The Dangers of Co-Signing.

The Dangers of Co-Signing
By Michelle Black

We've all been there before.  A friend or family member asks you to co-sign for a car loan, a home loan, or some other type of financing and you feel obligated to help your loved one out.  You might think that being a co-signer is not really that big of a deal since you are not the primary borrower on the account.  However, the truth is that co-signing for someone else really is a big deal and not only is it a big deal, it can be detrimental to your credit as well.

When you co-sign for someone else's loan you are legally responsible for the account just like you would be if you received the loan for yourself.  Co-signing makes you a joint account holder. Plus, although you are not in control of making the monthly payments, the credit history for the account will affect your credit scores every single month.  If your loved one makes even 1 late payment on the account, your credit score could drop - in some cases up to 100 points or more.

The HOPE4USA team strongly recommends that our clients never, ever, ever co-sign for a friend or family member, not even for a child.  Spouses are the only people you should ever consider co-signing for and then ONLY IF one of you cannot qualify for the loan based upon your income alone (i.e. a mortgage loan).  We know that can be very hard to say "no" to a loved one, but if you make up your mind ahead of time that you will never co-sign it can help to make the situation a little easier when and if it presents itself.

Remember, you can refer your friends or family members to the HOPE Program if they are facing credit issues.  Our caring staff will be happy to help the people you care about establish the healthy credit they need to qualify for future financing on their own. Call 704-499-9696 for more information on the amazing services offered by the HOPE Program.

Credit Reports

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Michelle Black is an author and leading credit expert with nearly a decade and a half of experience, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars across the country. She is an expert on improving credit scores, budgeting, and identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here. 

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Can Collection Accounts Really be Removed from My Credit Reports?

In my previous article, Will Paying Collections Help My Credit Scores?, I discussed the common misconception that paying a collection account will raise your credit scores. It is true that paying a collection account probably will not raise your credit scores and, in some cases, may even lower your scores if recent activity is reported on the account due to your payment. However, there is another credit myth which I would like to debunk today and that is the misconception that a collection account cannot be legally removed from your credit report. The statement that a collection account cannot legally be removed from your credit report is simply untrue. When a collection account is deleted from your credit report the result is almost always a credit score increase - great news for the consumer! There are several possible ways that collection accounts can be deleted from your credit report. Let's discuss a few of them:

Removal by Dispute - 

Have you checked your credit report lately? Chances are that, if you did so, you found errors and inaccuracies. In fact, a recent study released by the Federal Trade Commission found that 40 million Americans had errors on their credit reports. 

According to the Fair Credit Reporting Act (FCRA) you have the right to dispute any errors, mistakes, or inaccuracies with the credit reporting agencies - Equifax, Trans Union, and Experian. If any of the data is incorrect on an account (i.e. the balance, the date of first delinquency, the date of last activity, the date opened, the date of default, the date reported, account notations, etc.) then you have the right to dispute it. Furthermore, you are even allowed to dispute erroneous accounts with creditors and collection agencies directly.

Pay for Deletion -

It is possible for you to make an arrangement with a creditor or collection agency to pay an account in exchange for the deletion of the account from your credit report. You should know that it is extremely difficult to get a creditor or collection agency to agree to these terms. Some companies will reject a pay for deletion offer out right. However, payment for deletion is possible and it is 100% legal.

There is nothing in the Fair Credit Reporting Act which compels a creditor or collection agency to report an account to the credit bureaus. The reporting of accounts is 100% voluntary. Even though it is not illegal for an account to be paid for deletion, the act is frowned upon by the credit bureaus and most of the agreements that the bureaus have with collection agencies states that the collection agencies cannot engage in pay for deletion settlements.

Finally, if you do get a creditor or collection agency to agree to a pay for deletion arrangement you will likely be required to pay 100% of the debt. As with any debt negotiation, it is always important to get agreements sent to you in writing since "he said, she said" will not hold up if a dispute arises later.

Goodwill Deletion - 

You can request for a creditor or collection agency to grant you a goodwill deletion after an account has been paid. It is a long shot to have a goodwill deletion request honored; however, it certainly cannot hurt you to ask.

These are a few of the ways that a collection account can be removed from your credit reports. You have the right to try to employ some of these strategies on your own, though doing so will likely be time consuming and very difficult. You also have the right to hire a reputable credit restoration company to assist you. If you would like to speak with a HOPE Credit Expert regarding your credit report please give us a call at 704-499-9696 or click here to schedule a no-obligation credit analysis today.

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Michelle Black is an author and a credit expert with over a decade of experience, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and  a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, credit reporting, correcting credit errors, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE Facebook page by clicking here. 

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Will Paying Collections Help My Credit Scores?

Paying collection accounts is usually the first place people start when deciding to try to fix damaged credit reports. However, the idea that paying off a collection account will boost a consumer's credit scores is, unfortunately, usually very wrong.

FICO's credit scoring models (the brand currently used by most lenders) were designed to help lenders predict the likelihood of a borrower going 90+ days past due on a loan within the next 2 years. If a borrower is likely to go 90+ days delinquent on an account within the next 2 years then a lender will probably consider the borrower to be a bad credit risk. When you pay off an outstanding collection account, even if a zero balance is reported to the credit bureaus, that does not erase the fact that the delinquency occurred in the first place. Therefore, FICO scoring models will still  typically score you as a bad credit risk, even after you have paid off collection accounts.

It is the occurrence of the delinquency (aka the late payment) which lowers the consumer's FICO scores, not the balance on the collection account. The fact that the delinquency happened is not erased when a collection account is paid. To further illustrate this point, let me ask you a question. Would a $1,000 medical collection, a $100 medical collection, or a $0 medical collection lower your credit scores more (assuming they all were added to your credit reports at the same time)? If you guessed that the 3 collection accounts would likely have roughly the same impact upon your credit scores then you are 100% correct.

Additionally, paying a collection account could accidentally harm your credit scores further due to a deficiency within some older credit reporting systems which might penalize you for "recent activity" on a collection account whenever a payment is made.  Paying an older collection account, which hasn't reported any activity in several years, might make the collection account appear to be more recent in the eyes of these older FICO scoring models and could therefore potentially result in a drop in credit scores. The reason this occurs is because the credit bureaus will update the "date reported" field when the collection agency reports the new balance ($0 if you paid or settled the debt) and when the "date reported" becomes more recent it might damage your FICO credit scores.

However, you do want to exercise caution when it comes to collections since simply ignoring these obligations could come back to bite you as well. If you have a collection account on your report which you know stems from a real financial obligation and you know that the balance is correct, then it may still be in your best interest to try to settle the debt. Unpaid debt can potentially result in being sued, wage garnishment, and judgments.

Remember, if you owe a collection account, you can always try to settle it for a lesser amount and you can even hire a reputable professional to assist you. Paying 100% of the collection will probably not affect your credit scores any more positively than paying a 5o% settlement in full since the account is already derogatory. Neither scenario removes the collection account from your report, so do yourself a big favor and save yourself some money if you choose to settle any collection accounts. Finally, it is very important to always, always, ALWAYS get proof of the settlement and the satisfaction of the account in writing from the collection agency.

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Michelle Black is an author and a credit expert with over a decade of experience, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars on various credit and financial topics. She is an expert on improving credit scores, credit reporting, correcting credit errors, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here.

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More Expert Credit Advice

Credit Report vs. Credit Score - What's the Difference?

Credit Reports versus Credit Scores

Let’s face it, for most people the world of credit can be a very confusing place. If you can’t explain the difference between a credit report and a credit score, you are not alone. People often use the terms “credit reports” and “credit scores” as if they were interchangeable. However, credit reports and credit scores are two totally different animals. Here is a crash course in credit terminology to help you make sense of this confusing topic and turn you into the super savvy consumer you always wanted to be.

Credit Reports

There is not merely one, but rather three major credit bureaus who compile data from lenders, credit card companies, collection agencies, public records, etc.  The credit bureaus are Equifax, Trans Union, and Experian. The data is compiled into credit files which are then used to generate credit reports (basically user friendly versions of the credit files themselves). In fact, the credit bureaus compile credit data about millions of consumers and sell credit reports to lenders and directly to consumers themselves.

If you have not checked your credit reports in a while, it is a good idea to do so right away. After all, it is ultimately your responsibility to monitor your credit reports for errors and for fraud. You can access a free copy of each of your credit reports (NOT your credit scores) each year at www.annualcreditreport.com. Credit reports do not exist to judge your credit management history, but rather to simply lay out the facts regarding how well you manage your debts.

Credit Scores

Contrary to popular belief, the credit bureaus themselves do not calculate your credit scores. Where a credit report simply lists a record of your credit management history, a credit score actually exists to evaluate and rate that data into an easy to understand number for lenders. A low number indicates that the consumer has a history of poor credit management. A high number indicates the opposite.

The original and most popular credit scoring model by a huge margin is FICO. In 1989 FICO partnered with Equifax to introduce the first credit bureau FICO risk score. The purpose of a FICO credit score is to predict risk – specifically the risk of the consumer going 90 days late on any account within the next 24 months. Today, FICO builds credit scoring software and installs it on the mainframe of each of the 3 major credit bureaus. The credit bureaus will use FICO’s software to calculate their own credit data and then sells the credit reports with credit scores to lenders. FICO receives a royalty from the credit bureaus for the use of the software.

FICO credit scores range from 300 to 850. If a consumer has a low credit score then the data in the consumer’s credit report indicates that there is a high risk involved with loaning money to that consumer. If a consumer has a high credit score then there is a low risk involved with loaning money to that consumer.

As mentioned above, consumers are currently not entitled via federal law to receive free copies of their credit scores annually. (Note: if you apply for a mortgage then mortgage lenders are required by law to show you all 3 of your credit scores that were pulled for the mortgage application.) Still, there are several places online where you can receive free educational credit scores (not the same scores as the ones used by lenders) or a free score from one of the bureaus individually. You can also view your credit scores, often initially for free, as a benefit of signing up for monthly credit monitoring services. Beware, many monitoring services will only all you to see your credit score from one and not all three of the credit bureaus. CLICK HERE to access a great comparison site where you can check out the benefits of several different credit monitoring services before deciding which option is right for you.

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Michelle Black is an 12+ year credit expert with HOPE4USA, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and  a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE Facebook page by clicking here. 

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Should I Consolidate My Credit Card Debt?

Credit card debt can quickly become an ugly monster. As a reader of the HOPE4USA blog, you already know that outstanding credit card debt can significantly lower your credit scores, even if every single payment is made on time. (Check out The Ideal Credit Card Balance to Optimize Credit Score for more information regarding how credit card balances impact your credit scores.) If your credit card debt has gotten out of control, then it is time to step back, assess the damage, and come up with a plan of action to fix the problem before it gets worse.

Step One: Face the Facts

Now that you are ready to begin tackling your credit card debt problem, the first step is to make a list of all of your current credit card debt. List your credit card debt from the card with the highest balance at the top of the list and the card with the lowest balance at the bottom. Here is an example:

1. Capital One - $5,000
2. Chase - $3,500
3. Citibank - $2,800
4. Discover - $1,200

Step Two: Figure out How Much You Can Afford to Pay

Of course, you must maintain at least the monthly minimum payment on each of your credit cards in order to protect your credit scores. However, if the minimum payment is all that you pay then you can count on being stuck underneath a pile of credit card debt for a long time – potentially as long as decades! If you do not already have a monthly budget set up for yourself, then CLICK HERE for a complimentary copy of the HOPE Basic Budgeting Worksheet. Once you have filled out your budget sheet (and maybe made a plan to cut back on unnecessary spending) you will be able to determine how much “extra” income you can afford to pay on your credit card debt each month.

Step Three: The Snowball

One option for paying off your credit card debt is the “snowball effect.” Here is how it works. Begin by paying the minimum payment on all of the credit cards on your list, with the exception of the card with the lowest balance (#4 – Discover in the example above). For the card with the lowest balance you will want to use all of your additional funds and pay the largest payment possible. Your goal should be to pay off the card with the lowest balance first, then move up the list to the next card with the lowest remaining balance. Rinse and repeat until all of the cards from your list have been paid in full.

Step Three: Determine If a Consolidation Loan Is Right for You

If you find yourself in a situation where it is going to take you a long time to pay off your credit card debt, even if you use the snowball effect method above, then it may be time to consider a debt consolidation loan. There are 2 great benefits to a debt consolidation loan. First, when you consolidate your revolving credit card accounts into an installment loan your credit scores will likely see an almost immediate increase. The reason you will most likely see a credit score increase is because credit scoring models, like FICO and VantageScore, do not treat installment debt the same way they treat revolving debt. A credit card with a balance has a great potential to harm your credit scores. However, an installment loan (like a personal loan or a vehicle loan) does not have the same negative effect. The second benefit that comes along with a consolidation loan is that it has the potential to save you money. Most debt consolidation loans have a much lower interest rate than your credit card accounts.

If you do decide to use a debt consolidation loan as a tool to help get yourself out of credit card debt, keep the following in mind.

1. Do not charge your credit cards back up once they have been paid off.
You have to determine ahead of time that you will not allow it to be an option to charge up new balances on your credit cards. In fact, it would probably be a good idea for you to lock your credit cards up in a safe place and only use them about once a quarter in order to maintain some activity on the accounts.

2. You should still try to pay off your consolidation loan early.
Just because you consolidate your credit card payments into an installment account does not mean that you should not try to pay the loan off early. Paying extra money onto the principle balance of your consolidation loan each month is still a wise financial strategy to follow.

CLICK HERE to compare consolidation loans and personal loans to find an option which may be right for you.

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Michelle Black is an 12+ year credit expert with HOPE4USA, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and  a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE Facebook page by clicking here. 

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