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Charge-Offs Will Cause Lenders to Write You Off

 
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June 20, 2012
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QDear Erica,

I had two credit cards I was late on and then never paid off. On my credit report they show as charged off. My credit score is 520. How can I bring the score up if I don’t have any other credit cards? I have a car that I make payments on every month, but I’m only the co-applicant. Although I’ve made my car payments on time for the past two years, my credit score is still the same. – Nat

AHi Nat,

I’ll explain what’s going on with a scenario. Pretend an acquaintance — we’ll call him George — came to you for a loan. He seems like a fine guy, and you know he’s employed. You’d like to help him out. But you’re also smart, so to find out if it’s a good idea, you make a few calls to a few friends who know him well. Soon you discover that George’s financial habits have been less than stellar. He’s borrowed money from them, but after a few sporadic payments, he stopped altogether and never repaid them!Ask Erica

Surely you would come to the conclusion that lending to George based solely on his word is too risky. You might, though, if he left his car with you, or if someone with a great borrowing reputation promises to pay you back if he doesn’t.

What you did was check George’s credit report (his friends’ testimony). It was bad, but you might consider the arrangement if he offered up collateral (the car) or a more responsible friend’s guarantee (a co-signer).

This is exactly what a bank will do to you — and why you need to add positive information to your consumer credit report.

Credit reports are objective records of a person’s borrowing history. The moment you got those credit cards, the issuers began sending all of your activity to the three major credit reporting bureaus — TransUnion, Equifax and Experian. These companies list all kinds of information that lenders and businesses want to know so they can make a sensible decision about you. Reports include an account’s maximum credit line, your current balance and your payment pattern for the past seven years. They show other loans too, such as that car note, which is being reported both on your and the co-signer’s reports.

Because you’ve defaulted on your credit card accounts, your reports (and therefore your scores since they are generated from that data) are not attractive. Just as you would tell George that you wouldn’t extend him an unsecured loan without a co-signer, a bank would be just as wary about you.

The payments you or the other person are making on the car note are fine, but not good enough to mend the damage that the unpaid debts are doing. FICO scores range from 300 to 850, and an excellent score is in the mid-700′s. Yours is definitely on the low end.

To bring your report and those numbers up, you’ll have to do three things:

  1. Pay off your current debts. Even if the balances have gone to collections, delete them. A paid balance looks better than an unpaid one.
  2. Get a secured credit card. You can get a credit card that is guaranteed by money you put down with the bank and charge smartly from here on out. I don’t recommend getting a co-signer for a card because linking to someone who has already proven to be a bad credit risk puts their own credit in danger.
  3. Wait. The older your past problems become, the less they tend to matter to creditors. FICO scores weigh more recent information heavier than older information, too. After seven years, evidence of the defaults shouldn’t even be reported.

You can do this, Nat!

Got a question for Erica? Send her an email.


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