Ask Liz Weston

Get smart with your money

Credit & Debt

Does paying down installment loans help your credit?

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Dear Liz: I know a high balance on a credit card hurts your credit score and that it’s best to keep balances low and pay them off each month. But does the same theory hold true for installment borrowing such as auto or student loans, which obviously have a higher balance in the beginning of the loan repayment period?

Answer: Paying down installment loans will help your credit score, but typically not as dramatically as paying down balances on revolving debt such as credit cards.

The leading FICO credit scoring formula is much more sensitive to balances on revolving accounts. The wider the gap between your available credit and the amount you’re using, the better.

So is it pointless to try to fix credit report errors?

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Credit Check 1Dear Liz: I watched 60 Minutes last night regarding the 3 credit bureaus and was amazed at what I learned.  I was hoping to spend time trying to repair our credit score, but according to the report last evening, it sounds like a total waste of time as the three credit bureaus basically are not accountable to anyone and they very rarely take action in your defense.  Was this a one-sided view?

Answer: The credit bureaus would tell you yes, but the answer is way more complicated than that.

The show reported that 40 million Americans have errors on their credit reports. That’s about one in five U.S. adults covered by the credit bureau industry. About half (one in 10) have errors serious enough to hurt their credit scores.

(Update: A Federal Trade Commission report released today said one in four had at least one “potentially material error” on at least one of their three credit reports and that one in 20 consumers had significant errors on their credit reports that could cause them to pay more loans.)

That’s a pretty high error rate, but an even bigger problem is that the process to fix mistakes is almost completely automated and structured to favor the data provider (the banks, lenders and others supplying information) over the consumer. Here’s how the Ohio attorney general described it:

“The federal law says that if you believe that there is a mistake, you can go to them and they have an obligation to do a reasonable investigation. They’re not doing a reasonable investigation. They’re not doing an investigation at all.”

The show interviewed former bureau employees in Chile who confirmed what others have reported: that their jobs were to assign two-digit codes to the complaints. That’s it. Then the complaints are forwarded to the lenders and other data providers for response.

People can and do get errors fixed if the data provider acknowledges the error or simply fails to respond to the credit bureaus’ queries. If the data provider continues to insist it’s right, however, it’s pretty tough (if not impossible) to get the bureaus to step in.

That’s how people get caught in seemingly endless cycles of disputing mistakes only to have them reappear, or never disappear, from their reports.

The credit bureaus, which apparently turned down opportunities to respond on camera, now point to a study by the Policy and Economic Research Council that found 95% of consumers were satisfied with the outcome of their disputes. The study was paid for by a grant from the Consumer Data Industry Association, which represents the credit bureaus.

It’s not exactly pointless try to fix errors. The FTC report said four out of five people who dispute errors get results. You should still try, and you may well find it’s possible, but you should plan to be tenacious if your initial efforts are rebuffed. (You should get your free credit reports directly from www.annualcreditreport.com. Don’t go to other, lookalike sites, some of which are owned by the credit bureaus but that aren’t the federally-mandated site that gets you your free reports.)

You should also support efforts by regulators and consumer advocates to require the credit bureaus to put a more responsive system in place.

Don’t close accounts; pay off debt instead

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Dear Liz: I’m 22 and a graduate student with only one year left before I enter the “real world.” I have four credit cards — one store card, two Visa cards and one MasterCard — only one of which carries a balance. I want to make the best decisions regarding my financial health. Which would be better for my credit: closing the account that’s the oldest (opened when I was 18) but that will no longer be used because of its small credit limit and high interest rate, or leaving the line open?

Answer: Closing accounts can’t help your credit scores and may hurt them. If you had a long credit history and many accounts, the impact of closing a low-limit account shouldn’t be that great. With such a short history and relatively few accounts, though, you could be doing unnecessary damage to your scores.

The best thing you can do for your financial health, now and in the future, is to pay off your credit card balance. Credit cards should be used as a convenience, not as a way to live beyond your means. Resolve to charge no more than you can pay off in full each and every month. You’ll save yourself a fortune in interest and help protect yourself against bankruptcy.

You don’t have to be in debt to have good scores

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Dear Liz: How deep in debt must a person get before he or she is able to get a mortgage on a home? My grandson, age 26, has been steadily employed by the same company for nearly six years. He rents a place he can afford, buys used cars for cash, has a nice savings account and basically avoids debt by not buying things he can’t afford with cash. Now he would like to begin investing in a home. When applying, however, all he hears is that because he doesn’t have a credit rating, he can’t get a loan. Does he really have to create debt in order to get a loan?

Answer: The idea that you have to be in debt to have a good credit score is a persistent and destructive myth. It’s just as wrong as the idea that all you have to do to have good scores is manage your finances responsibly.

To have good credit scores, you must have and use credit accounts. This does not mean you have to be in debt or carry credit card balances. Simply using a couple of credit cards lightly but regularly and paying them off in full is enough to build good scores over time.

Your grandson may need to start by getting a secured card, which offers a line of credit equal to the amount of cash the applicant deposits at the issuing bank. Websites such as NerdWallet, CreditCards.com, CardRatings.com and LowCards.com highlight current secured card deals.

He also could consider “piggybacking” onto someone else’s good credit by being added as an authorized user to that person’s credit card. In some cases, the other person’s history with the card can be imported to your grandson’s credit bureau files. The person considering adding your grandson should check with the issuer to see whether such an import is possible.

Be careful when settling old debts

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Dear Liz: I paid all of my old collection accounts except for two, which now are beyond the statute of limitations. I would like to find the best way to negotiate with the collection agencies without getting sued. Even though the original delinquency was over four years ago, the agencies are reporting these every month as current debt, which is really hurting my credit score. My intent is to offer a lump-sum settlement amount if they will remove the report from my credit file with the bureaus, or alternately in return for a “paid” notation on my report file. However, I cannot afford to pay the amount they say I owe.

Answer: If the collection agencies are simply reporting your debts each month with a correct “date of last activity” — usually the date you stopped paying the original creditor — your credit scores aren’t being hurt anew each month. If the agencies are reporting a new date of last activity each month, however, they are illegally re-aging your debts. You can dispute this illegal reporting with the credit bureaus and directly with the collection agencies. If the errors aren’t corrected, you can file a complaint with the Consumer Financial Protection Bureau, which took over regulation of the major credit bureaus last year.

Filing disputes is not something you’d want to do if the debts are still within the statute of limitations, said Michael Bovee, president of Consumers Recovery Network, which specializes in debt settlement. You wouldn’t want to draw attention to yourself or your debts. But you run little risk in filing a dispute now since the debts are too old for the collectors to file a legitimate lawsuit.

Bovee said that simply contacting the agencies about the debts shouldn’t restart the statute of limitations, but debt expert Gerri Detweiler of Credit.com advised caution.

“It may be well worth it to consult a consumer law attorney,” Detweiler said. “Otherwise [you] may reset the clock on these debts and owe the entire amount plus interest.”

You can get referrals to consumer law attorneys at the National Assn. of Consumer Advocates, http://www.naca.net.

You don’t have to pay the reported debts in full to reach a settlement, Bovee and Detweiler agreed. Often the totals reported are inflated by interest and fees, and the collection agencies probably paid only pennies on the dollar to buy this debt.

Start by saying you have only so much money to work with and offer 20% to 30% of what the agency says you owe.

“A realistic expectation for negotiating a debt this old would be to settle the account for 50% or less than the current balance owed,” Bovee said. “If they raise objections, there is no problem in mentioning that you are aware that the debt is past the statute of limitations for you to be sued, but that you are just trying to do the right thing.”

Don’t say you’re trying to improve your credit, since that gives the collector leverage over you, Bovee said.

You can negotiate to have the collections deleted from your credit reports, but the original delinquencies and charge-offs will remain and will continue to affect your credit scores until they pass the seven-year mark.