How debt af­fects credit score

Los Angeles Times - - BUSINESS BEAT - By Liz We­ston Ques­tions may be sent to Liz We­ston, 3940 Lau­rel Canyon, No. 238, Stu­dio City, CA 91604, or by us­ing the “Con­tact” form at askl­izwe­ston. com. Dis­trib­uted by No More Red Inc.

Dear Liz: I am try­ing to help my daugh­ter deal with enor­mous stu­dent loans. She is a doc­tor and very busy and sim­ply can­not deal with the stress of al­most $ 350,000 of ed­u­ca­tion debt. I want to help her re­fi­nance, but to get the best rate I would like to help her im­prove her credit score ( even if it is al­ready 712).

She had three small debts turned over to a col­lec­tion agency af­ter a visit to an emer­gency room a cou­ple of years ago. We plan to pay them off. Do I have to ask the col­lec­tion agency to erase them or con­tact the orig­i­nal cred­i­tor? An­swer: You men­tion that your daugh­ter has a 712 score, but she ac­tu­ally has many credit scores that change all the time. Small med­i­cal col­lec­tions can have an out­size ef­fect on those scores — or they can have no ef­fect at all. It de­pends on what credit scor­ing for­mula the len­der hap­pens to use.

The latest ver­sion of the lead­ing credit score, FICO 9, ig­nores paid col­lec­tions and treats un­paid med­i­cal debt less harshly than other types of col­lec­tion ac­counts. The most com­monly used ver­sion, though, is FICO 8, which ig­nores only those col­lec­tions un­der $ 100 and doesn’t dif­fer­en­ti­ate med­i­cal from other col­lec­tions.

Some lenders still use older ver­sions of the for­mula that pun­ish peo­ple for even small col­lec­tions.

FICO also has a ri­val called the Van­tageS­core. The latest and most- used ver­sion of that for­mula, Van­tageS­core 3.0, also ig­nores paid col­lec­tions.

You can con­tact the lenders you may use to re­fi­nance the debt to find out which scores they use, and which ver­sions. That could help you de­cide how hard to push to get these col­lec­tions erased.

If paid col­lec­tions aren’t counted, you can just pay them off and be done with it. ( You’ll of course want to keep the pa­per­work show­ing the debts have been paid and have your daugh­ter check her credit re­ports to make sure the ac­counts re­flect a zero bal­ance.)

If the ac­counts could hurt her even if they’re paid, you have a cou­ple of op­tions. One is to ask the hos­pi­tal to take back the ac­counts, since med­i­cal bills are of­ten placed with col­lec­tion agen­cies on consignment rather than be­ing sold to them out­right. Then you can pay the hos­pi­tal, and the col­lec­tions should dis­ap­pear. ( Although, again, your daugh­ter will need to fol­low up to make sure.)

Another op­tion is to try to ne­go­ti­ate a “pay for dele­tion” — which means the col­lec­tion agency prom­ises to stop re­port­ing the ac­count in re­turn for pay­ment. You’ll want this agree­ment, if you can win it, to be in ad­vance and in writ­ing. Easy way to make quar­terly pay­ments Dear Liz: I’m of­ten re­quired to make es­ti­mated quar­terly pay­ments and was al­ways con­cerned I would miss one of them.

A few years ago, I came across the Elec­tronic Fed­eral Tax Pay­ment Sys­tem ( EFTPS) that is of­fered by the U. S. Trea­sury. The beauty of the sys­tem is that once it is set up, there is noth­ing more for me to do. I set up all the pay­ments I need to make and the sys­tem takes care of it.

I just have to set it up each year at the time I file my tax re­turn. I have been us­ing the sys­tem for sev­eral years and have had no is­sues what­so­ever with it. An­swer: Thanks for shar­ing your ex­pe­ri­ence with EFTPS. While that sys­tem al­lows you to sched­ule pay­ments up to 365 days in ad­vance, the Di­rect Pay op­tion for in­di­vid­u­als al­lows sched­ul­ing only up to 30 days in ad­vance. Mak­ing tax pay­ments through the IRS web­site Dear Liz: Re­gard­ing the reader whose tax pay­ment never made it to the IRS: I agree that elec­tronic pay­ments are the best and safest, but you might want to em­pha­size that the pay­ments should be done di­rectly through the IRS web­site.

I made the mis­take of sched­ul­ing a cou­ple of pay­ments through my online bank­ing, and a month later I re­ceived a no­ti­fi­ca­tion from the IRS that I was in ar­rears, although the bank state­ment indi- cated that the pay­ment has been deb­ited.

It took sev­eral months of cor­re­spon­dence be­fore the IRS ac­knowl­edged that the money was re­ceived. Luck­ily, the penal­ties and in­ter­est were only about $ 20, so I didn’t have to go through the ad­di­tional has­sle and fill­ing out forms to re­claim it. The IRS web­site is very easy to use, and I haven’t ex­pe­ri­enced any prob­lems since. An­swer: The IRS’ Elec­tronic Tax Pay­ment Sys­tem, which was de­signed pri­mar­ily for busi­nesses, has been around for nearly two decades, but the agency only re­cently added a “Di­rect Pay” op­tion ex­pressly for in­di­vid­u­als to make es­ti­mated tax pay­ments and pay bills. These meth­ods and oth­ers, in­clud­ing elec­tronic funds with­drawal when you e- file your re­turn, are ex­plained at http:// www. irs. gov/ pay­ments.

Nick M. Do Getty I mages


can have an out­size ef­fect on credit scores or no ef­fect at all.

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