Understanding Your Credit Score Part II
Understanding your credit score is the first step in improving your credit. Last week Maddy Armstrong with Southern Trust walked through what your credit score is and what type of purchases and/or payoffs affect your credit score. In Part II of Understanding Your Credit Score Maddy is explaining to us how to handle any negative marks against your credit, what adjustments you can make to make those positive changes, and how long those adjustments take to positively affect your score. So dive on in with Maddy!
The following is provided by Maddy Armstrong as general information. Maddy Armstrong nor Jessica Deleo are considered your loan officer, REALTOR®, or to be considered to be providing advice to any reader about your personal financial situation. Maddy Armstrong nor Jessica Deleo can be held liable for any individual decisions made about personal financial choices.
NEGATIVE ITEMS ON THE REPORT
Bankruptcy- 7-10 years to fall off report
Judgment- 7-10 years to fall off report
Collections- 5-7 years to fall off report
Collections
People often talk about “being sent to collections.” Having a collection on your record is when you have an outstanding payment that a company has been trying to collect on you have no paid it. Once that company has exhausted its own resources of getting the payment they will turn the process of repayment to “collections.”
What to do if you have a collection against your credit:
Collections should be paid off based upon how recent the collection is. Most people would think you should pay off your oldest collections first but it’s actually the opposite. Newer collections should be paid off right away. Paying off older collections may hurt the score as the payoff reminds the credit bureaus that an older collection was outstanding. If a old collection is not reporting currently, you may not want to pay it off. If you do pay off a collection, DO NOT SETTLE FOR LESS. Insist on paying off the collection in full. Paying off a lesser amount will result in a “charge off” which may continue to hurt your score in the future.
Judgements
A judgement is when a collection is taken before a court judge and they (the judge) establishes when, what, and how you need to pay off your collection.
What to do if you have a judgement against your credit:
Paying off judgments will not help your score dramatically however you cannot get a mortgage with an outstanding judgment. You must pay off all judgments in order to qualify for a mortgage. You will need to get a letter of satisfaction from the courthouse and be sure to send it directly to all 3 credit bureaus as the courthouses often do not report settled judgments to the bureaus. Assume that if you don’t tell the credit bureau about a settled judgment yourself, then they haven’t been told.
Charge Offs
Charge offs are what happens after your collection has been turned into a judgement and then still has not been paid off. Companies basically just give up on ever seeing the money from you at this point. BUT WAIT! That’s not as great as it sounds. Once you get to this stage it’s a slow climb back to the positive credit peak. Charge offs never leave your credit history and you can’t ever get an A+ credit rating. It’s best to stay far FAR away from the land of charge offs. Collections, Judgments and Charge Offs are all measured by their age. Depending on the original score and credit history, when a delinquency of this nature hits a report the effect will be different by measure but negative nonetheless. Points will be lost initially and then the line will remain idle most of the time. If the Collection, Judgment or Charge Off is paid off within two years then most of the points originally lost will be regained. If the item is paid off after 2-5 years no points will be regained, and some points will be lost depending on how old it is. If the item is paid off after five years then it is almost as bad as the Collection, Judgment or Charge Off just appearing as if it were new. The credit report is going to concentrate on the date filed vs. the date last updated. The delinquent item will become diluted with time, don’t “wake it up.” If the credit report at stake is one of B rating or better and the delinquency is older than two years, then it is better to pay it off at closing instead of trying to remove it beforehand. If your credit rating is below a B rating then the losses will be minimal when waking up that sleeping giant for reasons that we discussed before. If you have a foreclosure, short sale, or bankruptcy in your past it is important to know that you can get a mortgage following any of these events. To do so you will generally need:
- To be perfect on your payment history after these events with no late payments on any items or credit lines.
- Have re-established credit by opening new credit and paying it on time for 1-2 years.
- You will need to have 2-3 credit lines.
It is best to keep a low balance and showing super responsible use of credit after a BK (bankruptcy) or foreclosure. I find that many clients avoid/stay away from credit because of their experience. Do not fall into this trap- make sure you are re-establishing good credit! It will only help you in the future!
CREDIT IS A GAME, PLAY IT SMART!
THAT’S IT! You now have the keys to review your credit and start taking action if need be. If you have any further questions - feel free to contact Maddy!
Happy Hunting,
Maddy Armstrong, LenderSouthern Trust MortgagesNMLS 916952Office: 804.305.2344Email: MArmstrong@SouthernTrust.com