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One of the rights afforded to us under the Fair Credit Reporting Act is the ability to challenge information on our credit reports with which we do not agree. I addressed several methods of disputing credit entries in this Mint article.
The credit dispute process is free and normally takes less than a month. There is some confusion, however, about the impact a credit dispute can have on your credit scores. In this post, we’ll cover what happens when you dispute a credit report, how a credit dispute impacts your credit score, what is disputable, and how you can do so.
When Can I Dispute a Credit Report?
When you file a dispute with the credit reporting agencies, they are required by the Fair Credit Reporting Act to show that the item is “in dispute.” They accomplish this by placing the code “XB” on the offensive credit entry.
The XB code is what’s referred to in my world as a “Compliance Condition Code.” When it’s placed in your credit report, it reads as “Consumer disputes, investigation in process” or some derivative of that wording.
Essentially, it means that the credit bureaus received your dispute and are actively investigating the information.
The Impact of “XB”
When the XB code is present on an account, a public record, or a collection, credit scoring systems treat it differently than they would if the account was not actively in dispute.
This is where the confusion comes from. The FICO score will not allow an item that is actively being disputed to harm your score. How does it accomplish this?
FICO will not consider an item with the XB code present for either its Payment History or Debt related measurements. So, if you have a credit card account with late payments and you’re disputing those late payments, the FICO score will choose not to consider those late payments. And, if you have a credit card account with a large balance and you’re disputing the balance, the FICO score will not consider the balance.
So, does disputing a credit report hurt your score? No. The act of disputing items on your credit report does not hurt your score. However, the outcome of the dispute could cause your score to adjust. If the “negative” item is verified to be correct, for example, your score might take a dip. Note: this dip is not because the dispute was proven inaccurate, but because the XB code is taken off. Alternatively, if the disputed item is proven to be inaccurate, this could raise your credit score.
The fact that the FICO score is temporarily ignoring these items can cause your scores to be higher. Having said that, the score improvement is temporary and can’t be used to “game” the system.
What happens if the disputed item is found to be accurate?
If the item has been verified as accurate, then the credit bureaus are no longer investigating it. That means the credit bureaus will remove the “in dispute” label by removing the XB code.
Once the XB code is gone, then the item is fair game in the eyes of FICO because it has been verified and is, arguably, accurate.
This process isn’t news, and lenders also know about it, which is why you can’t just go and dispute everything that’s bad on your credit reports, have your FICO scores shoot through the roof, and then go apply for a loan.
Most lenders, especially mortgage lenders, require that all items DO NOT have the “in dispute” label before they process an application to closing. They realize the score that has been calculated is likely not the consumer’s most accurate score because the model is ignoring certain aspects of the credit report.
And FICO isn’t the only scoring system that has this specialized treatment of items that are currently being investigated. If you check your credit score using the VantageScore model, you may run into a similar situation.
According to Sarah Davies, Vice President of Analytics and Product Management at VantageScore Solutions, “While an account is documented as ‘Account information disputed by consumer under the Fair Credit Reporting Act (XB)’, it is temporarily excluded from consideration by the VantageScore model.”
What if the item is still being disputed?
If you were not successful getting the offensive credit entry removed or changed, then you can still have it shown as being “in dispute” for as long as it remains on your credit reports. But, that is not the same as an item that’s in dispute AND being investigated.
That is to say, lenders will still likely consider the item when evaluating your credit score since the XB code has been removed.
If you still disagree with an item you can have a label added to your credit reports showing as much. But, that’s not going to cause the score to reflect that label for Payment History and Debt measurements.
How to Dispute a Charge on Your Credit Report
If, after reviewing what happens when you dispute a credit report, you decide it could be the right course of action for you, here’s how you can get the ball rolling.
Step One: Obtain a recent copy of your credit report
In order to dispute an item on your credit report, you’ll need to prove to the powers that be that your credit report is inaccurate. To do so, you’ll want to have a copy of your credit report handy. Consumers are entitled to one free credit report each year from each of the three main credit reporting agencies, which you can access through AnnualCreditReport.com. Or if you’re a Mint user, you can easily view your credit score in the Mint app whenever you please!
Once you’ve got your credit report in front of you, pull out that red pen of yours and notate any items on the report that are inaccurate or with which you do not agree.
- There is incorrect personal information on your credit report, such as your name or Social Security Number
- There is a negative item that is beyond the statute of limitations for reporting
- The report shows that you carry a debt balance which you have already settled
- There is duplicate information shown on your credit report
- You have a duplicate credit report or mixed information for yourself and another person
- There are fraudulent items on your report, like a new credit card or loan that you did not open or apply for
Step Three: Decide which credit dispute method to use
File a report with the credit bureau: This is the most common method consumers use to dispute credit reports. Each of the credit reporting bureaus—Experian, Equifax, and TransUnion—have dispute forms on their website which you can fill out.
Here’s where you can find them:
If the error appears across each of the credit bureaus’ reports, you’ll need to file a separate report for each. Each of the credit dispute processes vary slightly, but in general, you’ll need to include the dispute form with an explanation of the error(s) as well as a copy of your report with the same error(s) notated.
Report the error to the furnisher: Another method you can use to dispute a debt on your credit report is to go directly to the source—the lender, bank, credit card company, or collection agency that misreported information. When you dispute the item, the furnisher will then be required to report the dispute to each of the credit bureaus, making your job a little easier.
Takeaways
To wrap up, let’s review a few of the key takeaways we covered.
- Does disputing a credit report hurt your credit score? No, credit disputes do not hurt your credit score. When an item on your report is being investigated, the credit bureaus will notate this on your credit report using “XB” code which signals to lenders that the item is under review and should not be considered in their evaluation.
- Depending on the outcome of your dispute, your credit score may be adjusted to reflect the updated information. If a negative item is removed, the dispute could improve your credit score.
- To dispute an item on your credit report, follow these steps:
- Get a copy of your credit report
- Decide whether or not you should dispute the item
- File a dispute with the furnisher or the three major credit bureaus with a dispute form and a copy of your credit report
For more information of credit disputes, check out this blog to learn how to win a credit dispute.
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Save more, spend smarter, and make your money go further
We live in an increasingly cash-free society. While cash is still king and accepted almost everywhere, more and more people are moving away from cash. From credit cards and contactless payments, different banks and credit issuers have an incentive to make sure that THEIR card is at the top of your wallet. That can lead to an opportunity for people with the financial savvy to earn a little extra by making the most out of their credit cards.
How many credit cards should you have?
The first question you might wonder in trying to make the most out of your credit cards is how many credit cards you should have. While there is no one right answer to that question, you should consider the possibility of signing up for a new credit card. The reason for that is that the most value you will ever get from your credit card is its welcome or signup bonus.
Normally, credit cards might give anywhere from 1-2 cents (or 1-2 airline miles or points) per dollar spent on most purchases. It’s really hard to get any appreciable amount of rewards only earning one or two cents per dollar. On the other hand, when you sign up for a new credit card, the credit card company will usually offer an initial signup bonus.
An example might be earning 50,000 airline miles for spending $2,000 in the first three months of having the card. So while you’re making that $2,000 of spending, you’re earning TWENTY-FIVE miles per dollar spent. An example like that can help illustrate the power of signing up for new credit cards — it’s just so much easier to get a healthy balance of rewards this way.
How signing up for credit cards affects your credit
Before you start signing up for every credit card you see, there are a few things that you’ll want to know. One of the most common credit card questions people ask is whether signing up for new credit cards hurts your credit score. For most people, signing up for a new credit card every couple of months will not have a material impact on their credit score. In fact, the increased credit limit can actually help your credit score.
Get organized
The one thing that CAN hurt your credit score is if you aren’t organized and start missing payments on your credit card. So if you do decide to open new credit cards, make sure that you have a system in place for organization. You want to make sure that you have the financial ability and discipline to pay your credit card statement, in full, every month. If you don’t, you risk hurting your credit score, and the interest and late fees can really put a dent into any rewards that you might earn.
Using the “right” credit card
When you only have one credit card, it’s pretty straightforward to decide which card that you should use with any given merchant. You just use the one credit card that you have, every time and everywhere. If you have multiple credit cards, it starts to get a bit more complicated. Some credit cards earn the same amount of rewards no matter where you use them, while others earn bonus points in certain categories.
There are a couple of ways that you can handle using the “right” credit card. Some people just try to remember what bonus categories each of their cards have and use the right one based on their memory. Another strategy is to tape a small note to each card in your wallet with where to use it — groceries, gas, restaurants, everywhere else, etc.
An important thing to remember is that the difference between using the “right” and “wrong” credit card on any one transaction is minimal. We’re talking less than a dollar’s worth of rewards per purchase. And while every bit adds up, it’s not something to lose a whole lot of sleep over.
Maximize your credit card rewards
Once you have earned a good stash of credit card rewards, it’s time to put them to their best use. If you’re wise, you can maximize your credit card rewards without hurting your credit. A good rule of thumb is that most travel rewards are best used with the program where you’ve earned them. Delta Skymiles are best used to travel on Delta; Hilton Honors points are best used to stay at Hilton hotels.
Flexible bank rewards points like American Express Membership Rewards, Citi ThankYou points, or Chase Ultimate Rewards are more valuable because they can effectively be used in multiple ways. You can use them to pay for travel, transfer them to hotel or airline travel partners or redeem them as statement credits to help pay yourself back. Having that flexibility is a good way to maximize the value of your rewards points.
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credit score significantly. Depending if you file for chapter 7 or chapter 13, bankruptcy will stay on your credit report for seven to 10 years. You should also be aware that when you file for bankruptcy, all of your financial information becomes available to the public. The court may also decide on how and when you can spend your money, as well as who you must repay first.
Something else that you can try instead of filing for bankruptcy is checking if you are eligible for an income-driven repayment plan. This allows you to repay your student loan debt at an affordable monthly rate based on your income. Another option is to see if you are eligible for a forbearance. A forbearance puts a temporary hold on your loan payments if you are approved. To get approved you must show that you have some kind of outstanding medical expense or financial obligation. You can also get approved for military or AmeriCorps service. One thing to consider with a forbearance is that your loans still build interest when you don’t pay them.
Next, you can check to see if you meet the requirements for Public Student Loan Forgiveness (PSLF). To qualify you must have made at least 120 qualifying monthly loan payments under a qualified plan while working full-time for a qualified employer.
Some last things to consider before you decide to file are the costs and time it takes to get your loans discharged. Getting student loans discharged is very uncommon, so you will want to be certain you will qualify before you try. If you plan on filing, you should be ready for filing fees and attorney fees — attorney fees average over $1,400 and filing fees are typically around $300. This can be a lot, especially for someone who is looking to file for bankruptcy. That is why it is important to fully understand where you stand with your finances. Many people do not realize what it costs to file for bankruptcy. For some people this is a burden that damages their finances even more. This is why you must be certain that you can do things like pay your rent and buy groceries after filing. If this is too much, then you might want to consider other options.
How to Demonstrate Undue Hardship
Proving that your student loans will cause you undue hardship is not an easy task. You will have to demonstrate that paying back your student loans will cause a significant negative effect on you and those who depend on you.
There is no set way to determine or ask someone to demonstrate undue hardship. Courts have the discretion of what methods they use to determine your hardships. A common method used by many courts to prove undue hardship is the Brunner test. To prove undue hardship, you must meet all three factors of the test:
- Poverty – You can’t afford to pay your loans with your present earnings and spendings, and maintain a minimal standard of living afterwards.
- Persistence – Your present financial struggles will carry on for a considerable amount of time while you repay your loans.
- Good Faith – You have made efforts in good faith to repay your loans and arranged for an affordable payment plan
Some courts use a different method of testing for undue hardship known as the Totality of Circumstances Test. For this test the court will review all of your applicable financial assets, future earnings, and expenses. Based on what they find they might rule for undue hardship. This test is different from others because it looks at all aspects that could have an effect on the person, rather than just one or two factors.
Filing for Student Loan Bankruptcy
Discharging your loans comes at the end of bankruptcy, and you might run into some tough questions along the way. There are a few things you can do to help you understand and complete the process.
1. Talk to a Financial Advisor or Lawyer
As mentioned, getting your loans discharged can be very challenging, especially for someone who is unfamiliar with the process. This is why you will want to seek assistance from a bankruptcy lawyer who is practiced and has been in these situations before. Their professional knowledge will be very useful when it comes to filling out the correct forms and procedures.
2. File for the Correct Type of Bankruptcy
When you try to discharge your student loans, you will first have to file for bankruptcy for either chapter 7 or chapter 13. Chapter 7 might discharge your loans if they deem you unable to pay because of undue hardship. Chapter 13 bankruptcy will not get rid of your loans, rather restructure the payments so they are affordable.
Chapter 7
- You must show the court that you cannot afford the cost of your loans.
- If you are eligible, all loans can be cleared and you will no longer be personally liable.
- You must meet with and be questioned by your appointed trustee and creditors.
- This process can take 4 to 6 months, but can completely discharge your loans.
Chapter 13
- You can prove that you can repay some of your debts, but finishing your current payments will cause undue hardship.
- Rather than being discharged, loans are restructured. You will hold onto assets and debts will be discharged after the case.
- You must create a payment plan for the court and all creditors to view.
- Payment plans can take 3 to 5 years.
3. Start the Adversary Process
An adversary proceeding is a lawsuit filed in bankruptcy and basically means that you are making a complaint in court. This is required for bankruptcy because your complaint is your inability to pay your student loans. When you file this proceeding you will need to have proof that you cannot make your loan payments due to undue hardships. This means verifying your income and proving that dependents rely on you, making it impossible to pay your loans.
So can you file for bankruptcy on student loans? The answer is yes, but you should look into other options first and establish an affordable payment plan. Now that you know what it takes to discharge your student loans this way, and you understand the difficulty and costs that come with proving undue hardship, you can take your next steps. Use a debt-to-income ratio tool to help you plan your payments by determining your ability to afford and pay a loan.
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