Good vs. Bad Debt

When you look at your bills each month, you may feel overwhelmed by the amount of money that you’re spending on debt. Sometimes debt might seem like a trap that you only want to fight your way out of, but not all debt is bad.

When a lender looks at your credit report to see what kinds of accounts you have, they will look at some debts more favorably than others. If you’re focusing on getting out of debt, you need to know which debts are considered bad and which are considered good.

Some Debt is Good

Some kinds of debt are actually investments. It might sound preposterous, but it’s true. If you used debt to finance something whose value will appreciate or contribute to your financial health, then you’ve incurred good debt.

What are some examples of good debt? A student loan borrowed to finance education. It’s been proven that people with college degrees make more money over their lifetimes, so a student loan is an investment in yourself. A mortgage loan used to purchase a home is good debt since homes typically appreciate in value.

And Some Debt Is Bad

Now you know there’s good debt. You can incur bad debt too. Anytime you accumulate debt to pay for something that can be consumed, the debt it bad. Once you’ve consumed the item, there’s no value in it, yet you’re left with debt to pay for something you no longer have. Bad debt is financially unhealthy.

Because of the things that credit cards are used to purchase, credit card debt is often bad debt. When you use credit cards to purchase everyday items that you will use or that will depreciate in value soon after they’re purchased, you have accumulated bad debt.

Auto loans, by definition, are bad debt, because the car will depreciate in value as soon as you drive it off the lot. Even though transportation might be a necessity, the auto loan is still bad debt.

To maintain your financial health, you must make sure that you don’t accumulate too much debt, whether it’s good debt or bad debt. It is possible to become overloaded with debt, even good debt, to the point that you struggle to make ends meet.

Debt Settlement

Debt settlement companies say they can relieve financial strain by lowering your monthly payments and reducing the amount of debt you owe.

This may seem like a solution to your money woes, but there’s a lot that these companies don’t tell you.

Like their high administrative fees for example. Debt settlement companies charge hundreds of dollars and fees which they never tell you about, because you don’t ask. Most consumers that use debt settlement as an option are so desperate for relief that they put their trust into the companies without exploring other options or digging deeper to find out how the company operates. They usually don’t find out about the fees, until it’s too late.

Not only do debt settlement companies charge you high fees without ever telling you, they also use your monthly payments to fund these fees before sending a single penny to your creditors. Months go by, your credit cards are reported as thirty, sixty, and ninety days late, and your credit score plummets. But this is exactly what the debt settlement companies want.

To settle your debts, these companies wait until your debts have fallen behind a few months, then they contact your creditors to negotiate a settlement. Debt settlement banks on the fact that your creditors are more willing to negotiate after you’ve been late for a few months. Sometimes this works, and sometimes it doesn’t. If it doesn’t, your creditor could end up charging off your account. A settlement hurts your credit score. A charge off hurts it even worse.

Meanwhile, you continue to send your payments to your debt settler. You think your debts are being paid. Actually, they’re not. Your creditors are getting impatient. You may receive phone calls and letters from your creditors, which you have been advised to ignore. Your creditors are fully within their rights at this point to file suit or bring judgment against you. In either of these cases, you could end up paying your creditors far more than you owed to begin with.

Before you sign an agreement with a debt settlement company, make sure you have all the facts. Find out about any fees they charge and how they work with your creditors. If a company advises you to stop paying your credit cards for any amount of time, run the other way. Debt settlement can end up hurting your credit a whole lot more than it helps.

Disputing Your Credit Report

Consumer reporting agencies, better known as credit bureaus, collect financial information from you from institutions with which you have a relationship.

This information is compiled into a credit report. If you’ve had a credit card, loan, or a collection account,  chances are you have a credit report.

Creditors and lenders to whom you make an application for credit use your credit report to determine how you pay your bills. They then use this information to determine whether or not to extend credit to you. If the information contained in your credit report is incomplete or inaccurate, you could be turned down for credit.

In the case that your credit report indeed has information that is not correct, you are allowed to dispute this information. The Fair Credit Reporting Act provides you with the advantage of having the information provider confirm or update information that you deem as being incorrect.

When you find inaccurate information on your credit report, the first thing you should do is contact the credit bureau that the report came from. Write a letter to the bureau stating the information that you think is not correct. Provide copies of any documentation you have to support your claim and request that the information be removed. It is a good practice to include a copy of the credit report indicating the items that are questionable.

After receiving your letter, the credit bureau will investigate your claim, forwarding any information you provide about the claim to the creditor or lender who provided the information. The creditor then has 30 days to provide proof supporting the information on your credit report. If the creditor determines that the information disputed is indeed incorrect, it is required update the account with all three credit bureaus.

Once the investigation has been completed, the credit bureau must let you know the results. If there were any changes to your credit report as a result of the dispute, you must be provided with a free copy of your updated report. You can also request that the credit bureau send a notice of the changes to any party that has received your credit report in the last six months.

It is best to send disputes via certified postal mail so you have verification that the dispute was sent.

Included below are the addresses for each of the credit bureaus:

TransUnion
P.O. Box 1000
Chester, PA 19022
1-800-888-4213

Equifax
P.O. Box 740241
Atlanta, GA 30374-0241
1-800-997-2493

Experian
P.O. Box 2104
Allen, TX 75013-2104
1-888-397-3742

How Inquiries Affect Credit

Ten percent of your credit score comes from applications made to your credit report. Each time a creditor or a lender takes a look at your credit report to determine whether or not to extend credit to you an additional inquiry is placed on your credit score.

If you’ve checked your credit report lately, you might have noticed that there are several inquiries from businesses you might not have heard of. Not all of these inquiries have an effect on your credit score.

The inquiries that are included in your credit score are those from your own applications for credit. When you make an application for a credit card, auto loan, or mortgage, you have given the lender permission to look at a copy of your credit report. This action places a voluntary inquiry on your credit report. Those inquiries that you initiated by applying for credit are the ones that affect your credit score.

Other inquiries that might appear on your credit report do not count towards your credit score. These inquiries include those made by prospective employers, businesses that you already have credit with, business seeking to offer goods or services to you, and your own requests for credit reports. While these inquiries do appear on your version of the credit report they aren’t included in the calculation of your credit score. If you didn’t apply for credit for an inquiry that appears on your credit report, then it’s very likely that the inquiry isn’t included in your credit score.

Shopping around for the best rates on mortgage or auto loans doesn’t hurt your credit score, if the shopping is done within 45 days. All mortgage and auto loans made within a certain span of time are treated as a single entry by the credit score calculation. Note that some lenders might choose to use an older version of the credit score calculation that reduces the shopping span to 14 days.

Depending on the information already in your credit report, your credit score might not decrease at all when you make an application for new credit. If you have a longer credit history and more accounts, your credit score usually won’t decrease all from a new application. If it does decrease, it won’t be by more than a few points. Additional inquiries have the greatest effect on people who have short credit histories and only a few accounts.

Although credit inquiries will remain on your credit report for two years, those made within the past six months have the greatest impact on your credit score. Even so, since inquiries only count for ten percent of your credit score, your

Effects of a Bad Credit Score

Buying and selling goods and services is the hallmark of today’s society. Except for the air you breathe, everything you need for living must be purchased - clothes, food, transportation, and shelter. Three little digits known as your credit score have a great influence on your ability to purchase these things.

Your credit score is a numerical summary of your financial history. The number is calculated via an algorithm that takes into account your payment history, debt level, length of credit history, credit applications, and types of credit. Certain actions, such as making several applications for credit in a short period of time, have a negative effect on your credit score, which can range from 300 to 850. The lower your credit score, the harder it will be for you to obtain certain services.

You might first think that your credit score shouldn’t come into play as long as you aren’t purchasing something using credit. Many service providers define credit in a much broader sense. The electricity company defines credit as extending one month of service to you when you. Your cell phone company considers your one- or two-year contract as a form of credit. Each of these companies will use your credit score as a determining factor to extend these services to you.

A low credit score might mean that you pay an additional deposit for services such as utilities and cellular phone service. Even worse, you could be denied for some services solely on the basis of your credit score, even if you have the money to pay for the service up front. Many landlords use your credit history as a basis of extending a lease to you. Some of these landlords establish a minimum credit score requirement. Fall below this credit score and you could be denied the rental, even if you were going to pay for the entire lease up front.

Certain employers use the credit score as a contingency for employment. An application for employment can be denied if your credit score is low.

The same way that a low credit score can seemingly slam doors in your face, a high score can open doors you might not have realized existed. Most people who have high credit scores don’t realize the benefits extended to them. A higher credit score allows you to qualify for platinum credit cards that provide many rewards for credit card use. Lower interest rates and security deposits are some other advantages that a high credit score can yield.

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