Too often we hear real estate agents or loan officer tell a client to pay off some old collections, and then wonder why their credit score DROPPED! So I want to try and explain how sometimes doing the right thing, is not doing the right thing. Each creditors information or trade line reports to the credit report with a MOP Rating (Current manner of payment) with a 1 rating being good, and a 9 rating being the worst. All charged off and collection accounts are recorded as a 9 MOP rating. The moment an account in collections reaches a 9 rating, the dollar amount of that account no longer matters. Meaning a $10 collection and a $5000 collection are viewed the same in the eyes of the FICO scoring algorithm. The 2 most important factors now are paid/unpaid and the date of last activity or date of last update. When it comes to credit issues time helps heal things. Let me explain, if you have a $50 medical collection on the credit report that hasn't updated since 3 years ago, and you have a $50 medical collection that just reported last month. The newer collection that reported last month will have a much greater negative impact on the client’s credit report. Here is where it gets tricky and what normally causes the issues of scores dropping. When you just go through and pay off old collections, it will re-age or update the collection to the present. It is basically updating the date of last activity to now. Since it is a collection, it will still be rated as a 9 MOP rating. What this means is the FICO scoring algorithm doesn't differentiate that it was an old collection that was just updated. Rather it just sees it as a new MOP 9 rated account was added to the credit, hence dropping their scores because it thinks a new collection hit their report. Credit Guys has a few ways we can help your clients avoid this pitfall. We can attempt a pay for deletion on these accounts, meaning we can negotiate a settlement amount with the promised the collection will then be completely removed from the report. If we are unable to receive the previous outcome, we will negotiate a settlement amount where they will NOT update the date of last activity.
On a daily basis we hear people complaining to us about how they pay their bills on time and wonder why they don’t have perfect credit. Well that is because credit is complicated and there are many different factors that go into the scoring. Payment history only accounts for up to 35% of what goes into your scores. So I want to explain “Credit Utilization” which can account for almost just as much as paying your bills on time at 30% in this short article. An important note to remember is credit scores were developed to help the banks determine how much of a Risk you are to lend money to. So the second largest (30%) factor in helping the banks determine your risk factor is “Credit Utilization”, which is simply referring to your balances in relation to their limits on revolving accounts. They have developed certain thresholds to help them determine your risk as it relays to balances on your revolving accounts. Those thresholds are as follows; 0% = No Data- If you don’t ever carry a balance they have nothing to report so there is “No Data” being submitted to your credit reports. 1-10% = Perfect Ratio -Consistently carrying a balance in this range will maximize your credit utilization factor. 11-30% = Good Ratio- This is considered acceptable and will get you a good positive rating. 31-50% = Neutral Ratio - You are getting closing to becoming a “Risk” so you will not get hurt here but you won’t get rewarded either. 51%+ = Bad Ratio - Once you break this threshold you are becoming more of a risk and the closer you get to 100% or Maxed Out levels the more of a risk you become and the more your scores will be negatively affected. How to determine your “Credit Utilization” is very simple, just take your balance and divide it by your limit. Example: Your have a $387 balance on a $1000 limit credit card. You are 38.7% utilized on this account. While Credit Utilization is a large factor that can negatively impact your scores, another important note to remember is your credit score is a snapshot of what is on your credit at the time a report or scores have been requested. Meaning it is very simply to fix this issue. Your final utilization score is based on an aggregated total of all of your accounts. Sometime it is easier to pay your balances down, sometimes it might be easier to open a new account or increase the limits on existing accounts. Some people are going to call me crazy about raising the limits or opening a new account. Remember the goal here is to bring your utilization percentages into anacceptablerange, thisdoes not always need to be done by paying down the balances. While that is the most preferable route, it is not the only way or the best way in some cases. Yes, I understand that increasing old limits or adding new accounts will require a new inquiry to be placed on the report and the length of history could also be affected. But in this game of percentages, inquiries and history hold a MUCH lower % than Credit Utilization in regards to credit scores. So getting your utilization in line at the expense of a new inquiry or account is well worth it. Credit Utilization is a constant battle, and is something that always needs attention. It is not something that can be reviewed once a year and addressed then.
In this book Keith Knapp CEO and Dave Fulk President of Credit Guys will give you an in depth look of what is in your credit and how to understand it. **DOWNLOAD HERE** Guide_To_Understanding_Credit.pdf