Think Before You Open That New Credit Card Account

December marked the spark of thousands of new store credit cards opening up in addition to Bank Credit Cards as all types of temporary incentives were given to woo consumers - from 10% off; 0% interest to cash back rewards. Did you fall victim to this as well?  

It's often said that you should not open credit accounts unless you need them; don't do it just to build a credit score.

I disagree with that. You can't get the credit accounts you 'need' if you fail to open up credit accounts for the sole purpose of just building credit. Can you buy a house without some form of credit already established? A car? At what interest rate/terms? I DO agree that you should not open credit unless you need it and that includes building credit. I DO agree that you should not open new credit just to get a discount.

However.... before you open up that new credit account, weigh the benefits/consequences:

10% of your score is based on New Credit - that's mostly negatively, not positive. FICO weighs:

• How many new accounts you've opened in the past 6-12mths; 
• How many new accounts of the same type you have opened (so if you have too many new credit card accounts, for example, this can be viewed negatively); 
• How many inquiries you've had in the past 12mths; and how long it's been since you've opened up any new accounts. 
• Payments made on an account bringing it out of a negative status to positive (This positively impacts this section of your score) 

So, when you apply for a new credit account; the first thing that happens is a hard inquiry - that's negative. If approved, you'll have a new account on your report that will affect the first bullet above, New accounts opened in the past 6-12 months - that's negative. If you already have too many accounts of the same type - that's a negative. Another negative is something called the Average Age of Accounts; this is apart of the 15% calculation of your score called Length of Credit History. One of the major things it takes into consideration is the average of older accounts and newer accounts; so if you have a pretty long history; when new accounts are opened the Age of your Accounts are shortened.

So, what's positive about opening new credit?

Well, your Debt Utilization is increased. Debt utilization is apart of the Amount Owed section of your score, which makes up 30% of your score. When you have more available credit than you have used (amount you have spent) credit; that is a positive. Just looking at the percentages, 30% is much higher than 10%, right? So, obviously if you can benefit from having more available credit, then it's worth the temporary ding in your credit score. To add; once you start paying on time over the next 6-12 months you'll see a sizable boost in the Payment History section of your score as well; which makes up 35% of your overall score.

Therefore, if you open up new credit the negative impact will be short lived as you keep your balances low and pay on time over the next 6-12 months. If, however, you open a new account and spend over 30% of the available credit and make late payments; your score will tank significantly. Credit is based primarily on our habits - 65% of our score takes into consideration our paying habits and how much we owe nn our credit; revolving accounts (credit cards) in particular.

Hope this helps!

If A Debt Is Written Off, Do I Still Have To Pay It?

The term ‘written off’ can be misleading, especially if both the terms ‘charged off’ and ‘written off’ appear in the same credit trade line on your credit report. So, it’s good to know the difference, as the two are often used interchangeably.

A charged off account means that the creditor has removed the debt from their accounts receivables and charged it off as a loss due to lack of payment; this usually happens between 90-180 days of non-payment depending on the type of account. A charge off reduces a creditor’s earnings and their tax liability, which is the point of reclassifying the debt so that the income the lender gets taxed on is exclusive of uncollectable debt. The account is closed for future charges, however the debt still remains due. Charging off the account doesn’t mean the creditor doesn’t expect to ever get paid, it just means they haven’t been able to collect payment as of the date of the charge off. This is why the balance owed on the account will still reflect on your credit report.

After the account has been charged off the creditor has a few options:

· Transfer the account over to their internal collections department, if applicable

· Assign it to an outside collection agency, but keep ownership of the debt

· Sell the debt to a debt buyer/collection agency

A debt that has been written off can mean one of 3 things; A) it has been forgiven, B) the value has been reduced, C) the profits have been reduced.

The only way to truly know if a debt has been forgiven is if you receive a 1099, if you haven’t received one don’t be afraid to ask for it. You’ll have to potentially pay taxes on the debt, but it’s a heck of a lot cheaper than having to pay the debt in full or having to go through litigation for a money judgment proceeding.

In regards to options B and C; a credit card debt, auto loan, mortgage are examples of assets to a creditor. So if you are in arrears and the creditor feels they won’t be able to collect on the entire debt, they’ll write off all or a portion of it in order to reduce the value of both the company and the profits so that they can get a tax reduction, or because they have paid taxes on the profit already and want to get their money back.

Now, looking at the two definitions they look the same right? Both are for accounting purposes only. The difference is that when an account is charged off it means ‘not collected/uncollectable’ and a write off means ‘reduction/loss of value/profit’.

And interestingly enough, if you have not gotten a 1099, a written off debt can still be collected and sold. It does not matter if a debt is written off or charged off you are still liable for payment of the debt. If the debt has been canceled (1099) after it has been written off or charged off, you may be liable for taxes for the unpaid amount.                                   
                       
There are things to consider prior to deciding if you’re going to pay a debt or not and a ‘written off’ or ‘charged off’ status is not one of them.

State law mandates how long a consumer can be held liable to pay a debt. Each state sets their own time limit that a creditor has to sue a consumer for a judgment for repayment. Once that time limit has expired, a consumer can use the expiration of their state’s statute of limitations (SOL) as a defense against most collection activities.

It’s important that you do not do anything to restart this time frame. Most activities include making a payment or agreeing in writing or verbally that you are responsible for the debt. So, if a charged/written off debt is close to being expired due to statute of limitations, I’d suggest not making a payment.

Something else you want to look at are the remarks/status. Is it still with the original creditor? Has it been transferred? Sold? Is a collection agency listing the same debt? The last thing you want to do is make a payment to the wrong entity.

And finally, please take into consideration that paying a debt that is written off, charged off, or in collections will do absolutely nothing for your credit score. The damage of the status (charge/written off; collections) has already been done. Having ‘Paid’ in front of the negative status will do absolutely nothing to improve your credit score.

Hope this helps!