Worth the Wait

As the old adage says, “Time Heals All Wounds”. In some cases this may even apply to your credit! Bad credit and low credit scores are often the result of bad debt. In the process of establishing LuxuriousCREDIT, getting rid of bad debt is always a priority. As you may know, most negative items such as charge-offs and late payments remain on your credit report for seven years. What you may not know is that there are some exceptions to this rule. Some of these exceptions include collections reported by collection agencies, Chapter 7 Bankruptcies, unpaid tax liens, and defaulted student loans. Let’s look a bit closer at waiting as an option for debt management and credit repair. As you read bear this question in mind, "Is it worth the wait?”

For collections reported by a collection agency the wait is seven and a half years from the date the debt first became late. Chapter 7 Bankruptcies can be expected to fall off in ten years, unpaid tax liens and defaulted student loans can remain on your credit report indefinitely. The seven year clock for charge-offs starts winding down from the very first reporting of this status to a credit bureau. This is normally approximately six months after the first delinquency leading up to the charge-off. The seven and a half year clock for collections starts winding down at the occurrence of the first delinquency leading to the collection, regardless of when the collection appeared on the credit report. The seven year, ten year, and, in some cases, never ending clocks for bankruptcies, tax liens, defaulted student loans, and other public record items begin from the date they are filed.

So, depending on the type of debt, you can reasonably expect some negative information to fall off of your credit report with time. However, what impact will this have on your credit score? Well, while you can expect a bump, you may not experience a huge boost in your credit score when negative items fall off. The score bump is most likely to be small to moderate at best. Here’s why, keeping in mind that one of the most important factors that determines the impact of negative items on your credit score is the length of time since the last delinquency, the longer the time period, the less impact it has on your credit score. Therefore, by the time these items finally do drop off of your credit report, their impact has already been greatly diminished compared to the initial decline they may have caused.

You should also be aware that there is a possibility that your credit score could actually dip slightly after the removal. This may seem counter intuitive so allow me to explain. In Credit Report 102 we discussed, in detail, the structure of your credit report.  Your credit score is calculated using a series of scorecards, as an accumulation of points based on the information in your credit report. The type of scorecard used to calculate your particular score depends on a combination of scoring factors such as lent of time you have been using credit, number of credit accounts, derogatory payment information, as well as other information that helps to determine your creditworthiness.

The concept of the multiple score card system is meant to simplify the prediction of credit risk. In order to do this your current credit information is weighed against your credit history and that of other consumers with similar credit experiences. As your credit history changes over time, so too do the scorecards used to calculate your score. For example, one scorecard used to measure a “clean” credit report will evaluate differently and assign different sets of points than a scorecard designed to score a report containing bad debt and other negative items.

For this reason, a loss of points is possible, despite an improved credit report, in some cases, as a result of switching from one type of scorecard to another, such as when a consumer’s report no longer contains any negative information. In this case, the new credit score would be calculated using a new scorecard made up of a different set of scoring criteria and different corresponding point assignments. The benefit of moving to a better scorecard is that, over time, a higher credit score can be achieved with responsible credit management. Fortunately, this type of score dip is the exception and not the norm for these types of situations. However, you will need to consider the risk before determining whether you are willing to wait rather than pay off the items you owe.

You now have quite a bit to consider in regards to waiting as a means of debt management. In some cases it is just a matter of time. In other cases you may never see certain items removed due to the nature of the debt. As you continue to pursue LuxuriousCREDIT you must weigh the above considerations as well as any moral qualms you may have about not paying your debts in order to reach a final determination. As you know better, do better, and watch your credit luxuriously transform.

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