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7 Things That Harms Your Credit Score

As an adult, the first lesson you'll learn about finances, is that your credit score is of paramount importance when you're looking for mortgages and similar lifetime investments. Very often, without meaning to, you tend to take steps that harm your credit. It's important therefore, to know these traps, just as it's important to maintain financial discipline.

Here are 10 such things that will influence your credit score negatively. Be informed and forewarned.

1. Maxed Out Credit Cards

When you max out your cards, it will show on your credit report as using 100% of your credit balance – which is counter-productive for you. Just so you will have an idea – the best credit to limit ratio should be 35% - 65% at most. If it crosses this threshold, it will damage your score.

2. Defaulting On Payments

The fact that you have not paid a loan installment shows that you are not responsible enough to uphold your side of the contract, which you signed at the time of the loan application. This is one of the easiest ways to hurt your credit score.

3. Foreclosure

When your home is in foreclosure, it actually says that your credit provider can no longer trust you with the loan, so they cancelled it and made good on the losses. This is a terrible thing for your credit score, which will show you as incapable of proper financial planning. This also has a vicious cycle effect, as following such a development it will be very difficult for you – if possible at all – to avail of a home mortgage.

4. Account Collection

You credit score hurts when a creditor sends your account for third-party collection. This is because (as far as your credit report is concerned) this is interpreted as the "last resort" available to your creditor. Normally, when all else fails the creditor company would hand over your account to a third party, and hire them to collect the amount due. In other words, this means you need to pay your debts or negotiate terms with your creditor, while they are still willing to listen. Do not let it slip through your fingers and reach a debt collection agency!

5. Bankruptcy

This is devastating, to say the least, to your credit score. You will bear the “branding” for at least 10 long years. You'll definitely not want to be considered a “high risk” investment by various creditors. Avoid bankruptcy like plague; only accept it when the all other options have failed.

6. Charge off Account

One of the worst things that can happen to your credit report and score is to have an account charged off. This implies that the creditors have determined that you are unable to pay your debt. This shows you as a financially-irresponsible adult – almost on a par with a person who declares bankruptcy.

7. Paying Credit Cards Late

It's bad enough that you're using your credit cards when you do not have enough money to pay the bills; it's even worse when you pay late (and usually the minimum required payment). For one, your credit score will reach a new low; and secondly, you'll slip into unmanageable credit card debt in no time at all!

5 Alternatives to Dealing with a Collection on Your Credit Report

The entry of a collection on your credit report can really hurt your score. Therefore, when this happens it pays to put some effort into either deleting it, or minimize the damage it can make to your score.

What can you do when you find a debt collection has found its way into your credit report?

First and Best Choice

Dispute the debt within the legal limits. The debt collector is required to contact you before reporting the debt; and as such, you have 30 days to get this debt validated. In this process, the collector is required to authenticate this debt with valid proof. If this does not happen, you can demand that this debt be removed from your credit report.

Alternative no 2

Request that the debt collector remove the entry in exchange for a settlement payment. In order for this to work, you need to have especially good negotiation skills. You need to convince the debt collector that it's in their best interests (not yours) that they accept the settlement because that will be the best they could get under the circumstances. The circumstances, by the way, should be extenuating enough to put you in a “could not help it under the circumstances” light.

Alternative No 3

Try to negotiate with the debt collector to remove the debt in exchange for payment. This needs to be done carefully, as you will need a letter from the debt collector agency stating that they agree to remove the entry from your credit report. Unless you have the agreement in writing, you may pay the debt, and still have the debt on your credit report. Therefore, it's important that negotiations be made in such a manner that the debt collector agrees to take back the entry in return for payment.

But this is not enough either! You need to ensure that the debt collection agency keeps its end of the bargain, and removes the entry from the credit report. If not, you may supply a copy of the signed agreement and request the three bureaus to remove the entry as per the legal document.

Alternative No 4

Some collectors will receive a settlement or even payment, but still not want to remove the entry from your credit report. Try to negotiate your way through this one, because it's well worth it. It's beneficial, if you are not confident about your own negotiation skills, to avail of a credit repair agency, which offers this type of service. Just ensure that the credit repair agency is reputable and legitimate.

In case your request does not meet with their approval in the end, at least insist that in lieu of having the entry completely removed, it state "paid in full" or "settled" against it. This will reinstate your credibility with future lenders.

Alternative No 5

If all else fails, it's still in your interest to pay the debt. It's always better to have the debt paid, because a paid debt is better that just a reported "for collection" debt. At least, the paid debt will show that you have taken care of your financial responsibilities, albeit a little past the due date.

Resources

The Credit Repair Organizations Act
The Fair Debt Collection Practices Act (FDCPA)
Fair Credit Reporting Act (FCRA)
Consumer Credit Protection Act
The Fair Credit Billing Act
The Equal Credit Opportunity Act (ECOA)

 

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