Fixing credit without screwing creditors?
March 30, 2015 10:07 AM   Subscribe

Pretty much what it says in the title. I need to pay debt. I need to increase my credit score. How do I do both simultaneously?

I have debt that goes back nearly 20 years. I know a good chunk of it has fallen off my credit report, and I feel horribly guilty about that. I want to pay my debt; that's kind of important to me. The problem is, I currently have just enough income to put gas in my car, and that's about it. I'm working on increasing my income; that is most emphatically NOT my question.

As my income increases, I'll have more money to throw at existing debt. My goal is to eventually be debt-free except for a (please the gods) future mortgage someday. I currently have very, very few expenses, because I'm living in a friend's house, with him and his family, and he and his wife have made it very clear to me that I do not have to cover any living expenses. (This, of course, also has me feeling horribly guilty.)

So, to the root of my question: how do I pay this debt WITHOUT screwing up my credit score? I realize it may be impossible to accomplish. I don't know yet if I'm ok with that or not. I don't think I'm ok with not paying the debt. The friend I'm staying with suggested that this morning, and I was fairly appalled. So I guess I need to ask, what's the best way to pay the debt while screwing up my credit the least? I haven't pulled up my credit reports yet; I know that's important, and it's on my list of things to do today. I just haven't swallowed enough anxiolytics yet to be able to do it. Oh, bankruptcy won't help too awfully much. A large chunk of the debt is about $30k in student loans. (Community college, shorter duration, no degree.)

Bonus question: As my income increases, what percentages of income should I put toward paying debt, saving to move out on my own, an emergency fund, and the few living expenses I do have (such as more healthy foods to eat, gas for the car, if I need hair goop to look good to work more, etc.)?
posted by The Almighty Mommy Goddess to Work & Money (15 answers total) 2 users marked this as a favorite
 
Absolutely pull your credit report, you can get it free. Depending on what the status of your student loans is, either continue to pay those, or, if you haven't, call them, set up a rehabilitation program, talk to them about what you can afford each month. Then your next step is to take care of the more recent debts that are on your credit report. If you contact the agencies, sometimes you can get pay to delete, which means they remove the items completely from your report. Also, I want to note that at this point, if you have debts that are 20 years old, they have been written off and bought and sold so many times that the debt is no longer with the prior creditor, they took the loss years ago. Honestly, the only reason to pay those off is if you are looking to gain top secret security clearance.
posted by Nimmie Amee at 10:26 AM on March 30, 2015


Income-based repayment plans for federal student loans can do great things for a credit score. My understanding is that even if your payment due is $0 per month, it gets recorded as a full and timely payment on your credit report.
posted by Little Dawn at 10:42 AM on March 30, 2015


So there are two things: your credit report and your credit score.

You can get credit reports for free, one a year, from each credit reporting agency. These simply track things that creditors have reported knowing about you. It's factual and not an assessment. The key thing is to ensure it is correct - are there debts on it that have been paid off? Is it missing something positive that future credit reviews should know about, like a credit card that you pay off regularly?

What you're looking for here is to make sure there's no fraudulent activity listed.

Credit scores are generally not free and there are lots of different ways to calculate them. Places like CreditKarma will give you a "free score" but it's not calculated the same way that a bank might use. FICO is the standard but there's more than one kind of score generated by FICO. So this isn't worth worrying about too much - just don't get a bad score.

The score is a judgement of your credit-worthiness for lenders to use to decide whether to offer you a mortgage, credit card, etc. The only way to improve your credit score is to have credit that you don't abuse (mostly). It's a bit of a catch-22 since you can't get credit without having credit.

If having a higher numerical credit score is really that important to you, you can get a secured credit card. That's where you give them some money (say $500) and you get a credit card with a $500 spending limit. It's "secured credit". And then just don't use it.

This will do two things: one, it's something on your credit report which might otherwise be empty. School debt may not show up until you miss a payment depending on how the lender reports it. Two, your credit score is partly based on how long you've had lines of credit open. So even if you're broke now, having had a tiny secured line of credit open for several years will look good once you need a loan or mortgage.

I'm not saying you should actually go out and get a secured credit card - you probably have better uses for the security deposit money now. But if you want to just improve your credit score by itself then it may be helpful. You could also do it anytime in the future too, so there's no rush.
posted by GuyZero at 10:43 AM on March 30, 2015


I will teach you to be rich, Ramit Sethi.

It is a nice simple book about financial planning for beginners (or late beginners like you and me). It has nice actionable steps at the end of each chapter that you can work your way through.
posted by srboisvert at 10:50 AM on March 30, 2015 [1 favorite]


I think some parts of your question may be putting the cart before the horse. As I understand your question, you have some anxiety or guilt at the thought of not paying off debts that have fallen off your credit report (due to age), but you're worried that doing so will drag your credit score down further? First of all, I agree with everyone else that you need to pull your credit report to see what creditors you have (and to confirm there is no inaccurate or fraudulent information on it). If you know what debts you have, you can compare so you know what debts have actually fallen off. (As you probably know, just because a debt was incurred a long time ago, doesn't mean it falls off your credit report because its more than 7 or 10 years old - that only happens once a debt is paid off or discharged or the like.)

After you look at the creditors/debt on your credit report (which I'll call "active debt", as opposed to debts that have fallen off your credit report, or "inactive debt"), you need to make a plan to deal with the active debt first. As your income increases, you need to make regular, timely payments and then you can work towards getting debt free, both of which will improve your credit score.

Assuming you're able to pay off your active debt and, through making regular payments, have improved your credit score in some respects, I do think there is a conflict between your goals of paying off the inactive debt and maintaining/improving your credit score and buying a house, since paying off the inactive debt could (as I understand it) mean that those old debts (and resulting defaults or latenesses) are reactivated and back on your credit report. But that potential conflict seems like it is very much in the future, since you are not now in a position to either pay those old debts or buy a house. Why don't you work on the things you can do now (pay the active debt and improve your credit score)? When you are ready to address this conflict, you can re-evaluate your feelings on the inactive debt. Or perhaps you could buy the house first (using your improved credit score) and, assuming you won't need to get credit right away after a house purchase, pay off the inactive debts after, to assuage your conscience. Your credit could take a hit but, assuming you have reformed credit-wise and are now making regular debt payments on everything, including a mortgage, your credit should recover.
posted by Caz721 at 11:00 AM on March 30, 2015 [2 favorites]




In some cases the creditor has long ago charged it off, and by their books you no longer owe them. The debts may be with a collection agency, who bought the debt off your creditor for pennies on the dollar (and being that these debts are so old, it may now be a series of agencies who have no relation to your original creditor.) Do you feel a moral obligation to pay the collection agency if this is the case?
posted by kapers at 11:14 AM on March 30, 2015 [1 favorite]


Yeah, it's a nice moral stand to be committed to paying off old, inactive debt, but you're a long way from covering the old stuff anyway, and the student debt is absolutely your highest priority (unless any of the other debt is accumulating interest costs) because a) it's not typically dischargeable in bankruptcy and b) you can face serious penalties for ignoring it, including loss of things like your driver's license in some states, and wage garnishment, and a lot of other unpleasant stuff. Get in touch with the lender, see if you can rehabilitate at an affordable level, and focus on that. It will take you a while if you're as hand to mouth as you say to cover 30K. And since you're not in school that amount is accruing what might be market rate interest too. Should be on your credit report if you've defaulted. But there's some chance the original lender is no longer servicing the loan.
posted by spitbull at 12:06 PM on March 30, 2015


When I was in debt, I basically put all my income beyond what was needed for basic expenses into paying off the debt. Since you seem to have a safe/stable living situation, I wouldn't even worry about maintaining a serious emergency fund. Just get the active debt paid off as fast as possible.

As for debt that has fallen off your credit report, I would almost certainly not jump into the craziness of dealing with debt that has been sold and resold, and who knows what collection agency has it now. Instead, put an equivalent amount of money (or what you can manage) towards bettering the world in some way, essentially paying it forward.
posted by ktkt at 1:23 PM on March 30, 2015


Focus on your credit score and give yourself a break regarding paying back all creditors. It's an admirable goal, but you are holding yourself to a standard that isn't used by major players in the economy. In the grand scheme, stabilizing your finances and living situation would likely be a better use of resources than paying back a debt that was written off long ago.
posted by she's not there at 1:34 PM on March 30, 2015


Response by poster: Crap, I COMPLETELY forgot about my immediate financial goal: I am currently unable to open a bank account. I don't know what banks look at, if it's credit scores, or credit reports, or what. (And I truly feel like a moron for not knowing things like this. I took economics in high school, but I was reading college level econ books when I was 8. Neither had anything about personal finances; it was all macroeconomics, supply and demand, those type of things.)

To answer(ish) some questions: I don't have some anxiety about not paying old debts. I have tons of anxiety about not paying all my debts. As in, it's taking extra meds for me to deal with any of this in any way at all. I think I remember that old debts vanish from credit reports after 7 years, but I don't know.

Do you feel a moral obligation to pay the collection agency if this is the case? Yeah, I kinda really do. It doesn't matter who holds the debt now; it's still a debt that I incurred, which I should be paying off. Believe me, I know that I'm nowhere near being able to take care of "retired" debt. But it's still my debt, and I still have the moral obligation to pay my debt.

As far as credit score, the last time I tried to open a bank account, the account manager told me that my credit score was 410. Even I know that that's crazy low. For my short term goal of opening a bank account, and my long term goal of buying a house, I know my credit score needs to be a lot higher. I just don't quite know how to get there.

Thank you very lots for all the replies. My hands were shaking as I wrote the original question, and are still shaking now. I love AskMeFi.
posted by The Almighty Mommy Goddess at 2:06 PM on March 30, 2015


Crap, I COMPLETELY forgot about my immediate financial goal: I am currently unable to open a bank account.

I was in this situation, and it didn't have much to do with my credit score: it had to do with having an account closed due to a negative balance (My story: lost a job, automatic insurance payment went though, didn't have enough money to get above zero). That black mark followed me for YEARS, it's part of a different system banks use that's not nearly as transparent as a credit score, so unfortunately I don't know how to remove it -- but I suggest talking to a bank that has denied you an account and see what they say. Another option is to find someone you trust to open an account for you, and add you to the account -- that's how I did it, with my girlfriend-then-future-wife. Also try a credit union -- their members are their owners, and at least the one I'm a member of has the specific, stated goal of helping responsible people build credit, so if you're trying to make responsible financial choices, go in, tell them that, and ask what you need to do to open an account.
posted by AzraelBrown at 2:33 PM on March 30, 2015 [1 favorite]


I don't think the bank account denial has to do with your credit score exactly - apparently there a different scoring system banks use. You can order a report from Chex Systems to find out why you were denied a bank account.

I would start there. Don't worry about your credit score then. Just focus on paying the debt and figure out what issues are flagged in Chex's system.
posted by GuyZero at 2:45 PM on March 30, 2015


Best answer: Congrats on facing up to this; it is so stressful but you're on the path now. You are not a bad person because you had financial trouble.

I just have to make my case re: any old, charged-off debts that have been passed around from agency to agency for literal decades, and no longer impact your credit score. I would recommend putting that money to better use. Paying your student loans and active debts, bettering your life situation, starting checking and savings accounts would be MUCH better uses. Hell, throwing it in the garbage would be a better use of your money. Even if you did somehow locate which collection agency now "owns" your debt (if any agency does even claim it, given the age of your debts), for which they will have paid literal pennies, giving your money to that agency does not seem like a sensible use of your extremely limited funds. These companies are known as "zombie debt collectors" and you can read up on their practices online and decide if the hassle of giving them money thereby reactivating your debt and sacrificing your credit score would make you feel morally absolved. I seriously encourage you to rethink that part of your problem.

This is one of those situations where you'll do better if you can somehow separate the emotional component from the practical. Look, I understand the anxiety and the guilt. Oh god, the guilt. I understand the feeling that you incurred a debt and you have to pay it no matter what or else you're not the person you thought you were. But the thing is, your creditor doesn't want that money and can't accept it. The original collection agency they sold it to doesn't even want it anymore. At this point you'd be handing free money over to some faceless and likely shady disinterested party at the risk of your financial future.

You deserve to use the income you work for to better your life.

You have taken a HUGE BRAVE step in the right direction, even asking this question. This is terrifying but you are not alone--so many Americans are in debt it's basically an industry in itself. The first thing to do is pull your free reports from ftc.gov, which will list every single debt they have on record for you. Then you can pay for the scores if you really want to at this point (you know are low so it's not as important at this time as reviewing your reports.) Seriously, it's so scary and overwhelming now, but once you have all your reports printed out in front of you you can face up and get to work. You can make a budget and prioritize who gets paid first and how much. Generally creditors are willing to work with you-- some money is better than no money, so they will take what you can give.

The bank probably did not deny you an account due to credit score, but probably something banking-related. If you can clear that up first, that'll be another HUGE BRAVE step.
posted by kapers at 2:51 PM on March 30, 2015 [2 favorites]


Best answer: A large part of the answer to your question really depends on what your current credit situation is, and what the specific reasons your scores are (supposedly) so low. There could be many reasons, each with its own snowflake solutions. I agree that your credit score is probably not why you were denied a bank account.

Step 1: Request your credit reports as mentioned above from this site. These are your 'official' files, and while they don't include a score, they show you the details of your credit history which will be helpful.

Step 2: Go to one of the free score sites (I subscribe to both CreditKarma and Credit Sesame). These aren't 'real' scores, as was mentioned - but you don't care about that. They are ballparks for your own reference at this point. They will give you information on general issues that are affecting your score. They will also provide an overview of your accounts and what state they're in.

What comes next depends on what you find in step 2. I'll try to summarize what to do about certain items. Whatever I describe below though, your top priority is keeping current accounts current. This is your #1 priority over anything else. If your student loans aren't late, don't let them become late to implement any of these solutions. These are all secondary to keeping current on what is already listed as such. Here's a list of the most common issues that will affect your score, in order of priority of what you should focus on if you find them:

Public Records / Judgements / Liens
Not much you can do about these until they're paid. Once they are paid, sometimes people have luck going back to the court and having it vacated, so that it drops off your report. Otherwise they remain for 7 years after the date the Judgement was made / filed. These are the more 'official' and 'bad' of the derogatory items since they involve some sort of court action. Clear these up as you can, and once paid try to get them removed.

Collections
If you have accounts in collections, pay attention to the date of first reporting. These will go away 7 years after that date. If they are old, consider letting them just fall off. If your morals wants that you should pay them, do so, but before just writing a check, contact the Collection Agency with a 'Pay for Delete' letter. This is an offer to them that you will pay your debt in return from them completely removing the collection from your file, not simply marking it paid (which has debatable impact on your score, but it is certainly worse than not having it there at all). This link has help and an example. Those MyFico forums are a great resource in general, too.

** Be aware that many people in the above forums have reported that paying off a collection - especially an older one - DOES hurt their score, albeit slightly, presumably because that account now shows recent activity, which affects the score calculation when it sees it as a recent account instead of old. Regardless, the account should only appear until 7 years after the original delinquency, not date of last contact.

Chargeoffs
Here, the creditor has written off your debt. It's possible you may have charged off accounts that are also reflected in collections. You'll have to figure that out. For COs, again if it's your moral goal to repay these debts, contact the original creditor and do something similar to the above PFD. Offer to pay off your debt in return for them removing your account from your credit file or at least reporting it as current. Might work, might not. Can't hurt to try. If you match a collection account with one of these chargeoffs, work with the Collection Agency first with the aforementioned PFD letter. (Many times the original creditor won't even have your account available anymore.) If you have success there, contact the original creditor afterwards with a goodwill letter asking for a better status on your file.

Account balances too high
A large portion of your score is determined by your balances vs. limits on your credit cards, both collectively and individually. The rule of thumb is 30% balance to limit ratio is a big cutoff point, and 10% is ideal. There's a number of theories out there on how best to deal with these - there's the snowball theory which says pick off the smallest ones first, and as you pay them off you 'snowball' that money into paying off the next smallest one a little quicker, etc. The other main theory is to attack highest interest first. How you go about it depends on your main goal - paying the least amount of interest or getting your score raised quicker? Up to you.

There is light at the end of the tunnel. My scores were in the mid 5's only a few years ago and with a little letter writing, a little time, and being blessed with a better income to help pay everything off, I'm now around 800. Feel free to memail me with questions specific to your report and I'll be happy to help.
posted by SquidLips at 5:45 PM on March 30, 2015


I had a monster debt accumulate while I was in college. It was overwhelming and I had credit cards and debt collectors calling every day, at home, at work, at school... Gah, even now when I think of it my blood pressure goes up!

First, I would really suggest taking another job if you can. Working two jobs stinks, but everything you make (even if it is just being a checker at the grocery store) you throw towards your debt. EVERY PENNY. If you work 10 hours a week at 8 bucks an hour, that is 80 (or like 65 after taxes depending on where you live) that you get to send towards your piece of mind and emotional well being.

Now, I like credit karma. I've heard people think it is a dumb website, but it had good, free tools to use that can help you learn to manage your debt, as well as give you a general idea of your credit score and what steps will make your score go up.

Now, what I ended up doing was starting with the small debts first and worked my way up. Getting a $500 credit card debt paid off felt good, and so moving on the cards with thousands on them seemed more manageable.

Some folks choose the debts with the highest interest rate to pay down first, or choose the debts that will directly impact credit scores (utilities, car payments, student loans, etc) first.

Regardless, choose one thing and pay it off. Pay minimums on everything until the one is paid off. Once that is done, tackle the next one. Take the money you were throwing towards the first debt and apply that, plus your minimum payment, to the next one. Don't worry about how long it takes. Just worry about making those payments on time.

Good luck with everything.
posted by spacecowgirl at 9:21 PM on March 31, 2015


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