Credit scores and debt issues are plaguing consumers these days. For example, credit scores, with more restrictive lender guidelines and confusion over calculation, are resulting in fewer mortgage approvals and homeowners unable to take advantage of record low refinancing rates. Debt collection companies are illegally harassing consumers to repay debt, often when there is no legal obligation to do so.
Debt issues: If debt collection companies keep calling you, politely tell them to stop and if they don’t, a complaint will be filed. There are so many complaints filed these days that reporting harassment probably won’t help. But do not be intimidated by anything the caller says, even threats of legal action.
Unless you have co-signed, you are not responsible for the debts of relatives, deceased or living. Moreover, outstanding uncollected debt has a statute of limitations which once exceeded is no longer legally collectable. Do not ever make a payment — even partial — on any long outstanding debt even if it is yours. Such action can restart the clock on the time limitation. Non-payment of debt has already significantly hurt your credit standing. Even repaying the entire outstanding debt will not help improve your credit score. Make timely payments on everything else to gradually improve your credit score. After seven years, the owed debt is wiped off the credit report, improving your score.
Credit scores: Scores are not easy to manage owing to two factors beyond individual control. First, there’s more than one credit score. Most popular is the FICO score. But each of the three credit reporting agencies has their own formula for FICO-based scores.
Adding to the confusion, lenders are not consistent with the scores they use for accepting applications and assigning risk classification. A home mortgage company may use a different score than a credit card issuer or auto finance company. Second, lenders are not responsible for credit scores; they merely report data to the credit agencies which use it with their own scoring criteria and then report the results to the lending community. This leads to all sorts of problems for the consumer.
For example, one big factor in credit score calculations is the ratio of outstanding debt to the availability of credit; the higher the ratio, the “riskier” the borrower. Owing to the recession, however, lenders (especially credit card issuers) unilaterally closed inactive accounts and/or reduced lines of credit. This had the unfortunate result of increasing the debt ratio, making the borrower appear more risky. The credit score takes a hit (as much as 40 points) even though the borrower has an excellent payment history. New loan applications can be denied or done at higher risk pool rates of interest.
These days, even if you try to reduce your overall monthly debt payments in keeping with better budgeting and reduced personal risk, you can still get hit with credit score reductions. Mortgage modifications (changes in loan terms), for example, are reported as “partial payments” in accordance with credit data industry rules. In effect you are delinquent and your credit score will reflect this “fact.”
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