Monday Q&A: Is there a quick fix for low FICO scores?

This question came from one of my formspring followers:

Q: Is there any way you can improve your credit score in a short time?

A: I'd generally say no, but really the answer depends on how much you want to improve your credit score and what you consider a short period of time.

Ruining a credit score usually happens over time, as either bad financial decisions or tough times erode your record of on-time payments and throws your debt-to-available-credit ratio out of whack. If it took you two years for your FICO score to drop below, say 600, don't expect it to be 800 in a year or less.

The things that help you improve your credit score the most are making payments on your debts on time and paying down the balances on any outstanding accounts you have, especially unsecured accounts like credit cards. The faster you can pay off any overdue or outstanding balances, the better chance you have of raising your score. But any blotches on your credit report, like delinquencies, bankruptcies or accounts in collection, can remain a drag to your FICO score for as long as seven years.

Do what you can to be responsible with your credit from here on out, but don't expect things to turn around overnight.

$0 Balance Challenge: Paying off $8,157 in credit card debt in 12 months

Hope everyone had a GREAT weekend. I'm starting off this week with a little update on the $0 Balance Challenge. I got an email a little while ago from a woman who's looking to get rid of $8,157.47 in credit card debt over the next 12 months:

In June 2008 my graduation present to myself was Suze Orman's Young, Fabulous & Broke. I was constantly being harassed by creditors. Suze said I should pick up the phone and talk to them, so I did. I set up a payment plan $80 per month on one card, $120 per month on the other. I haven't missed or been late on a payment.
The great part of the arrangement was that they cut my interest rates and there are no late fees. The bad thing is that the cards are closed. At the time I didn't realize that they would be closed or what that would mean for my credit score. I am now working to pay the cards off and since my score is too low to get a credit card, I am thinking of getting a secured card to help rebuild my credit.

Card #1 $3,175.49
Card # 2 $4,981.98

I will definitely have the 1st card paid off w/in the next year. If I have most of the 2nd one paid off by then I will be extremely happy. The goal I'd already set for myself was to have 0 credit card debt by my 25th birthday. Also, I ran up my cards on books, flights back home for the holidays, a car that kept breaking down, etc. Eventually, I stopped using the cards, but since I couldn't pay, the interest rates and late fees kicked my butt.

This is a great example with a lot of lessons in it for those taking the challenge. Among other things, the writer noted that she is working part time and has student loans to pay, as well. This is a pretty common situation for recent college grads, many of whom find themselves underemployed and stretched with debt once getting out of school.

First, it's a great thing that she got proactive and worked out a payment arrangement with her creditors. I'm hoping that in addition to that, she got everything in writing, in case there are any problems later. She might also want to write the three credit reporting agencies (Experian, Equifax and Trans Union) and ask that a note be inserted in her file explaining that she's worked out a payment plan with the creditors who she's been delinquent with. It won't help her numerical score immediately but it could help if for some reason another lender pulls her report anytime soon.

For someone working part-time and living on their own, it might be a bit of a stretch to pay off nearly $9,000 of debt in 12 months. According to Bankrate.com's credit card calculator, it would take monthly payments of $279.55 to pay off the first card in a year's time, assuming an APR of 10.25 percent and no other fees, and $438.57 to pay off the second card. Right now her payment arrangement calls for far less than that, so getting to zero won't happen unless there's extra money in the budget for more payments.

Still, that's OK. There's a workable plan in place and since the cards are closed, there won't be anything new added to the balance. If she's diligent, she'll be celebrating a zero balance before too long. Good luck.

image courtesy freedigitalphotos.net

What to do when your creditor disappears

Twitter question of the day is from @djamesUBMS:

What should one do when paying a creditor and the company (whoever owns your overdue account) disappears or folds?
Background is: Visa credit card that went to collections, we made the effort to find the account after checking our credit, payed it down very quickly. Then all of a sudden, there was no working number and the website was useless. We still owe some cash, but can't pay it down because we can't find the company.

Be careful here and don't assume you're off the hook because you can't find the company. Often when a company folds, it keeps a collections arm open to recover money that it is owed so that it can pay off its remaining debts. In other cases, those debts are acquired by a collections firm for pennies on the dollar, and they in turn spend their time hunting you down. By paying little for the debt and collecting as much as they can on it, they make a profit.

With that in mind, you need to be proactive by making as much of an effort as possible to find the creditor and pay the bill off. If you can't get in touch through conventional means, Google the collection agency to see what you can find out. Pull your credit report again in a month or so and see if there are any new delinquencies being reported. If so, call the creditor that reported them; if not, call the credit bureau and ask someone if they know whether the company you owe has gone out of business.

As a precautionary measure, you might want to write the three credit reporting agencies (Experian, Equifax and Trans Union) a letter to add to your credit file explaining that you've made significant attempts to contact the creditor but haven't received a response back.

In the meantime, in lieu of making monthly payments, set aside the money you'd be paying on that bill in an account where you won't touch it. If and when the creditor shows back up, you don't want to be without the money to pay them off. If they don't show back up, you've stashed away some extra cash for other goals. Good luck.