What is a collection account?
If you become delinquent, that is, several months late on a payment for anything from a phone bill to a credit card or a medical bill, the original creditor can place your account in collection status. At that point, the original creditor will use a debt collector as a means to collect any monies outstanding that they believe you owe.
Most accounts fall into collection status over a dispute between the consumer and the creditor. Often consumers feel they already paid or simply don’t owe the money a creditor is requesting. In other instances, consumers get behind in their monthly payments or get overwhelmed with debt to the point that a collection account is opened by the creditor. Either way, a collection is a major derogatory and one you should avoid at all costs if you want to maintain a solid credit score.
If a collection shows up on your credit report, your credit score will likely drop by 20-50 points or more, depending on your overall credit history and depth and other related factors.
What is a Charge Off?
A “charge off” is one of the most severe credit delinquencies a borrower can receive on their credit report. While not quite as harsh as a bankruptcy or foreclosure, it is definitely in the same tier and should also be avoided at all costs.
So what exactly is a charge off, and why is it called such?
If a credit account is not paid on time, it will eventually go into collection status. If it is not paid at that time or successfully disputed with the creditor, it will enter charge off status, often after six months of non-payment.
The reason it’s called a charge off is because corporations file a Profit and Loss statement with the IRS each year detailing the company’s profits and the losses, including bad debt that is essentially charged off as a business expense. It’s very typical for large corporations to claim these losses and it’s factored in as part of doing business.
Though the amount in question is written off at the end of the tax year, it is still legally collectable. There’s a good chance a collection agency will continue to badger the consumer for the money or a portion of it.
An account is considered delinquent if a payment has not been made on time.
An account usually is considered in default if it is 30 days past due. The term indicates that the borrower has not paid as required through the loan agreement, and it usually will be reported to the credit bureaus at this time.
What are the different types of bankruptcies?
A bankruptcy is considered a very negative event by your credit report regardless of the type. While there are many things to consider when considering filing for bankruptcy, you can expect it to impact your score for as long as the bankruptcy is listed on your credit report. However, as time passes, the negative impact of the bankruptcy will lessen. Here is a brief definition of the most common types of bankruptcies and how long you can expect each to remain on your credit report from the date it is filed:
Chapter 7: Basic liquidation for individuals and businesses; can report for up to 10 years.
Chapter 11: Rehabilitation or reorganization, used primarily by business debtors, but sometimes by individuals with substantial debts and assets; can report for up to 10 years.
Chapter 13: Rehabilitation with a payment plan for individuals with a regular source of income; once completed/discharged, it can report for up to 7 years.
How long will a foreclosure or repossession affect my credit score?
A foreclosure or repossession will remain on your credit report for seven (7) years, but its impact on your credit score will lessen over time. While both of these are considered an extreme negative on your credit report, it’s a common misconception that it will ruin your score for a very long time. In fact, if you keep all of your other credit obligations in good standing, your credit score can begin to rebound in as little as 2-3 years. The important thing to keep in mind is that a foreclosure or repossession is a single negative item. If you keep this item isolated, it will be much less damaging to your credit score than if you had a foreclosure or repossession in addition to defaulting on other credit obligations.
What are public records and judgments?
Public records are legal documents created and maintained by Federal and local governments, which are usually accessible to the public. When you are taken to a small claims court and the judge makes a ruling against you, this judgment is considered a public record. Some public records, such as divorces, are not considered by your credit score. But adverse public records such as bankruptcies, judgments, and tax liens, are considered. Your score can be affected by the mere presence of an adverse public record, whether paid or not. Adverse public records will have less effect on your credit score as time passes, but they can remain on your credit report up to 10 years based on the type of record.
Judgments specifically remain on your credit report up to seven (7) years from the date of filing. Judgments will almost always have a negative effect if not directly on your credit score, then on your general stress level when you receive a formal court appearance letter and then have to deal with going to court. Before letting a bill or credit obligation get to the courthouse, see if there is an alternative that might work. Reach out to the person or company that you owe money to and see if some sort of arrangement can be worked out. If you are dealing with a collection agency or another company, they may be willing to work out a settlement with you that is equitable as it’s almost always more efficient for them to work with you directly than through the courts.
What are the different categories of late payments?
Your credit score considers late payments using these general criteria: how recent the late payments are; how severe the late payments are; and how frequently the late payments occur. So this means that a recent late payment could be more damaging to your credit score than a number of late payments that happened a long time ago.
You may have noticed on your credit report that late payments are listed by how late the payments are. Typically, creditors report late payments in one of these categories: 30-days late, 60-days late, 90-days late, 120-days late, 150-days late, or charge off (written off as a loss because of severe delinquency). Of course, a 90-day late is worse than a 30-day late, but the important thing to understand is that you can recover from a late payment prior to charge-off by getting and staying current with your payments. If, however, you continue not to pay your debt and your creditor either charges it off or sends it to a collection agency, it is considered a significant event with regard to your score and will likely have a severe negative impact.
It’s important to always stay on top of all of your bills because your history of payments is the largest factor on your credit score. There may be circumstances that cause you to be unable to keep current with your bills – maybe an unexpected medical emergency or losing your job. Before being late for any payment, it is recommended that you reach out to your creditor. The creditor may be willing to work something out with you that you both can live with. If your creditors won’t work with you, try to avoid having your account going so delinquent that the creditor charges it off, sells your account to a collection agency, or it becomes a judgment. You can never again get that account current once it charges off, becomes a judgment, or is turned over to a collection agency.
What is an inquiry?
A portion of your credit score – 10% to be precise – considers the number of inquiries made for your credit report. Credit inquiries are placed on your credit report each time a business requests a copy of your report. The Fair Credit Reporting Act (FCRA) requires businesses to have an acceptable reason for accessing your credit report.
Acceptable reasons include:
– Grant credit
– Collect debt
– Underwrite insurance
– License issuing by some government agencies
– Legitimate business transactions
Companies that obtain your credit report under false pretenses or those that use it improperly violate federal law.
Types of Credit Inquiries:
Not all inquiries that appear on your credit report affect your credit score. Inquiries that are made because of an application you made for credit are the ones that affect your score. These voluntary or “hard” inquiries are the only credit inquiries that count toward your credit score.
When you review your credit report, you might notice that several inquiries appear from businesses with which you didn’t apply for credit. Other businesses might check your credit report because they want to offer goods and services to you. For example, creditors who send “pre-approved” credit card offers have often checked your credit report first. While you can do your own credit inquiry, it can also be done by potential employers and businesses that you already have credit with. The important thing about it is that none of these “soft” inquiries count toward your credit score.
Your version of your credit report includes all inquiries. When lenders and creditors look at your credit report, only the voluntary inquiries appear.
What is a credit score?
A credit score is a sum used by lenders as an indicator of how likely you are to repay your loans. Your credit score is generated by a mathematical formula utilizing the data from your TransUnion, Equifax, or Experian credit reports. Lenders have been using credit scores as part of the lending decision for more than 20 years.
What factors influence my credit score?
Various factors determine your credit score including the following:
– Payment history
– Outstanding debt
– Length of credit history
– Severity and frequency of derogatory credit information such as bankruptcies, charge-offs, and collections
– The amount of credit used compared to the credit available
How does my credit score affect me?
Your credit score is an important indicator of your financial health. Lenders use your credit score to determine:
• Whether or not you are a good candidate for a loan
• The type of interest rate you will pay
While your credit score is a key determinant of your creditworthiness, lenders also examine the information on your credit reports and your loan application.
Regularly checking your credit reports enables you to:
• Be informed of the most up-to-date information on your credit history
• Correct any inaccuracies to make sure that your credit data is a true depiction of your credit record, thereby increasing your chances of receiving credit under the best possible terms
What is a 'good' credit score?
There are several types of credit scores available. Typically, a higher score is better. The lender decides the credit score range that it considers to be a good credit risk or a poor credit risk. For this reason, the lender is the best source to explain what your credit score means in relation to the final credit decision. After all, they determine the criteria used to extend credit. The credit score is only one component of information evaluated by lenders.
What is credit scoring?
Credit scoring is a method used by lenders to help decide whether or not you are a good candidate for a loan.
Lenders employ a credit scoring system to determine your credit score. They compare information on your credit report with the performance of consumers who have similar credit characteristics. In the same way, they also examine many credit characteristics including your payment history, the number and kind of accounts you have, the number and frequency of your late payments, and any collections or bankruptcies. Generally speaking, positive credit characteristics make your score higher and help you qualify for better loans. Negative characteristics, meanwhile, make your score lower and may interfere with your ability to qualify for the best loan terms.
How is a credit scoring model developed?
A lender creates a credit scoring model by using several criteria:
– Selecting a large sampling of customers.
– Analyzing the data in consumers’ credit reports to determine the factors that relate to credit worthiness.
– Assigning a degree of importance to each of the factors based on how accurate a predictor it is in determining who will repay their loan on time.