Tag Archives: credit rating

Aging like fine wine

Building credit takes time. As I often tell my clients: credit building is a marathon rather than a sprint. The age of credit is an often misunderstood concept as in today’s fast paced society it is something that can be very important to improve credit history.

The average age of accounts is one of the factors that contribute to your overall Length of Credit History, which itself accounts for 15% of your total FICO credit score. This is calculated as a simple, non-weighted average; it’s the sum of the ages of your credit accounts divided by the number of accounts that you hold. These are also ranked in importance: the age of your oldest account, average age of accounts, and age of your newest account.

When you close a credit card, it can stay on your credit report and continue to age for 10 years. This means that you could open a credit card today, cancel it tomorrow, and 9 years from now, it would still show up on your credit report and contribute to your credit history.

An example of this would the average of your credit cards. Card 1 is 7 years old, card 2 is 3 years old and card 3 is 2 years old. We could take the average between the 3 cards to obtain an average age of 4 years between all credit cards. If you close one of the cards and fast forward 10 years card number 1 is now 17 years old, card 2 is 13 years old and card 3 is 12 years old. Taking your average age of accounts to 14 years old. This can still be in effect due to credit card accounts lingering on your credit report can still effect your history for up to 10 years. The most important concept to remember is not to close the longest (oldest) open trade as this will hurt your average age of your accounts and your credit score. Closing the newer cards will have less of an impact due to them being newer, but it is important to remember when closing a credit card that there is credit capacity (amount of available credit vs amount of credit used) that is lost when this happens. If the capacity is reduced thus will also hurt your score if your balances are too high on your remaining cards. Only close out credit accounts as needed (if they’re not installment loans of course).

Credit utilization can be tricky but if one knows how to navigate the complexities it can be a rewarding tool. Letting time work it’s magic on your open credit accounts cab do wonders for your score. Until the next time dear readers excelsior.

Collect call

What Happens If You Don't Pay a Debt Collection

Dealing with credit can be tricky, there are different types of factors that build your credit and factors that hurt it. One such factor that hurts your score is having collections out against you. Collections are oftentimes neglected and can come back around in the future.Did you know that 71 million Americans have collection debt of some sort or another? (courtesy of urban.org)

Collections come from when a loan or bill has gone unpaid or was charged off/ listed as a loss on a company’s profit and loss statement and is given over to a collection agency. The collection agency then goes to contact you to collect the debt to be paid off. Once the collection is paid then it is cleared from the book of the collection agency and is reflected on your credit report if it is paid off. The same applies if a bill is listed as a collection on your credit report.

In my field of expertise, I have come to know that letting collections sit is not conducive to a healthy credit rating and can serve as an annoying anchor weight stopping your credit from reaching new heights. It is imperative to get rid of collections as soon as they are discovered or If something is going towards collections. Even if a bill disappears somehow and it was not paid there could be a chance it was sent to a collection agency to pester you to get their payment. These are not to be taken lightly. Even if a collection is paid it remains on a credit report for seven years but despite this, it could show that it was paid and prevent a collection agency from bothering you about the same debt. This is because a collection agency has seven years to collect this debt before they lose their chance to get paid. If it is coming down to the wire the collection agency can sell this debt to another agency and the “doctor’s bill from 10 years ago” could be lurking around for the next 20 years! Like dirt under a rug, it is waiting to be disturbed and make a mess again.

Collections can hurt your FICO credit score, contrary to a commonly held belief I have come across in my time in the field and research. The claim is that when updated from “unpaid” to “paid,” the collection can appear to the scoring formula as having originated more recently than it did, which, if true, could lower the score. However, the “assigned” date on the credit report does not change when the collection status is updated, nor do the credit scoring formulas give fewer points for a paid than an unpaid collection. Due to the length of time since the debt was assigned to a collection agency weighs so heavily on a credit score, the removal of the most recent collections can often be expected to raise a score. On the other hand, if there are multiple collections and it’s the older ones that you’re able to get removed, such as via a “pay for delete,” you may not see any improvement in your score following the removal of these older collections. So there is no evidence to support the myth that paying a collection can lower a score.

Collections can happen to anyone, whether you are already managing your credit responsibly or have hit hard times financially. Separating the facts from the fallacies about collections and credit scores can help you make more of the right moves and avoid some of the bad ones that can have an undesirable result. One way to check on the impact a collection might be having on your credit is to obtain your credit report from your bank, credit union, or from even the bureaus themselves. You can also go to sites like annualcreditreport.com to get your report for free as well. Do not let collections sneak up on you, something that might seem insignificant can still have an impact in the long run. Until the next time friends, excelsior!