated from mycreditkeeper.com for me were way wrong. Your mileage may vary - but I’d steer clear of this one.

Got a financial site that you’d like to see reviewed? Send in an email to info@wealthjump.com with the address.

So I’ve mentioned a couple of times that there are multiple ways that you can monitor your credit report. Your credit report is different than your credit score. Your credit score is an estimated risk to a lender. So if you are looking to buy a car and the dealer runs your credit report they are actually looking at their risk. Their only interest in your credit report comes to your FICO score. Any single time that you’ve tried to get credit, whether getting a job, renting an apartment, or getting your utilities ran - this number is what’s looked at.

Your credit score can be between 300 and 850. The national average of credit scores is 676. If you have any types of problems on your credit, you can probably estimate that you are around 600. If you file bankruptcy, you can expect a credit score of around 475-500. If you have a lot of credit problems and are in danger of bankruptcy or foreclosure, expect lower than that.

What raises your credit score?

1) Paying bills on time, every time. Make sure you have pulled your own credit report so that you know which of your accounts report to credit agencies monthly. Those are the ones to pay special attention to on the date that you are paying a bill, because they report positive payments. Most other bills (such as utilities, rent, or other services) only report your bad experiences. This makes up 35 percent of your total score.

2) Your debt to income ratio. This is how much money you owe vs what you bring in every month. If you have a ton of credit, they guess that you use your credit and makes you more of a risk than someone who has one credit card and has never used it is a better risk. Of course, if you don’t have a record of good credit it keeps adding up. So what you should do is get credit and keep your account balances low. This is makes up 30 percent of your total score.

3) Balance of types of credit - if you have a multiple types of loans like revolve credit (credit cards) and installment credit. (mortgages and car loans) This makes up 10 percent of your total score.

4) Credit inquiries - This is a check on how much credit you are trying to get. If you don’t have any other problems with your credit, this will have little effect on your score. If you have any other negative problems (late payments, bills sent to collections, etc) you need to be careful on how much credit shopping you’re doing.

So after all of that, are you curious what your credit score could be? Check out the Bankrate/FICO calculator.

So you’re taking a look at your annual credit report (You are getting it right ever year right? Tsk Tsk, Get your free annual credit report) and you see an old debt that you didn’t pay off a few years back. It’s relatively low cost and looks like an easy thing to correct. Before you reach for your check book - think again.

Liz Weston talks about a scenario where someone decides to pay off an old debt, and her score actually went down by 95 points. Liz also mentions things to look out for when messing around with payment plans and old debts.

“Thanks to the sometimes bizarre quirks of credit scoring, state statutes of limitations and the federal Fair Credit Reporting Act, consumers can’t always assume that paying off old debts will improve their financial situation or make them a better risk in lenders’ eyes. Add in the tactics of some unethical collection agencies, and you have a real quagmire.” - See MSN Money’s article When Paying Bills Can Hurt Your Credit Score

What was strange to me while researching this is that there is a nicely worded post on Yahoo Answers by contributor “echo” which goes very quickly to the point. Don’t pay a collector unless you have verified that they can even collect or charge you any money:

“If it is with a collection agency, send a debt validation letter first. Make sure that they have not illegally inflated the amount, that they are licensed and/or bonded to collect in your state if your state demands it, that they even have the legal right to collect on that debt (it’s not unheard of for a collection agency to try and collect a debt they have no legal right to collect on)” - See this Yahoo Answers post Will paying off old debt improve my credit score?

From personal experience, paying off old debt did not help me at all. In fact, I experienced a lost of 1-2 points. But it could’ve been more as I was paying down debt as well, so it may have impacted a lot more than that. In the end, I would not go back and pay the 4 yr old debt even though it was only $49. If that debt had been $490 instead, I’d be more upset over a loss in credit score points.

What I recommend doing is not risking it, pay off all of your current debt. Your credit cards, your auto loan, your mortgage, then and only then, look at your credit report and get rid of the old debt. Of course, at that point, your credit score doesn’t really even matter that much because you have no debt, and no mortgage, rent, car payment, credit card payments and can just go out and buy things out right instead of relying on your credit.

There are many reasons why you’d want to check your credit score. The first is obviously to make sure someone else isn’t using your credit. Identity theft is prevalent in the wired world - you want to make sure you aren’t a victim so that you can use your credit without someone elses charges on top of your own. Also, you need to know more about your finances than a mortgage broker or an auto dealership’s financial department while you’re shopping for that new car.

Anytime you are denied credit you are sent a letter in the mail stating the reasons why you are denied and then saying very specifically in the letter that you are entitled to a free credit report by that agency. So the moral of this story is that you should read your mail past the “We’re sorry to inform you that….” You are entitled under US law to a free report within 60 days of a company taking adverse action against you, like being denied credit, insurance or employment. Also, you are entitled to one report a year if you’re unemployed and looking for a job or if you’re on welfare.

Annually you are allowed on free credit report using the FTC service at annualcreditreport.com. If you don’t have internet access (we’ll leave it to you, fair audience, to figure out how those folks are reading this site) - you can fill out the Annual Credit Report Request form and mail it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

You can also buy additional copies of your report at the 3 major credit bureaus:

Equifax - Ph: 800-685-1111 or on the web at Equifax.com

Experian - Ph: 888-397-3742 or web at Experian.com

Trans Union - Ph: 800-916-8800 or their website at Transunion.com

If you’re in Colorado, Georgia, Maine, Maryland, Massachusetts, New Jersy and Vermont, you already have free access to your credit report.

You may be wondering whether you need all 3, the answer is absolutely. Not every debtor reports to all 3 bureaus. From my point of view, Transunion is rarely used for calculation or reporting. Experian is ranked second and Equifax is the most popular.

So in short, you need to check your credit score at least annually. Be informed and protect yourself from identity theft.

Bloomberg is reporting that consumer borrowing has increased in March as Americans spend more of their hard earned money taking out car loans and charging to the credit. Falling real estate values and high gasoline rates are to blame, says Bloomberg at U.S. Consumer Credit Increased $13.5 Bln in March

It’s not that bad to use credit cards to make purchases as long as you pay off the credit within your billing period. Every credit card will usually have a date when the finance charges are calculated, the secret not paying interest on your purchases is to figure out that date and pay off whatever you’ve charged. It’s really not rocket science to do it, you can read your billing statement or give your credit card company a call and ask them when their finance charges are calculated. So you can spend money on gas on a credit card and make a single payment for your gas budget every month. Some credit advisors actually say paying off the balance every month on your credit card increases your credit score. I know from my own experience with this that you definitely build a good relationship with that particular credit card company where you get credit limit increases and access to special cards that have extra rewards.

Be sure to pay the balances off before that date, or you pay the finance charge. If you pay the finance charge it defeats the purpose of the single transaction and actually costs you more money for gas.

If you are having a hard time making your mortgage payment:

1) Get on a budget plan immediately to try to save your house.

2) Contact your lender and explain the situation.

3) Look around for excess that you can sell on sites like Craigslist or ebay

4) Consider speaking with a real estate agent to put your house on the market. Selling it and downgrading to a house or rental that you can afford is a lot better than foreclosing and ruining your chances of making major purchases for a long while.

Continue coming back to this site (wealthjump.com) for more information on how you can build your credit and get control of your budget.

Well not technically, she gets to tweak her marketing of her “Fico kit” to improve credit scores. Have this be your warning that there are people out there saying they can do things with your credit that they cannot do.

“Under a proposed settlement of a class action lawsuit against the Fair Isaac Corporation and Equifax, which sell products to consumers who want to gauge how fondly lenders will view them, there are new limits on the assertions these products can make about their ability to raise people’s credit profiles.

Ms. Orman sells “Suze Orman’s Fico Kit” on both her Web site and one run by Fair Isaac. Although she was not a defendant in the lawsuit, her kit was among 156 products that came under fire as potentially violating the Credit Repair Organizations Act, a law designed to control fly-by-night credit-repair agencies.” - In the NY Times

Noone can instantly repair your credit. Not even the hosts of QVC and MSNBC shows or best selling authors. There are steps that you can take to improve your score and maintain it, but sometimes you are just stuck waiting for time to elapse.

For more information on this lawsuit settlement visit the settlement website by clicking here.

The AP is reporting that blacks have been charged higher auto loan rates than other auto buyers. From the article, blacks paid a typical auto loan rate of 7% for new cards compared with 5% of white people.

See the article here at la.com - Auto loan rates higher for blacks?

I’m not sure what the color of your skin has to do with whether or not you are risk to a lender. But like it says in the article, auto dealers have some control of the rate based on the risk. Of course, they aren’t going to discuss the rate with the customer. Most auto dealers won’t even admit that they have the option of adjusting the rate with the lender. The dealer can always make it go higher to make the risk look good to the lender, but I’m sure there is a buffer to how much they would lower at it. Remember, a lender is the business of making money and the dealership is in the middle of trying to sell the car to you while getting their kickback from the bank.

Consider saving a huge down payment if you decide to make a new car purchase. If your car is on the fritz, get a used car that you can afford and keep the number of payments. In other words, don’t opt for the 5 year loan to make your car payments affordable - buy a car that works with your budget, not the other way around.

To keep a nice credit profile, you have to have credit. It’s a necessary sin, but one that you can control. It is good to have a few accounts open in good standing, and a lot of closed accounts that are closed but paid off in full. There’s no concrete number, but one thing for sure is that the credit bureaus calculate your total debt vs your income vs what risk other people are already taking on you and how that’s working out for them. So let’s say you have 5 credit cards and you want to get rid of some or all. Assuming that you have paid off all the balances, you do not want to close all 5 accounts at the same time. What is recommended by some credit organizations is to close your newest one first, then wait 6 months and close the next one, and continue down that path until you have all the cards that you want. Expect your credit score to lower by closing accounts, but by staggering the time that you close the accounts, you are giving your good credit history time to recover.

kiplinger.com agrees:

“And you’re right to keep old accounts open if they’re in good standing. A closed account “isn’t quite as meaningful as an open account in predicting risk,” says Maxine Sweet, of the credit bureau Experian, but it’s still a positive. Even better, says Sweet, is to manage your current accounts well by not missing payments and keeping your balances well under your credit limit.” See Closing Credit Accounts @ kiplinger.com

MSN Money agrees as well:

“No, no, no. For the umpteenth time: Closing accounts can never help your credit score, and may hurt it.
Every time I write this, I get more e-mail from people who say their mortgage lenders told them exactly the opposite. It’s true that having too many open accounts can hurt your score. But once you’ve opened the accounts, you’ve done the damage. You can’t repair it by shutting the account, and you may actually make things worse.” - MSN Money’s 4 credit scoring myths

They go a little farther than what I agree with. If you have an account open that is costing you money every month to maintain (ie: “monthly maintenance fees”) if you don’t think you need the card or are tempted by the available balance - CLOSE IT. A maxed out credit card balance or an account that you are paying for is a risk you shouldn’t take for a bank to use to risk consideration for possible NEW credit. I mean, that’s what the point of a credit score is - your number equals the risk you are to the lender not getting their money back.

If you are hunting for something to get rid of, get the rid of the newest ones. If you can’t afford to maintain a card, get rid of it. A maxed out card or a bunch of late payments is going to hurt worse than a closed account. So maintain a happy balance and you’ll be set.

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