Credit and You

***Disclaimer: This is a general "How To" approach to credit information, and while true in most situations, each individual circumstance may have exceptions. It is best to consult your personal lawyer if you have questions.***

I figured I would write an article to clarify some common misconceptions about collections and/or debt. This is not all-encompassing, and I certainly do not know the complex algorithm for calculating a credit score. However, using my experience in credit, I thought I would offer a small tutorial.

It is amazing to me just how many people have little concept of how credit works. When I was speaking with my husband, he admitted that before we got together, he simply paid his bills because he was afraid of what would happen if he didn't. He knew he had a credit report; but how to obtain it and how to read it were foreign concepts.

Let me first give an elementary explanation of a few things.

There are three major credit bureaus: TransUnion, Equifax, and Experian. When you have a credit account, (whether it is a credit card, car note, bank loan, mortgage, etc), it is usually listed with at least one of these three, if not all. For each entry on your credit report, it is referred to as a "trade line".

When an account is open and active, each different agency will list your payment history. This history will go back for two years. As long as the account is open, it will be listed on your credit report. Different agencies will use different abbreviations on their reports. For example, on TransUnion, they use a "1" to list current. So, for instance, you could see your credit card, and the payment history could look like:

111111x1111

This means that you made a payment each of those months, with the leftmost number being the most current month. The "x" would mean no payment was made, generally due to a balance not being owed.

This is all fine an dandy, but how much do you know about the darker side of credit? Let's say that you have an accident, and have to stop paying on your credit card. Eventually, you may be sent to collections. When this happens, you may see the phrase "Charged Off".

I cannot tell you how many people think this means that they no longer owe a bill. This is not true. Charged off simply means the creditor wrote your account off as a bad debt, and took it as a loss to them. However, the bill is still owed.

Also, there are laws that govern how long something can stay on your credit report, AND (state by state) how long something may be legally pursued. These are two completely separate statutes, and it may be possible to have one that is active and the other not.

For instance, in the state of Ohio, a credit card debt may be pursued in court (with the possibility of your wages being garnished or a lien placed against your house, for instance) for 15 years from the date the account went delinquent, in many situations. The federal reporting timeframe for something being on your credit report is 7 years from the date of delinquency. Obviously, by this point, the account may no longer be on your credit report, so it would be a nasty surprise to receive a court summons for something you mistakenly thought was no longer a problem.

The opposite could occur, too. It is entirely possible that something may no longer be legally pursuable, but is still on your credit report. There are different statutes for different types of bills, usually depending on the type of debt owed.

In terms of how something affects your credit, there are scales. The worst hits are legal action, and one of the biggest negatives is bankruptcy. If you are sued or have a tax lien, these also reflect negatively against you, worse than say, missing a payment on your active credit card. As to how many points each deducts, I cannot answer that, as there are many different factors to consider. However, generally, the older a debt is, the less of a negative impact it has upon your score.

About two years ago, Congress passed a law that made it mandatory that the credit bureaus offer each consumer access to a free credit report, once per year. There is a website setup that allows you to access it, and it will retain each time that you log in so that you cannot get a report sooner than once each twelve months.

This website is NOT the one that you see on TV with the cheesy actors. That one makes you input a credit card and signs you up for some credit monitoring service. The legit government site only requests basic information. I have included a link, below:

https://www.annualcreditreport.com/cra/index.jsp

Note that this allows each individual to access a credit report. So if you are married, each spouse is eligible to access their own report.

I strongly recommend that everyone accesses their credit report at LEAST once a year, more often if you have been a victim of fraud. I know what is on mine down accounts that have been closed for years. The last time I pulled it, I had addresses on it where I have never lived. It was a bit of a hassle to have to call and get them removed, but in the long run, it is worth it.

What do you do if you see something on your report and you have no idea what is it? Simple: dispute it. By law, when you dispute an account, the holding company must send you validation of the debt. This will simply list the name of the original creditor, balance owed, etc. Keep in mind, however, that disputing it will not necessarily close an account. It could fall off your credit report (not always, in fact, I would say that is rare), but I guarantee, in most cases, it is active somewhere.

Note: when a debt is active, it is NOT up to the agency to prove you owe a bill. The validation is a notice that tells you what the bill is from, so that the consumer can research their records. If it is fraud, or you paid it before it got to collections, or even afterward but to another agency, it is up to the consumer to prove it is not owed. Each agency has a different guidelines on what they may need to see to investigate your dispute.

As a recommendation, if you are disputing something and need to send in document copies, do a double-send. Fax a set, and send another set certified mail. The last thing you want to do, I am sure, is be told a few months down the line that your proof was never received. If you have a copy of the signature of whomever received it, it will make your life a lot easier.

Let us say that a bill is owed. There are several ways to pay a bill, but let's just cut to the chase and say you paid it. First and foremost, paying something will not remove it from your credit report. The law states that an account on your credit report must accurately reflect the status of your account. By removing it entirely, especially if the original creditor still has their trade line listed that says "Charge Off" of "Sent to Recovery", you have no proof that it was paid. When scoring your account, without a correponding payment line, this could affect your score.

Consequently, it will stay on there, but reflect that you paid it. When you pay a debt, make sure that you get a paid letter! I cannot stress this enough. Keep it somewhere safe, for a long, long time. Going back to Ohio as an example, let's say 12 years after you pay something off you get a summons to go to court for that same bill. Twelve years later, a bank wouldn't have copies of your check, and without a paid letter from the agency which took your payment, you may get screwed in court.

Also, in the short term, if for some reason your credit report doesn't update as paid, you can fax that paid letter as proof, and they will have to make the necessary corrections to your credit report ASAP.

Well, I have noticed that I have gotten long winded. Let me close by saying a few things. First, this is NOT all-inclusive. While true for most circumstances, an individual may have a debt that has special legal issues, etc. For those cases, you would want to speak to your attorney.

Second: make sure that you learn at least basic credit law! Again, while an individual case may warrant a special interpretation, by-and-large, most of the above instances that I listed apply to the bulk of consumers. Plus, without understanding what is going on with your credit, quite possibly the most important financial aspect of your adult life, you could be setting yourself up for a painful hit when you go to buy a car or a house.

Third: learn how to read your credit report! Yes, it is confusing. I know, I read them all the time. But, it is the only way to understand what is on it, and whether it is correct. An erroneous mark could play havoc on your credit score. Even something as simple as a late payment when there was none can ding your score. Take the time to make the corrections.

Fourth: this is not all-inclusive. I have not listed a lot of other things about credit, simply because I do not want an article that is neverending. Credit is complex, and court rulings may change how a debt may be collected any day.

Fifth: in short, know your credit, respect it, and if you have questions about it, contact a financial expert. A lot of debt may be intimidating, but there are people that can help you. If you have awesome credit already, congrats! Speaking as someone that rebuilt her credit to wonderful standing from a screw-up in college, I understand how hard it is to get a good score.

It takes time, and nothing is an overnight fix. As with everything in life, if it sounds too good to be true, it probably is. This goes for credit fixers. If they promise to clean up your credit in 24 hours, something ain't right.

It's your money, however. But if you owe a bill and you know you goofed, or even had a mistake with it, in the long run, you are better off paying it. It may stink to deal with it, but trust me, you will respect yourself more and have much more pride for fixing it.