Credit repair scams are making the rounds everywhere and scores of people are being duped into parting with their money against false claims. Honest, hard working people who have fallen on tough times and are looking to rebuild their credit after being in debt for years or having recently come out of bankruptcy are the most preferred targets for these conmen.
Credit repair scams and other such fraudulent practices mainly build their schemes and play on the ignorance of consumers when it comes to their credit score and how the system works.
What most people don't realize is that repairing and rebuilding credit is not rocket science and they can do it on their own without any kind of professional help. The real trick behind repairing your own credit score is to analyze each debt that you have and deducing how changes made to the debt will affect your score on the whole.
Even though consumers and even experts are still unaware of what exactly goes into making the FICO credit score formula, educated estimations lead most to conclude that at least 35 percent of the score is based on payment history while another 30 percent is based on your current debts.
Old debts and delinquent accounts
When it comes to your credit score, paying off old debts is certainly a good idea but the hard truth is that it will not level out the impact of the payments you missed against the account.
Once you have missed out on a payment against an account and you continue to do so, the account will go into a delinquent status. Paying against delinquent accounts will not have a direct positive impact on your credit score or negate the impact of missing the payments previously.
The only way you can improve the situation is by making enough payments to cover for the ones you have missed and bringing the account into âcurrent' status. Reducing the debt will improve your score.
Newer debts have a greater impact on your credit score than older debts. This is where it gets a little tricky and making a payment against a charged-off account might actually reduce your credit score instead of raising it. When an original creditor charges off an account, it usually means that the credit is expecting no further payments against the debt and is writing it off.
A charged-off account is usually sold off to a collection agency which in turn reports the same account to the credit bureau. The collectors report it from the day it has been sold to them and therefore the debt appears to be newer that it actually is. As such, this will have a negative impact on your credit score. Ensure that you try your best to bring accounts out of charged-off status or when dealing with collectors, make sure the account status has been changed from âcharged-off' to âpaid in full'.
The problem with settling debts is that you have no ultimate control over how the lender or the creditor is going to report it to the credit bureau. Some lenders might mark your account as âpaid' once they receive the payments and this can have a positive impact on your credit score. Some lenders might mark the account as âpaid as settled' which will ding your credit score. The best you can do is ask your creditor how your account is going to be reported while you are negotiating with them over the phone.
Devising a payment strategy
Some analyzing and a little bit of scheming can go a long way when it comes to paying off debts and repairing your credit score. Try to target and repay debts which are still showing up as delinquent on your credit report. This will have the maximum short term positive impact on your credit score.
Next, you should check up on your state laws and find out what the Statute of Limitation (SoL) for debts in your state is. Go through your credit report and mark out debts (if any) which are past the SoL (the SoL clock beings on the date the account became delinquent). Debts past the SoL are time barred and creditors/collection agencies can't sue you over them. You can tackle these in your own time and on your own terms.
Negative as well as positive accounts drop off your credit report after 7 years from the time they are first reported. If one or more of your accounts are on the verge of dropping off your credit report, consider paying against them after they have fallen off. Making payments on these debts after they have fallen off your credit report will have no impact on your credit score.