Credit Card Debt Management

No more pins and needles. Your life will be a lot less worrisome if you have already been practicing good money management habits, like paying bills on time and spreading debt around without overextending your debt-to-credit ratio. Fair Isaac Corp., that baffling company responsible for the FICO score, is adding a little bit of leniency into the system it uses to determine a person’s credit score. Here are some of the most significant changes, according to Money magazine:

Isolated late payments are less damaging: Any time you make a habit of paying bills late, it’s going to be ugly. However, if you’ve done that only once or twice a while ago, but are in good standing otherwise and have a lengthy credit history (10+ years), you’ll probably be in the clear. “In fact, you could see a one-time boost in your score with the new formula,” Walecia Konrad writes in Money.

Multiple credit inquiries are less damaging: Within a 45-day window, you can undergo several credit inquiries with little or no effect on your credit report. “The change is a reflection of the fact that the average person has more credit accounts and loans today than in the past,” Konrad writes.

Multiple debts? No problem: Rather than determining how many accounts you have, what will be more significant to your credit score is how close those accounts are to being maxed out. Accounts that are nearly maxed out will drop your score by several points, but successfully managing (and not maxing out) a mixed bag of loans and lines of credit will boost your score. Therefore, Konrad recommends spreading debt over several credit cards to keep debt-to-credit ratio down.

At the risk of appearing overly suspicious, are these changes a subtle way to try to boost the economy and lenders’ profits? At any rate, no complaints here. It will be nice to see that late payment on the Kohl’s credit card from 2003 finally drop off the credit report!

There is an art to credit card debt negotiation, and it’s not for the faint of heart. The first thing to remember is that the collector cannot get payment if the debt has passed the statute of limitations. Also, you should not have to pay for charged-off debt that you’ve already paid taxes on as if it were income.

If it is not past the statute of limitations, there is an outside chance that you could be sued, depending largely on the amount of money involved. It is always better to settle your debt, if possible, not only because you owe it but so as to prevent it from reappearing years later and haunting you. Because it may be with a third-party collector by the time you get around to paying it, you could settle your debt for a fraction of its true value. This is because that third-party collector bought that debt from your lender for pennies on the dollar and virtually any money they can collect from you is their profit. However, don’t forget that the difference between what you pay and what your debt actually amounts to is considered taxable income.

One major point: Something many consumers - and most debt credit counseling services - forget to negotiate is how the debt settlement will be reported. Your final payment amount is not the only thing on the negotiating table. You want that account to read, “Paid as Agreed” on your credit report. According to DebtSteps.com:

Although [Consumer Credit Counseling Services’] primary goal is a valuable one, they usually forget to negotiate on how the account will be reported, which means that although your debt is settled, your credit report will be ruined. And besides settling your debt, your goal should be to negotiate how this debt will be reported to the major credit bureaus.

If you are going to reinitiate contact with the collectors, you should ideally be prepared to pay in a lump sum, not in payment plans. This is to prevent any messiness like garnished wages, bank accounts or seized assets - again, an outside chance (depending on the monetary amount involved), but always a possibility nonetheless. Furthermore, before any money changes hands, get in writing from the collections agency the amount of the final debt payment and the fact that it will be marked “Paid as Agreed” on your credit report. Try to get a receipt of payment or at least save bank records showing that payment was made.

The unsavvy consumer may not understand the importance of checking one credit rating, let alone three. The FICO score, invented many years ago by the Fair Isaac Corporation, can range from 300 to 850, with a higher score being more ideal. It is directly used by lenders to determine your credit risk, i.e. whether or not they should loan you money.

Relatively simple, right? Well, not really. Inexplicably, three major credit bureaus keep track of Americans’ credit history and use different formulas and information to calculate a FICO score. These companies are TransUnion, Equifax and Experian. Lenders can pull one or all three of your credit scores. They will often pull all three and use the middle score, or use the average of all three.

According to Business Week:

“For the most detailed explanations on your FICO scores, go to myfico.com. A score from one credit bureau costs $14.95, all three are $44.85. It’s useful to buy all three because large lenders either average the scores or take the middle one. You’ll want to check your FICO scores once a year or several months before you apply for a loan.”

The point differential between your three credit scores could be as much as 50 points, because different bureaus track different information at different times, directly affecting the score they give you. So be your own most thorough investigator and give yourself the advantage when going in for a loan.