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Bad Credit and Personal Loans Questions and Answers

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Question: i have two hits on my credit that concern me and that i would like to fix if any way possible. i have two accounts with a credit card company in which a settlement for less that the total balance owed was offered by the company and accepted by me. they stated that this would be neither a bad or good hit on my credit. i have sense obtained a credit report and my credit score is very low. everything else that i have on my credit is current and never late. my question is, can settlements for less than total amount owed be a negative hit on my credit?, and if so, how can i get them removed or paid in full?

Answer: Credit reporting agencies determine credit ratings based on an extremely complex formula that considers a large list of variables, including number of credit accounts open, the credit limit and the current balance on those accounts, whether and how many past due payments have been made, and whether any debts are in default (not paid according to the original agreement).

I am guessing that the two accounts you reference were defaulted on, because companies will only usually accept partial settlements once the accounts are way overdue and it does not appear likely that they will ever receive full payment.

The fact that you settled the accounts with these companies by giving them the partial payments is not the main cause of your low credit rating. The reason your credit rating is so low right now is because those accounts were defaulted on before final arrangements were made with the companies.

While full payment of the debt might have kept your credit rating from being slightly less low than it is, the difference is very small compared to the effect the defaults themselves are having on your credit rating. Even if you go back and pay the rest of the amount now, it is not going to change the fact that the defaults happened. Unfortunately, now that they have happened, there is no way to erase these defaults from your record.

The Bad News: The law allows credit reporting agencies to use data from the last 7 years in your report. At this point, you can only move forward and wait for the 7 years to elapse, so that these negative incidents drop off your credit report.

The Good News: What you CAN do, in the meantime, is improve your credit rating gradually by doing as many of the following things as possible:

- Pay EVERY bill on time: pay them as soon as you get them, if you can. This is one of the BEST ways to make yourself look like a better credit risk to a lender if you try to get a mortgage, loan, or credit card.

- As far as credit cards, pay them in full every month if you can. If you can't, pay as much as you can every month, not just the minimum payment. (If you don't charge any more, and you only pay the minimum payment on a debt of several thousand dollars, it will take you more than 40 years to pay it off!)

- Better yet, don't charge anything. Spend money only if you have it in your bank account.

- You should never have more than a couple of active credit card accounts. Pick the two that are most useful or important, then cut up the other cards, and write to those companies, asking them to close your accounts (you need to put this in writing, and save copies of your letters).

- If for any reason, you ever have a catastrophic month or period when you are unable to pay all or part of your bills, CALL ALL YOUR CREDITORS IMMEDIATELY to let them know you are having a problem, and asking them if they will be willing to lower or waive your monthly payments for a short time. You will be surprised about how willing companies will be to work with you if take this approach. The worst thing you can ever do is just not pay a bill because you don't have the money -- this will absolutely trash your credit rating, in addition to possibly getting your accounts declared in default and sent to collection agencies.

Many, many years ago I got into bad credit trouble by paying bills late. I learned my lesson, and it took awhile, but by following these guidelines I have been able to get my credit rating up so far now that it is considered stellar.

One final note: DO NOT EVER be taken in by companies promising to "fix" or "repair" your credit rating. They can NOT erase bad debts or other "black marks" for you, and if they tell you otherwise, they are lying. These so-called credit-repair companies are, at best, companies who are charging you for doing what you can do for yourself, and at worst, they are total scams.

Hang in there, be patient, and follow the guidelines. Eventually, you will see it pay off in an improved credit rating.