Reader’s Question

My husband has three old credit cards from college that he racked up, then didn’t pay for years. A few years ago he started with a debt free counseling program that took a lump sum every month and paid each card a certain amount, with the agreement with the card issuers that he would not have fees or interest rate changes while on this program.

He was told that he has a zero credit limit on these cards, and once they are paid, they will be closed. We are receiving a good tax return this year, and plan to pay off the cards. What we really want to know, is what should we try to get them to mark the accounts as on his credit report to have a positive or least negative impact on his credit score? I’ve heard that we should ask for closed at consumer’s request. Is this good?

My Response

Closed at consumer’s request will work fine. The account history is what is really going to affect your credit score (as long as it’s not marked as a charge-off).

First of all, this isn’t a “bash Dave Ramsey” post. Rather, I greatly admire Dave Ramsey and his overall philosophy on personal finance.

I’m sure most of you have heard of Dave Ramsey (he seems to be everywhere these days), but for those of you who haven’t, Dave Ramsey is a popular financial guru –he has a radio show as well as a TV program on the Fox Business channel.

Dave teaches what he calls “The Baby Steps“. The Baby Steps comprise of 7 steps that Dave believes anyone can take to achieve wealth (or as he calls it, “financial peace”). Dave outlines these steps in great detail in his book, The Total Money Makeover.

I first read his book about a year ago and I have been listening to his free podcast on iTunes for about 4 months. I definitely recommend this book to anyone who is just starting to get a handle on their personal finances.

The process Dave uses in The Total Money Makeover is to take the reader through a journey as though they are completing each baby step during the read. Before discussing the particulars of each step and the subsequent reward, Dave methodically strives to hammer one idea into the reader’s head: Your money problems are your fault and it’s only through self-decipline in handling money matters that you can achieve financial peace. Basically he says that his steps will only work if you change your behavior in regards to money. I couldn’t agree more.

I am not going to review each one of Dave’s baby steps in this post (you can get them from his website), but I want to touch on the first two and express what I believe to be inconsistent (and potentially unhelpful) advice. I’d also like to open the discussion up so please comment or email me with your thoughts.

Dave’s first baby step is to save $1000 in an emergency fund –that is, money that should only be used if you find yourself in dire straits while you’re working on baby step 2.
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As a prelude to outlining baby step 2, Dave suggests that you get intense and do something drastic: cut up all your credit cards (he calls this a “plasectomy”). He tells the reader to close all credit card accounts that are paid off and pay off any credit card account with a balance as quickly as possible and then close the account.

Baby step 2 says to pay off all your debt (except the house), smallest to largest. At this point, he is assuming the reader has sworn off credit completely –forever.

This is where I find several inconsistencies. First of all, there is a big fat elephant in the room which Dave cannot avoid: closing all of your credit card accounts is going to ruin your credit score.

Dave’s response to this is simple, but in reality, misleading and unhelpful to most people. Dave says that people ought not concern themselves with their credit score. After all, having sworn off credit himself, he doesn’t even have a FICO score.

Dave claims that if you use his baby steps you will become rich, and I believe him. However, it should also be noted that even he admits this process takes decades. Do you want to pay an extra $50 per month on your car insurance until you become rich because you don’t have a FICO score? I don’t. Your car insurance premium is only one out of dozens of problems that will arise in your life with a poor (or no) credit score.

Do you ever want to get a decent rate on a mortgage? This is debt that Dave permits, by the way, because even he realized that most people cannot simply save $150,000 or more. Nonetheless, there is no such thing as a mortgage lender who doesn’t at least look at your FICO score. I dare anyone to find one, honestly.

Aside from the problem of ruining your credit score, the inconsistency really lies in the fact that prior to this, as we have discussed, Dave says that we need to become disciplined in money matters, yet at the same time he tells us that we lack the self-restraint to maintain an open credit card account without charging it off. The point is that anyone who lacks the ability to not use their credit card, more than likely also lacks the ability to save their $1000 emergency fund just for emergencies.

This all, of course, is a journey where we are suppose to acquire the skills to be successful with money, and this requires that we teach ourselves self-restraint rather than destroy the ability to be tempted.

Again, I wholeheartedly treasure Dave’s overall financial advice –it’s a real gem. However, I would kindly suggest that anyone who is starting with Dave’s Baby Steps, reconsider closing your credit card accounts. After all, with a little self-restraint taught by Dave Ramsey, it’s just as easy to put your cards in a dresser drawer and not use them.

Reader Question

Hi Ashley,
How soon will my credit score improve after I pay off my debt?
I am trying to figure out what is important. I was hoping you might be able to give me some insight.
Thank you in advance.
[name removed]

My Response

Hi [name removed],
I wouldn’t expect a huge jump in your credit score after paying debt off –the FICO score is, of course, largely based on you having debt. However, this is not to say your score won’t raise after you pay off debt. This is because you will be lowering your debt to credit ratio. Your debt to credit ratio should remain low if you want to maximize your credit score.

Hope this helps,
Ashley

Reader’s Question

Ashley,
I have 120 days past due with my GEMB/LOWES Card so they sold it to another lender who I am paying through a debt counseling co. GEMB/LOWES is reporting my PAY STATUS as 120 days past due although I have not missed a payment with the lender who bought my debt. Can I get this statement removed to read PAID AS AGREED?
Thanks!
[name removed]

My Response

Dear [name removed],
It sounds like you’re using a debt settlement company to pay off your debts. The problem with debt settlement companies is while they will settle your debts (eventually), your credit gets destroyed in the process.

The way it usually works is that you basically setup a savings account with the debt settlement company and pay them an amount you can afford on a monthly basis. Once you have enough money in that savings account to settle debt, they will attempt to negotiate with the collector on your behalf for settlement. The problem is that the debt settlement company requires that you stop paying the debt to the creditor while you are paying them. This is what destroys your credit. I’m afraid that unless you take matters into your own hands and stop paying this company, your credit will only continue to get worse. Trust me, [name removed], you can do this on your own if you follow the steps outlined in my blog.

Best,
Ashley

Take Home Point

Many people arrange for their debts to be handled by a debt settlement company falsely thinking that all of their credit problems are going to be fixed overnight and all they have to do is give the debt settlement company a small percentage of the amount successfully settled. The fact of the matter is that going this route is not easy –in fact, its painful because when you stop paying your debts directly to the creditors, the late payment entries pile up. Remember, the business model of debt settlement works by telling their customers to stop paying their debts and start saving money in a savings account with them. While this is good if you absolutely cannot afford your debt payments (the debt settlement companies will adjust your savings amount according to your affordability), they will not pay ANYTHING to the creditors until they think they can settle the debt.

Reader’s Question

Dear Ashley,
Once divorce, does my ex-husband’s credit score get better since the bad debt was under my name?

My Response

No, credit scores and marriage are not tied together. If you are getting a loan together, they may take both credit scores into account, but that doesn’t mean your actual credit score is affected by your spouses credit.

Best,
Ashley

The average credit score in the U.S. is 680

This average varies by state with South Dakota having the highest average (710) and Texas having the lowest (651).

Credit Scores range from 300 to 900

300 indicates horrible credit and 900 indicates perfect credit (I doubt anyone actually has a 900 credit score). You can also have a credit score of 0, but this isn’t included in the range because it would simply mean that you have no credit.

Statistics from creditreport.com

Negotiating for a creditor to completely remove a negative record on your credit report will usually increase your credit score more than if you pay the account off and the creditor changes the account status to ‘PAID IN FULL’. This is because even though your credit report may reflect that you have paid off the account, it still shows the history of the account (i.e., late payments).

Before you continue

If you have already made arrangements with a creditor or given them any money, you have lost your power to negotiate!

Negotiating a debt is intimating if you aren’t the “car salesmen type”. In fact, I am advising you against attempting to negotiate a debt over the phone. Keep in mind that debt collectors are not only well trained to get as much money from you as possible, but they also have the advantage of negotiating debts all day, everyday –that’s a lot of practice.

It’s important to remember that collectors project a hostile and very aggressive demeanor over the phone. This naturally puts you at a disadvantage because humans tend to become abrasive and on the defense when in the presence of such behavior. This means that you are more likely to let emotion skew your logic –ruining your chance to negotiate a lower debt.

Instead, I am going to discuss how to negotiate a debt by writing letters. In this situation you have the advantage. Here are a few reasons why:

1. You have time to gather your thoughts and compose a letter that reflects your intention and not your defensive emotions.
2. You are not being rushed and lied to by an aggressive debt collector.
3. Most important: A written correspondence offers you legal protections. On the other hand, if you come to an agreement over the phone and they fail to honor the agreement (it happens a lot), it’s difficult to prove.

There are also disadvantages (or minor inconveniences, rather) to negotiating via mail. Corresponding with creditors through the mail can be an exhaustingly long process –often it can take several months to receive a response. You have to decide if you’re willing (or if it’s worth it) to wait for the peace of mind that a negotiation can provide. I say go for it if you are the type of person that can mail a letter and forget about it. However, if you are the obsessive, nervous type, the waiting period can be stressful.

Your best chances for a successful negotiation

If you haven’t yet made any agreements with the creditor, you have a very good chance. This is because you still have the upper hand –they want something from you, not the other way around. Nonetheless, I have found that some types of accounts can be very difficult to get removed completely from your credit report.

Accounts and success rates

• Closed accounts (ex: Charge off) that have been since paid are extremely difficult to get removed. If you still carry a balance and the creditor is actively attempting to collect, getting a complete removal will have about a 1 in 3 chance of success.
• Open accounts, regardless of the account type (i.e., installment, revolving), that are delinquent have a marginal success rate of complete removal if you offer to pay the balance in full.
• Open/Active accounts that are reported as ‘LATE’ have a very high success rate of complete removal. This is particularly true if the account is in Collections.

Creditors often claim that they cannot remove records from credit reports. This is false. Creditors absolutely have the ability to completely remove a record.

Shooting for the stars

Keep in mind that getting a creditor to completely remove a negative record from your credit report is the best case scenario so try not to get your hopes up too much. However don’t let this bring you down, because you have nothing to lose by attempting to negotiate a complete removal. Also, don’t trick yourself into believing that you can negotiate a complete removal by promising to pay a small amount of the debt. In most cases, the creditor will only consider a complete removal if you offer to pay off the debt in full (or very close), in a short period of time.

To give you an example

I was able to get a $2000 credit card debt in ‘charge off’ status completely removed from my credit report by proposing to pay the creditor IN FULL over a 3 month period.

I hope I have provided you with an informative overview of the negotiation process. Take note that I cannot get too specific on this topic because individual situation are so widely varied. And ultimately your individual situation will determine your chances of getting a complete removal.

Now you’re ready to download My Free Removal Negotiation Letter

One last note: The success rates I have stated in this article are from my own personal experience. Your success might be different. Nevertheless, I’d love to hear how it works out for you, so drop me a line with your story