You can do what!? How to Improve Your Credit Score

Credit Score "Groups"

"It's all about the verbage!" says Chris, the instructor for the home buyer's counseling sessions I am taking. In the last session, he explained a few things about credit scores which I found fascinating and hopefully can help you out at some point in your life. 

Credit Score Groups
At a conference for home buyers counselors, the keynote speaker asked the crowd if anyone ever had a client that followed the counselor's advice to pay off a creditor only to find out that the client's credit score went down. The entire audience raised their hands. The speaker explained to the crowd that the three credit bureaus place people into groups based on their credit profile.

For example, if a person owes a creditor for multiple months/years that person is in a certain credit score group, let's call that group "People Who Owe Creditors." Within that group, credit scores can range between 550-600. Since this person has been in the group for a long period of time, his or her credit score is a 600. This person then pays off his/her creditors and finds that his/her credit score has dropped. They probably are thinking, "What the heck!? I paid my debts and my credit score dropped!?" This is probably a very crappy feeling. Now, from my understanding, what has occurred is this: this person is now in a new credit score group. Because he/she is new to the group he/she is "low man on the totem pole" and is branded with the lowest credit score possible for this group. Let's call this group "People Who Recently Had Debts and Settled Them." The scores in this group can range from 580-650. So even though the individual paid his/her debts, since he/she is in a new group, their score could dip down to a 580 (from a 600); however, the individual has the potential to reach a credit score of 650 in this group vs. a 600 max in the previous group.

Please note that the credit scores are arbitrary for this example. I do not know what the groups are or what the credit score ranges are (see the picture for a better idea of the groups).

Verbage
Talk is cheap, but verbage can make or break you when it comes to your credit score. Chris explained to us that if you're in a bind and owe a creditor money there are multiple things you should know before paying one red cent. If you are dealing with the creditor directly, he suggests you come to agreed terms and then submit those terms in writing. One key stipulation to include is how the creditor will report this information on your credit report. To avoid a derogatory comment, Chris suggests you state that you will pay the agreed amount only if the creditor reports that information as "paid agreed amount." on your credit report. This line shows up on your credit report, but cannot be interpreted as a derogatory line.

If you do not do this, the creditor can submit a line that reads, "paid less than amount owed." This can be interpreted as you didn't pay your debts and you're a dead beat. Those little words can make or break you when it comes time to finance something big, like a house.

Show Me Proof
Now here is an option for the bold. Chris explained to us that a creditor must show you written proof that you agreed to the terms of this contract and agreed to repay the money you borrowed. You may submit a written letter that states, I will not pay this debt unless I see my signature on record. The creditor then has thirty days to respond. If they do not respond in thirty days, you hit them with a second letter that instructs them to strike the debit and the comments from your credit report.

Credit Rebuilding Letters

Most creditors do respond, but on rare occasions they do not respond OR on even rarer occasions, the debt has been sold so many times and someone drops the ball when it comes to keeping records, so the creditor does not have proof. In that case, you are not required to pay your debt! Sounds crazy, but Chris says that this does happen. At the very least, it doesn't hurt to try.

Chris gave us a list of letters that he gives to people to send to their credit agencies in given situations. I have posted a picture of the list. He said that he would email me the letters sometime on Monday (today: 11/18) in multiple Word documents. Once I get them, I can send them out if you are interested (just comment on here or message me personally). I hope I've provided you with some information to think about if you wish/need to improve your credit score.



If your credit is fine, here are three basic rules to follow.

1. Do not come close to "maxing out" on credit cards. Try to keep your balance below 30% of your credit limit (ex: credit limit $10,000...do not keep a balance higher than $3,000).

2. Pay everything on time and the amount agreed upon. Late payments cannot be fixed over night. Resolving credit issues takes time!

3. Order copies of your credit reports periodically or before your apply for new credit. If you are rejected for a credit card, that lowers your credit score. Dispute any information that you find that is incorrect. Remember "derogatory" information lowers your credit score.

Remember, life does happen and debts do occur. If you ran into financial problems in the past, it pays to educate yourself and learn your options if you need to improve your credit. I hope I'm able to help educate some folks with this post. Best of luck!


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