3 Great Ways to Eliminate Credit Card Debt

Welcome to part 3 of the HOPE4USA.com Credit Card Mastery Series.

In today's episode we will be discussing 3 great ways that you can work to eliminate your credit card debt if you are already in over your head. Credit cards can be powerful credit building tools; however, credit card debt is never good for your credit scores or your wallet. Learn how to take control of your credit card debt once and for all - your credit scores and your wallet will thank you!

Visit HOPE4USA.com or follow us on Facebook during this informative weekly series so that you can learn how to turn your credit card accounts into powerful credit building tools. 

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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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Is Settling My Debt the Key to Better Credit?

Let's face it, no one plans on having bad credit. Aside from a few bad apples, the vast majority of consumers never set out with the intention of acquiring debt and failing to pay it off according to terms. Instead, most consumers who develop bad credit do so as a result of some unfortunate circumstance such as a job loss, an illness, divorce, etc. Even those consumers who find themselves swimming in collection accounts as a result of poor financial planning typically do not realize that they have overextended themselves financially until they have already bitten off more than they can chew.

One of my favorite sayings is the HOPE4USA slogan, "Bad credit happens to good people all the time." The reason why this statement means so much to me is because it is 100% true. Whether a person is facing credit problems due to bad luck or bad decisions, that does not mean that he or she is a bad person. Everyone deserves a second chance.

Cleaning Up Past Mistakes

Unfortunately, when most consumers set out to begin cleaning up their past credit mistakes they do it wrong. I cannot count how many consumers have expressed their frustration to me over the years after they paid off a pile of old collection accounts and their credit scores remained low - often even lower than they were initially. The fact that most consumers fail to understand is that paying off or settling collection accounts generally will not do anything to improve credit scores.

Why Paying Collections Doesn't Raise Credit Scores

The FICO credit scoring models currently in use by lenders do not reward consumers for paying off collection accounts. Current versions of FICO are much more concerned with the fact that a collection occurred in the first place than they are with the balance of the account. In fact, a collection account will have virtually the same negative impact upon a consumer's credit scores whether the balance is $2,000 or $0. (Defaulted credit card accounts are typically the exception to this rule.)

The purpose of a FICO credit score, also known as the design objective, is to predict the likelihood that a consumer will become 90 days past due on any of his/her credit obligations within the next 2 years. Current FICO credit scoring models are built with the assumption that a consumer who had collection accounts in the past is still likely to be 90 days late on an account in the future. Therefore, the presence of a collection account - regardless of the balance - is going to have a negative credit score impact.

Change on the Horizon?

FICO 9, the most recent credit scoring model released by FICO was designed to treat $0 balance collection accounts very differently than they have been treated in the past. The new scoring model was built with scoring logic to completely ignore collections with $0 balances. The result? Consumers who settle or pay their collection accounts could potentially see a massive score increase under the new scoring model.

Before you get too excited it is important to realize that it will likely be many years before FICO 9 is widely adopted by lenders - if it is even adopted at all. Check out my previous article, "Why You Shouldn't Be Too Excited About the New FICO 9 Scoring System...Yet" for more details. If lenders are not using the new scoring model then it is impossible for consumers to see any benefit from the new scoring logic.

What Should I Do?

If you believe that the fact that settling your collection accounts will not likely help your credit scores is a good reason to ignore the accounts, you may want to think again. Unpaid collection accounts have the potential to come with a lot of nasty consequences. Lawsuits, judgments, and wage garnishments are a few of the unpleasant side effects that often accompany unpaid debts. Settling past due accounts can be a very smart move, though it may be advisable to consult with a reputable professional for help and guidance before you get started

Where to Begin

It is important not to become overwhelmed when you make the decision to begin trying to fix past credit issues. The best place to start is to get a copy of all 3 of your credit reports (and possibly your scores as well). You can access a free credit report from each of the 3 major credit bureaus every year at www.annualcreditreport.com. Credit scores are not free, but you can often access them as part of a free or inexpensive trial to a credit monitoring service. CLICK HERE to compare trial offers which offer 3-credit scores.

Once you have your reports, review them thoroughly for mistakes. Credit mistakes happen more commonly than many consumers realize. In fact, the FTC estimates that over 40 million consumers may have errors on their credit reports.

When reviewing accounts for errors remember that all aspects of the account (i.e. balance, date opened, date of last activity, etc.) should be correct. If errors are discovered you have the right according to the Fair Credit Reporting Act to dispute those errors. You can dispute credit errors on your own or with the help of a professional. CLICK HERE for a great, free Credit Repair Toolkit to help you get started or you can schedule a no-obligation credit analysis with a HOPE4USA Credit Expert.

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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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Why Credit Avoidance Is a Bad Strategy

The title of this piece alone is enough to ruffle the feathers of the die-hard believers in the cash-and-carry lifestyle. So, before I even begin with my explanation of the many ways that swearing off credit can come back to bite you, let me begin by stating that you can still live a debt free lifestyle while building a solid credit score. Don't believe me? Has your favorite financial guru told you otherwise? Before you shake your head and move on to the next item in your newsfeed, take 5 minutes to hear me out. Trust me, you will be glad that you kept reading.

Your Credit Score Is NOT Your Debt Score

Despite what you may have heard, credit scoring models do not reward consumers for going into debt. In fact, the truth is quite to the contrary. The idea that you have to carry a lot of debt in order to have good credit scores is completely false. It is 100% possible for you to be debt free and still have very good credit scores.

Credit scoring models like FICO pay a lot of attention to a consumer's debt load. Many consumers find it surprising that a whopping 30% of their FICO credit scores come from what is known as the "Debt Category" of their credit reports. Credit scoring models are constructed so that the more you owe, the worse it is for your scores. This fact is especially true when it comes to credit card debt. However, if you have credit cards with zero balances you will be heavily rewarded in the credit score department. Having credit card accounts which you keep paid off shows the credit scoring models that you are a good credit risk. Conversely, charge up more credit card debt than you can afford to pay off in a month and not only will you waste money on interest fees but your credit scores will also suffer.

Credit Matters In More Ways Than You Think

If you have experienced a financial disaster, bankruptcy, illness, or just plain bad financial decision making in the past then the idea of swearing off credit all together and adopting a cash-and-carry lifestyle can be tempting. Deciding to close your accounts and never again apply for another credit card or loan is a drastic decision, but plenty of people have proven that it is possible to live a life free from these traditional "trappings" of the credit world. However, what followers of this cash-and-carry lifestyle fail to consider is the fact that pretending their credit doesn't matter can cost a lot of money in the long run.

Thinking that your credit will only have an impact on your life if you intend to apply for a credit card or a loan is completely unrealistic. Like it or not, we live in a very credit driven world. Here are just 7 of the negative consequences to not having good credit.

Without good credit:

1. It can be hard to qualify for an apartment.
2. Getting a cell phone contract can be very problematic.
3. Higher insurance premiums are probably in your future.
4. Getting a job or a promotion may be difficult.
5. Security deposits on utility accounts are higher.
6. Receiving a security clearance for a job could be very tough.
7. Qualifying to purchase a home might be impossible.

The Truth About Credit "Temptation"

Again, I agree with those who believe that debt is bad. Excessive debt will waste your hard-earned money, it will lower your credit scores, it can be bad for your marriage, and it can cause you a lot of worry and stress. However, the idea that swearing off credit cards in order to avoid the temptation to go into debt is an overly simplistic approach to a complicated problem.

The root of the problem which people who are afraid of credit need to address is the fact that having credit cards is not what caused their financial and credit problems. Problems of this nature are almost always caused by poor money management habits. Saying that credit cards cause people to go into debt is like saying that spoons make people fat.

Closing your credit card accounts is not going to eliminate the temptation to over spend. In fact, for the person who has truly mastered proper money management habits, the temptation to charge more than he/she can afford to pay on a credit card is no greater than the temptation to spend too much on a debit card. Cutting up your credit cards is simply not the answer to your financial problems.

If you have made credit or money mistakes in the past, you are not alone. Don't allow the mistake of your past to define you. Instead of feeling defeated and ashamed you can challenge yourself to try again.

You should not allow let fear or misguided advice cause you to believe that a life free from the world of credit is your answer. After all, in reality there is no such thing as leading a life which is unaffected by your credit. You can embrace this knowledge or you can try to hide from it. Either way, your credit is always going to have a big impact upon your life.  

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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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5 Ways to Give Your Credit a Kick in the Pants!

5 Ways to Give Your Credit a Kick in the Pants!By Michelle Black

Earlier this week we discussed The 5 Fastest Ways to Damage Your Credit.  If you have not reviewed this list yet, please take a moment to check out the article.  It may save you from making a detrimental mistake which could set your credit score back as much as 100 points!

However, today we will be focusing on a subject that is always much more enjoyable: Ways to improve your credit.  Since the 3 credit bureaus (Equifax, TransUnion, and Experian) all have a different system they use to determine your credit score, it is impossible to predict specifically how much any one action will change your credit score.  Still, we do know that if you heed the following advice, your credit scores cannot help but to improve with all 3 of the credit bureaus (as long as no new negative actions on your credit counteract the new positive changes):

1.  Make payments on time. I always like to start with this recommendation because payment history is the single most important factor making up all 3 of your credit scores.  A whopping 35% of your credit score is determined by your ability to make your payments on time.  Even if you have had some recent late payments (within the past 24 months) that have damaged your credit score, if you make a plan today to start paying your current bills on time you will start to slowly dig yourself out of the hole. Plus, if you want to dig yourself out of the proverbial credit hole even faster you can check out some of the great services that HOPE has to offer. 2.  Have enough open credit cards. It is important to have open revolving accounts (AKA credit cards) on your credit report.  Your credit score is a snapshot to potential lenders of how you pay your bills.  Therefore,  if you do not have enough open accounts, you may have low scores or even no scores at all. HOPE members, please check with your HOPE credit specialist to see if it is recommended for you to open additional credit card accounts or if you already have enough active accounts appearing on your credit report. 3.  Pay down open credit cards. Yes, it is definitely recommended that you establish some current credit card accounts if you do not currently have enough open.  However, it is not recommended that you establish any new debt by charging up the balances on your credit cards.  If you do have balances on any of your current credit cards, especially if the balance is over 50% of your credit limit, aim to pay off your credit cards ASAP.  You could potentially see a huge increase in your credit scores by following this advice.  (Note: current HOPE members can contact us to request a HOPE Snowball Debt Payoff Worksheet for help making a plan to pay off your current debts.) 4.  Check your credit report for mistakes/erroneous information. All 3 credit bureaus are quite notorious for making mistakes on our credit report.  Even if your credit report is in pristine condition, it is important to check your credit report 1-2 times every single year to make sure that there are no new errors being reported.  The good news is that you are legally entitled to a free credit report (minus your credit scores) every year from www.annualcreditreport.com.  Make sure to check your report with all 3 credit bureaus. 5.  Use old credit cards occasionally. Your length of credit history makes up approximately 15% of your credit score.  This means that those older credit card accounts on your report actually help to boost your credit scores more than new accounts.  Often a creditor will automatically close a credit card account if you do not use it for a prolonged period of time due to inactivity on the account.  Solution?  Use your old credit cards several times per year for a small purchase (which you pay off immediately) in order to keep your older accounts open and active.

Don't forget, if you or someone you know is in need of professional credit advice or assistance, we would LOVE for you to take the time to consider the services offered by the HOPE Program.  We want the opportunity to answer your questions and offer our unique expertise on all situations related to your credit report and credit scores.  There really is no such thing as a HOPEless situation! Please feel free to give us a call with any questions you may have at 704-499-9696.  We hope to hear from you soon!