Getting money to start in real estate investing is the biggest hurdle for people. Traditional lenders have stringent requirements, making it hard for people just getting started and hard for people looking to take their real estate investing to the next level.
This is where private money, an alternative to traditional financing, comes in. In this article, I’ll cover what you need to know.
Private money has been a key piece of my strategy. I would not have built my real estate business without it.
Table of Contents
Understanding Private Money
Private money refers to loans sourced from individuals or non-traditional institutions rather than conventional banks. These people invest their own capital directly in your project, secured by the property itself.
Said another way, private money usually means borrowing from a person who is looking to earn interest on their cash. For taking a risk on you and your project, they get some form of recourse, which may include getting the title to your property if you don’t pay the loan back according to the terms of the agreement.
Here’s what real estate investors get with private money:
Faster closing times: No red tape, which expedites deal execution.
Flexible criteria: Less rigid evaluation and underwriting, catering to scenarios banks might reject.
Private money loans are different than hard money loans. You can read about Hard Money here.
Want to make a lot of money? Learn about money with my Money Mastery course.
Key Points to Remember
Higher interest rates: Compared to traditional loans, expect rates ranging from 8% to 15% or higher.
Shorter loan terms: Private money is typically short-term financing, lasting 6-24 months.
Due diligence is crucial: Verify the lender’s credentials, experience, and track record thoroughly.
Legal agreements are everything: It’s best to have a lawyer draft a comprehensive loan agreement outlining terms, rights, and responsibilities. If there is a dispute, it’ll come down to the terms of the agreement. A lot can be on the line in these deals, so ensure you understand the agreement in full.
Just starting out? See my post The Best Way To Invest In Real Estate.
Pros of Private Money
Private money is one of the best options to start your real estate investing and to scale it.
It can also help kickstart the BRRRR method to rapidly expand your real estate holding. Here’s my article on How to Use the BRRRR Method, including using private money.
Access to capital: Secure funding even with imperfect credit or unconventional projects.
Speed and agility: Move quickly on time-sensitive deals and capitalize on fleeting opportunities.
Direct relationship: Build rapport with the lender, potentially fostering future collaborations.
Cons of Private Money
High costs: Interest rates and origination fees can significantly impact your profit margins.
Short timelines: Pressure to exit the investment quickly for repayment can limit options.
Risk of default: Non-compliance with loan terms could lead to property foreclosure.
Additional Tips
Start small with your first private money loan to build trust and experience.
Network with real estate professionals and advisors for recommendations on reputable lenders.
Have a solid business plan and financial projections to demonstrate your investment’s viability.
How to Find Private Money
Private money can be a great option for real estate investors. And it’s been a great way for me to scale my real estate.
If you want to find private money, you can read my article How To Find Private Money For Real Estate Investments.
Conclusion
Private money can be an incredible way to get started and also scale up. It’s been critical in my journey.
However, know what you’re getting into. Carefully understand the terms, exit strategy, and your risk tolerance.
The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
Some credit facts you need to know are your credit score is based on five key factors, FICO credit scores range from 300 to 850, checking your own credit won’t hurt your score, and twelve more facts outlined below.
With all of the misleading and incorrect information about credit floating around, it’s no wonder some of us feel lost when it comes to our credit reports and credit scores. Fortunately, we’re here to help set everything straight with these simple and clear explanations.
We’ve taken the time to compile the most important credit facts you need to know to understand your credit and everything that impacts it. Just as importantly, we’re setting the record straight when it comes to credit myths that have been lingering for too long. Read on to learn everything you’ve always wanted to know about credit.
1. Your credit score is based on five key factors
Most lenders make their decisions using FICO credit scores, which are based on five key factors. That means that when you apply for a new credit card or loan, these are the primary influences on whether you’ll end up getting approved. Here are the five factors, in order of importance: payment history, credit utilization, length of credit history, credit mix and new credit inquiries.
35% – Payment history. Your ability to consistently make payments has the biggest impact on your score. Having late and missed payments is detrimental to your credit score, while a streak of on-time payments has a positive effect.
30% – Credit utilization. Your utilization measures how much of your available credit you’re using across all of your cards. By using one-third or less of your total credit limit, you could help improve your credit.
15% – Length of credit history. In general, having a longer credit history is helpful, though it depends on how responsibly you’ve used credit over time. Using credit well over time signals to lenders that you can be trusted to manage your finances.
10% – New credit. Applying for new credit leads to hard inquiries, which can negatively impact your credit score. Spacing out your new credit applications—and only applying for credit when you need it—helps your score.
10% – Credit mix. Having a variety of different types of credit—like credit cards, an auto loan or a mortgage—can influence your score as well. A diverse credit portfolio demonstrates your ability to successfully manage different types of credit.
With the knowledge of exactly how your score gets calculated, you can make smarter decisions with credit.
Bottom line: Credit scores aren’t as mysterious as they first appear, and you have control over all of the factors that determine your score.
2. Credit reports are different than credit scores
Although they are related, a credit report and a credit score are different. Also, it’s a bit misleading to talk about a single credit report or a single credit score, because the reality is that you have several different credit reports, and your credit score can be calculated in many different ways.
A credit report is a collection of information about your credit behaviors, like the accounts you have and when you make payments. Three main bureaus—Experian, Equifax and TransUnion—each publish a separate credit report about you.
A credit score uses the information in your credit report to create a numerical representation of your creditworthiness. In other words, all of the information in your report is simplified into a single number that gives lenders an idea of how likely you are to repay a debt.
Surprisingly, your credit report does not include a credit score. Instead, lenders who access your report use formulas to determine a score when you apply for credit. The most common scoring models are FICO and VantageScore, but lenders can make modifications to the calculations to give more weight to areas that are more important to them.
Bottom line: You’ll want to be familiar with both your credit reports and your credit scores, as they each play a role in helping you obtain new credit.
3. Negative credit items will eventually come off your credit report
Negative items on your credit report can cause damage to your credit score. Negative items include late payments, collection accounts, foreclosures and repossessions.
Although these items can lead to significant drops in your credit score, their effect is not permanent. Over time, negative items have a smaller and smaller impact on your score, as long as your credit behaviors improve so that more recent items are more favorable.
Additionally, most negative items should remain on your report for seven years at the most due to the regulations set by the Fair Credit Reporting Act. A bankruptcy, on the other hand, can last up to 10 years in some cases.
Bottom line: Negative items can cause a decrease in your credit score, but they aren’t permanent. Start building new credit behaviors and your score can recover over time.
4. FICO credit scores range from 300 to 850
One of the most common credit scoring models is produced by the Fair Isaac Corporation, also known as FICO. While you may hear “FICO score” and “credit score” used interchangeably, there are in fact several different scoring models, so you could have a different credit score depending on which lender or financial institution you’re working with. The score you’re assigned by FICO will usually always be in a range from 300 to 850.
Accessing your FICO score gives you the chance to have a high-level overview of your credit health. Scores that are considered good, very good or exceptional often make it much easier to get new credit cards or loans when you need them. On the other hand, scores that are fair or poor can make getting new credit more difficult.
Here’s an overview of the FICO scoring ranges:
800 – 850: Exceptional
740 – 799: Very Good
670 – 739: Good
580 – 669: Fair
300 – 579: Poor
Remember, though: credit scores are not fixed and permanent. Your score responds to factors like payments, utilization and credit history, so positive decisions now will benefit your score in the long term.
Bottom line: The FICO scoring ranges lay out broad categories to give you a sense of how you’re doing with credit—and can also help you set a goal for where you want to be.
5. The majority of lenders use FICO scores when making decisions
While there are multiple credit scoring models, the majority of lenders check FICO scores when making decisions. That means that when you apply for new credit—whether it’s a credit card, a loan or a mortgage—the score that’s more likely to matter is your FICO score.
That’s important to know, because many free credit monitoring services will show you score estimates or your VantageScore. Some credit card companies provide a FICO score, however, and you can also request to see the credit score that lenders used to make their decision during the application process.
Fortunately, credit scoring models tend to reference the same data and weight factors fairly similarly. That means if you make on-time payments, keep your utilization low, avoid opening up too many new accounts and have a consistent credit history with a variety of accounts, you’ll probably be in good shape regardless.
Bottom line: Knowing your FICO score can help you have an idea of how lenders will view your application for new credit.
6. You have many different types of credit scores
Credit scores vary based on the credit bureau reporting them and the credit scoring model used. The major credit bureaus all have slightly different information regarding your credit history. This means that these three, along with other credit reporting agencies, report several FICO credit scores to lenders to account for different information they’ve collected.
There are also different scores specific to particular industries. For example, auto lenders review different risk factors than mortgage lenders, so the scores each lender receives might differ. Although it can get confusing, the most important things to remember are the five core factors that affect your credit score.
Bottom line: Although many people reference their credit score in the singular, the truth is that there are many different types of credit scores that take into account different factors.
7. Checking your own credit won’t hurt your score
Many people believe that checking their credit score or credit report hurts their credit, but fortunately, this isn’t true. Getting a copy of your credit report or checking your score doesn’t affect your credit score. These actions are called “soft” inquiries into your credit, and while they are noted on your credit report, they shouldn’t have any effect on your score.
Hard inquiries, on the other hand, are noted when lenders look at your credit during an application process—and these can temporarily reduce your score. This is used to discourage you from applying for new credit too frequently. However, the effect is typically small, and after a couple of years the notation of a hard inquiry will leave your report.
Bottom line: You can check your own credit report and credit score without any negative effect—and we actually encourage you to do so to stay on top of your credit health.
8. You can check your credit score and credit reports for free
There are three main ways to check your credit for free. You’ll likely want to take a look at both your credit reports and your credit scores. Here’s how to get a hold of both of those:
You’re entitled to a free credit report once each year by visiting AnnualCreditReport.com, a government-sponsored website that gives you access to your reports from TransUnion, Experian and Equifax.
You may be able to check your credit score free by contacting your bank or credit card company. Additionally, many free services—like Mint—enable you to monitor your score for free. Just make sure to note which kind of credit score you’re seeing, because there are many different scoring methods.
The information you find in your credit report lays out the factors that determine your credit score. By scanning your report closely, you’ll likely find out the best strategy for improving your score—for instance, by improving your payment history or lowering your utilization.
Bottom line: Information about your credit is freely available, so take advantage of those resources to stay on top of your credit report and score.
9. Your credit score can cost you money
Ultimately, the purpose of credit scores is to help lenders determine whether they should offer you new credit, like a loan or a credit card. A lower score indicates that you may be at greater risk for default—which means the lender has to worry that you won’t pay back your debts.
To offset this risk, lenders often deny credit applications for those with lower scores, or they extend credit with high interest rates. These interest rates can cost you a lot of money over time, so working to improve your credit score can have a measurable effect on your financial life.
Consider, for example, a $25,000 auto loan. With a fair credit score, you may secure an interest rate of 5.3 percent—so you’ll pay a total of $3,513 in interest over five years. With an excellent credit score, your rate could drop to 3.1 percent, and you’ll save nearly $1,500 in interest charges over that same five-year period.
Bottom line: A good credit score can have a positive impact on your finances, and a bad score can cost you money in interest charges.
10. Canceling old credit cards can lower your score
If you have a credit card that you’re no longer using, you may be tempted to close the account entirely. Before doing that, though, consider how it could impact your credit score.
Recall that two credit factors are utilization and length of credit history. Closing an old account could affect one or both of those factors when it comes to calculating your score.
Your credit utilization could drop after closing an account because your credit limit will likely be lower. Since utilization represents all of your balances divided by your total credit limit, your utilization will go up if your credit limit goes down (and if your balances stay the same).
Your length of credit history could be lowered if you close an older account that is raising the average age of your credit.
Some people worry that having a zero balance on their credit card can negatively impact their score. This is just a credit myth. A zero balance means you aren’t using the card to make any purchases. Keeping the credit card open while not using it actually works to your benefit. You’re able to contribute to the length of your credit history, while not risking the chance of debt and late payments.
You may need to use the card every now and then to avoid having it closed. Additionally, if the card has an annual fee, you may need to close the card or ask to have the card downgraded to a version that does not have a fee. Still, if there’s a way to keep the card open, it’s often good to do so even if you don’t plan to regularly use it.
Bottom line: An old credit card can benefit your credit score even if you aren’t using it anymore.
11. You can still get a loan with bad credit
It’s true that getting a loan can be more difficult with bad credit, but it’s not impossible. There are bad credit loans specifically for people with lower credit scores. Note, however, that these loans often come with higher interest rates—or they require some sort of collateral that the lender can use to secure the loan. That means if you don’t pay your loan back, the lender will be able to seize the property you put up as collateral.
If you don’t need a loan immediately, you could consider trying to rebuild your credit before applying. There are credit builder loans, which are specifically designed to help you build up a strong payment history and improve your credit in the process. Unlike a traditional loan, you pay for a credit builder loan each month and then receive the sum after your final payment. Since these loans represent no risk to lenders, they’re often willing to extend them to people with poor credit history looking to raise their score.
Bottom line: You can get a loan even with bad credit—but sometimes it’s wise to find ways to raise your score before applying.
12. Credit scores aren’t the only deciding factor for lending decisions
While credit scores are important in lending decisions, lenders may take other factors into account when deciding whether to offer you new credit. For example, your income and employment can play a significant role in your approval odds. Additionally, some loans (like auto loans and mortgages) are secured by collateral that the lender can seize if you default. These loans may be considered less risky for the lender in certain cases because the asset can help offset any losses from nonpayment.
In many cases, your debt-to-income ratio is also an important factor in whether you’re approved for a loan or credit card. Lenders consider your current monthly debt payments (from all sources) as well as your monthly income to determine whether you may be overextended financially.
Two different people may pay $1,500 each month for student loans, a car payment and a mortgage. That said, if one individual makes $3,500 each month and the other makes $8,000 each month, their situations will be considered very differently by a potential lender.
Bottom line: Keeping your credit score high can help you secure credit when you need it, but you’ll want to stay on top of all aspects of your financial health.
13. Your credit report can help you spot fraud
Regularly checking your credit report can help you notice fraud or identity theft. If someone is using your information to open accounts, they will show up on your credit report.
If you notice an account that you did not open, you’ll want to start taking steps to protect your identity from any further damage. You may also want to freeze or lock your credit, which prevents anyone from using your information to open up more accounts.
Bottom line: Reviewing your credit report provides you an opportunity to notice when something is amiss.
14. Joint accounts affect your credit scores, but you do not have joint scores
If you have a joint account with someone else, that account will be reflected on both of your credit reports. For example, a loan that was opened by you and your spouse will show up for both of you—and will affect both of your credit scores. That said, your credit history, credit report and credit score remain separate. No one—including married couples—has a joint credit report or joint credit score.
In addition to joint accounts, you may also have authorized users on your credit card, or be an authorized user yourself. Authorized users have access to account funds, but they are not liable for debts. That means that if you make someone an authorized user on your credit card, they can rack up charges, but you’ll be on the hook if they don’t pay.
Because joint account owners and authorized users can influence credit scores in significant ways, we advise you to be careful about who you open accounts with or provide authorization to.
Bottom line: Even though joint account owners and authorized users can influence someone else’s credit, there are no shared credit reports or joint credit scores.
15. Many credit reports contain inaccurate credit information
The Federal Trade Commission found that one in five people has an error on at least one of their credit reports, and these inaccuracies can greatly impact your credit. (Also see this 2015 follow-up study from the FTC for more information regarding credit report errors.) This is why you should frequently check your credit report and dispute any inaccurate information. For example, since payment history accounts for 30 percent of your credit score, one wrong late payment can significantly hurt your score.
It’s important to get your credit facts straight so you understand exactly how different things impact your score. One of the first things you should learn is how to read your credit report so you can quickly spot discrepancies and ensure that the information reported is fair and accurate.
After scrutinizing your credit report, you can look into other ways to fix your credit, like paying late or past-due accounts, so you can help your credit with your newfound knowledge. You can also take advantage of Lexington Law Firm’s credit repair services to get extra help and additional legal knowledge to assist you.
Bottom line: Your credit report could have inaccurate information that’s hurting your score unfairly. Fortunately, there is a credit dispute process that can help you clean up your report and ensure all of the information on it is correct.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
Reviewed By
Nature Lewis
Associate Attorney
Before joining Lexington Law as an Associate Attorney, Nature Lewis managed a successful practice representing tenants in Maricopa County.
Through her representation of tenants, Nature gained experience in Federal law, Family law, Probate, Consumer protection and Civil law. She received numerous accolades for her dedication to Tenant Protection in Arizona, including, John P. Frank Advocate for Justice Award in 2016, Top 50 Pro Bono Attorney of 2015, New Tenant Attorney of the Year in 2015 and Maricopa County Attorney of the Month in March 2015. Nature continued her dedication to pro bono work while volunteering at Community Legal Services’ Volunteer Lawyer’s Program and assisting victims of Domestic Violence at the local shelter. Nature is passionate about providing free knowledge to the underserved community and continues to hold free seminars about tenant rights and plans to incorporate consumer rights in her free seminars. Nature is a wife and mother of 5 children. She and her husband have been married for 24 years and enjoy traveling internationally, watching movies and promoting their indie published comic books!
Understanding debt collection practices is essential for anyone who has borrowed money. There are many misconceptions about how the process works, and today, we will address one common question: Can a collection agency sell my debt to another agency? The answer might surprise you.
Understanding Collection Agencies
What is a collection agency?
A collection agency is a company that specializes in collecting unpaid debts. They can be classified into different types, such as third-party debt collectors, first-party debt collectors, and debt buyers. Debt collection agencies play a crucial role in the debt recovery process, often stepping in when the original creditor is unable to collect the debt themselves.
How Collection Agencies Work
Collection agencies typically purchase debt from original creditors at a discounted price. This allows the original creditor to recover a portion of the outstanding debt while passing the responsibility of collecting the remaining balance to the collection agency. Once the debt has been transferred, the collection agency will attempt to collect payment from the debtor.
Can a collection agency sell your debt?
Legality of Debt Selling
According to the Fair Debt Collection Practices Act (FDCPA), it is legal for a collection agency to sell your debt to another agency. The FDCPA governs the actions of debt collectors and provides guidelines for how they must conduct themselves when attempting to collect a debt.
Reasons for Selling Debt
There are several reasons why a debt collection agency might choose to sell a debt:
Maximizing profit and minimizing loss: Debt buyers often purchase delinquent debt for a fraction of its original value. By selling the debt to another agency, the current debt holder can recoup some of their investment and reduce potential losses.
Prioritizing collection efforts: Debt collection agencies have limited resources and must prioritize which debts to pursue. By selling debts they deem less likely to be collected, they can focus on more profitable accounts.
Managing operational costs and resources: Selling debt can help a collection agency manage its cash flow and staffing needs, allowing it to maintain a steady stream of revenue.
The Debt Buying Process
How Debts Are Sold
Debts are often sold in large portfolios through auctions, where debt buyers and collection agencies bid on the right to collect the outstanding balances. Factors that can affect the price of debt include the age of the debt, the likelihood of successful collection, and the debtor’s credit history.
The Lifecycle of Debt
Debts can go through several stages during the collection and recovery process, with each stage affecting its collectability and sale value. As a debt ages, its value typically decreases, making it less attractive to potential buyers.
What happens when your debt is sold?
Rights and Responsibilities of the New Debt Owner
When a debt is sold, the new debt owner must abide by the FDCPA’s guidelines, just like the previous debt collector. This includes validating the debt and providing the debtor with a debt validation letter.
How Debt Sales Affect You
When your debt is transferred to a different debt collector, several changes may occur:
Communication with the new debt collector: You will likely receive notification from the new debt collector, explaining the transfer and providing their contact information.
Possible changes in collection tactics: Each debt collection agency has its preferred methods for pursuing debts, which means you might experience different collection tactics after your account has been sold.
Impact on your credit report: When a debt is sold, the original creditor typically reports the account as charged off, while the new debt collector will report the account as a collection account. This can negatively impact your credit score.
The Impact of Sold Debt on Your Credit Report
How Sold Debts Appear on Credit Reports
When a debt is sold to a collection agency, it can lead to multiple entries on your credit report. Initially, the original creditor will report the account as charged off, indicating that they have given up on collecting the debt.
Subsequently, the debt purchaser will create a new entry on your credit report as a collection account. If your debt is sold multiple times, each new debt collector may report the collection account, resulting in multiple entries for the same debt on your credit report.
How to Dispute Inaccuracies on Credit Reports
If you find inaccuracies on your credit report, such as incorrect balances, duplicate accounts, or accounts that should have been removed due to the statute of limitations, you are entitled to file a dispute. To do this, contact the credit reporting agencies (Equifax, Experian, and TransUnion) individually.
Send a written dispute letter to each agency, explaining the error and providing any supporting documentation. The credit reporting agencies are required to investigate your dispute and correct any verified inaccuracies within 30 days.
See also: How to Remove Collections From Your Credit Report
Strategies for Settling Sold Debts
Debt Settlement Companies and Their Role
Debt settlement companies can help you negotiate with debt collectors and potentially settle your debts for less than the full amount owed. These companies work on your behalf to reach agreements with creditors or debt collectors, often by offering a lump sum payment in exchange for forgiving the remaining balance.
While debt settlement companies can be helpful, they may also charge high fees and cannot guarantee success in settling your debts. Additionally, settled debts can negatively impact your credit score, as they will be reported as “settled” rather than “paid in full.”
Do-It-Yourself Debt Settlement
If you prefer to negotiate directly with debt collectors, follow these tips for a successful negotiation:
Assess your financial situation and determine how much you can afford to offer as a lump sum or monthly payment.
Research the statute of limitations for your debt, as this information can be a valuable bargaining tool during negotiations.
Contact the debt collector and make a reasonable offer based on your financial situation and the age of the debt.
Request a written agreement from the debt collector, outlining the terms of the settlement, and ensure that the agreement includes a statement that the debt will be considered paid in full upon receipt of the agreed-upon amount.
Keep records of all communications and payments, as this documentation can be useful in disputes or legal matters.
Protecting Yourself and Your Rights
Understanding Your Rights Under the FDCPA
The FDCPA provides protections for consumers against abusive and unfair debt collection practices. It’s essential to understand your rights under the FDCPA, including the prohibition of certain collection practices and your right to request debt validation.
Tips for Dealing with Debt Collectors
When dealing with debt collectors, consider the following tips:
Keep records of all communications: Maintain a file with all correspondence, phone call records, and payment agreements. This documentation can be useful in disputes or legal matters.
Negotiate a settlement or payment plan: If you cannot pay the full amount, try to negotiate a reduced payment or payment plan with the collector. Make sure to get any agreement in writing.
Know when to seek legal help: If you believe your rights under the FDCPA have been violated, consider consulting with an attorney or contacting your state’s attorney general’s office.
Bottom Line
It is legal for collection agencies to sell your debt to another agency. This practice is common in the debt collection industry, and understanding the process can help you understand the process of dealing with debt collectors. By staying informed about your rights and the collection process, you can better protect yourself and work towards resolving your outstanding debts.
Remember, financial literacy is crucial in managing debt and maintaining good credit. By staying informed and proactive, you can successfully deal with debt collection and take control of your financial future.
Dealing with debt can be an overwhelming experience. When you find yourself in a situation where you are unable to pay a debt, it’s important to understand the consequences of not paying a debt collector.
In this article, we’ll discuss the roles of collection agencies, the impact on your credit report, legal consequences, communication strategies, and ways to prevent debt collection issues.
Understanding Debt Collectors
Debt collectors are entities hired by creditors to collect debts owed by individuals or businesses. When you owe money to a creditor, such as on credit card debt or medical bills, and fail to make timely payments, the original creditor may sell or transfer the debt to a debt collection agency.
These agencies are responsible for collecting the unpaid debt and may employ various tactics, including phone calls and letters, to collect the outstanding balance.
The Debt Collection Process
Debt collection agencies follow a set process when collecting unpaid debts:
Initial contact: Collection agencies typically begin their collection efforts by sending a written notice, often called a demand letter, detailing the owed amount, the name of the original creditor, and instructions for repaying the debt.
Ongoing communication: If the initial notice is unsuccessful, the debt collector will continue to contact you via phone calls, emails, or additional letters to encourage you to repay the debt.
Reporting to credit bureaus: After a certain period of missed payments, usually around 180 days, the debt collector may report the unpaid debt to credit bureaus, which can negatively impact your credit score.
Potential legal action: If you still haven’t paid the debt, the debt collector may choose to file a lawsuit to recover the funds, which could lead to wage garnishment or seizure of assets if they obtain a judgment against you.
Legal Consequences of Not Paying a Debt Collector
1. Impact on Your Credit Report
When you don’t pay a debt collector, the collection account may be reported to the credit bureaus, which can have a negative impact on your credit score. A missed payment or default on your credit report can cause your score to drop significantly and remain on your credit history for up to seven years.
2. Lawsuits and Judgments
Debt collectors may resort to legal action in an attempt to collect an unpaid debt. Debt collection lawsuits can lead to judgments against you, which may result in wage garnishment, bank account levies, and asset seizures. It’s crucial to respond to a debt collector’s attorney or law firm if they initiate a lawsuit to avoid default judgments.
3. Statute of Limitations
The statute of limitations on debt is the time period during which a debt collector can sue you to collect a debt. This varies by state and the type of debt but typically ranges from three to six years. After this period, debt collectors can still attempt to collect the debt, but they lose the right to sue you for it.
4. Property Liens
In some cases, a debt collector may obtain a judgment against you and place a lien on your property. This means that if you sell the property, the debt must be paid from the proceeds before you receive any funds. Liens can also impact your ability to refinance or secure a home equity loan.
5. Seizure of Assets
Depending on the type of debt and the jurisdiction, a debt collector may have the legal right to seize your assets, such as your car or other personal property, to satisfy the debt after obtaining a court judgment.
6. Tax Consequences
If you negotiate a settlement with a debt collector for less than the full amount owed, the difference between the original debt and the settled amount may be considered taxable income by the Internal Revenue Service (IRS). You could receive a 1099-C form and be required to report this amount on your tax return.
7. Loss of professional licenses or certifications
In some cases, failure to pay certain types of debt may result in the suspension or revocation of professional licenses or certifications, impacting your ability to work in your chosen field.
Communication with Debt Collectors
The Fair Debt Collection Practices Act (FDCPA) is a federal law enacted to protect consumers from abusive debt collection practices. Under this act, debt collectors are prohibited from engaging in harassment, making false statements, and using unfair practices to collect debts.
If you believe your debt collection rights have been violated, you can report the violation to the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB).
How to Respond to a Collections Notice
Receiving a collections notice can be stressful, but it’s important to act promptly and responsibly. Here’s a step-by-step guide on how to respond to a collections notice:
1. Don’t ignore the notice
Ignoring a collections notice can lead to further consequences, including damage to your credit report and potential legal action. It’s crucial to address the notice as soon as possible to avoid escalating the situation.
2. Verify the debt
Before taking any action, request debt validation from the debt collector to confirm the legitimacy of the debt. This collection agency should reply to you in a letter that includes the amount owed, the name of the original creditor, and any additional details about the debt. Ensure that the information is accurate and up-to-date.
3. Determine if the debt is within the statute of limitations
Research the statute of limitations for the type of debt in your state to determine if the debt collector can still legally sue you for the unpaid amount. If the statute of limitations has passed, inform the debt collector and dispute the debt with the credit bureaus.
4. Negotiate with the debt collector
If the debt is legitimate and within the statute of limitations, consider negotiating a payment plan or settlement with the debt collector. This may involve agreeing to pay a partial payment or making monthly installments until the debt is paid in full. Be sure to get any agreements in writing to protect yourself.
5. Dispute any inaccuracies
If you find any discrepancies in the debt validation letter or believe the debt is incorrect, dispute the information with the debt collector and the credit bureaus. Provide any relevant documentation to support your claim.
6. Seek professional advice
If you’re unsure about how to handle the collections notice or need assistance with debt management, consider consulting a credit counselor, financial advisor, or attorney. These professionals can provide guidance and help you deal with collections.
Preventing Debt Collection Issues
Dealing with debt collectors can be overwhelming, but taking proactive steps to prevent debt collection issues from arising in the first place is key to maintaining your financial well-being. Here are various strategies that can help you avoid the pitfalls of unpaid debts and ensure you stay on track with your financial goals.
Create a budget and manage expenses: Developing a budget and tracking your expenses can help you avoid accumulating debt and ensure you’re making timely payments to your creditors.
Prioritize debt repayment: Paying off high-interest debts, such as credit card debt, should be a priority to prevent the debt from growing and to protect your credit score.
Seek help from credit counseling agencies or financial advisors: If you’re struggling with debt, consider reaching out to a credit counseling agency or a financial advisor for guidance. These professionals can help you develop a debt repayment plan, negotiate with your creditors, and offer advice on managing your finances more effectively.
Understand the importance of timely bill payments: Making timely payments on your bills, including credit card debt and medical bills, is essential for maintaining a healthy credit score and preventing collection accounts from appearing on your credit report.
Build an emergency fund: Having an emergency fund can provide a financial cushion in times of unexpected expenses or income loss. This can help you avoid resorting to credit cards or loans, reducing the likelihood of falling into debt.
Monitor your credit reports: Regularly reviewing your credit reports allows you to spot any inaccuracies or signs of identity theft early on. You can also track your progress in improving your credit score and ensure that paid-off debts are accurately reflected.
Conclusion
Failing to pay a debt collector can lead to several negative consequences, including damage to your credit report, legal actions, and financial stress. It’s essential to understand the roles of debt collectors and collection agencies, as well as your rights under the FDCPA. If you find yourself dealing with unpaid debts, it’s crucial to communicate effectively with debt collectors and explore your options for repayment or dispute.
By prioritizing debt repayment, creating a budget, and seeking help from credit counseling agencies or financial advisors, you can work towards resolving your debt issues and maintaining good financial health. Remember, knowledge is power, and understanding the debt collection process and your rights will help you overcome these challenges more effectively.
Shopping for your first home is an exciting time. You are choosing a place to plant yourself and bloom for many years to come.
However, home shopping is not all fun and games. Not only do you have to find the perfect home, but also the right financing terms for your new mortgage. If you have bad credit, you are likely worried about your mortgage options.
As a first-time homebuyer, the process of buying a home can be overwhelming. Before you lose hope, it is entirely possible to secure a home loan with bad credit. Many mortgage lenders offer subprime home loans that work specifically with borrowers with poor credit. We will dive into the details to help you get through the first-time home-buying process more easily.
How Bad Credit Can Affect Your Home Loan
Typically, lenders that approve loans to borrowers with bad credit offer less than favorable terms. In most cases, you can expect to pay a higher interest rate.
A slightly higher interest rate might not seem like a big deal. However, even a slight increase in your interest rate could result in thousands of dollars in interest payments over the course of your loan.
When you sort through your loan offers, make sure to run the numbers. You might not be willing to pay the premium rates for the opportunity to buy a home right now.
Other Factors that Mortgage Lenders Consider
As a borrower, your credit score is not the only factor lenders consider. Before a mortgage lender approves a large loan, it will look at various other factors, including:
The amount of money in your savings account. If you have a healthy savings account, that may offset your bad credit.
Income. The higher your income, the more likely you are to be approved.
Employment history. If you just landed a high paying job, then the lender might be less willing to work with you. However, consistently earning a high income for many years will strengthen your application.
Debt-to-income ratio. If you already have a high debt burden, then lenders may be less willing to work with you.
Current expenses. If your current rent payment is similar to the mortgage payment, then a lender may see that you are able to easily handle that expense.
When you go through the home buying process, expect to provide a lot of paperwork to verify this information. In many cases, you will be required to provide tax statements, paychecks, and more. However, if you stay organized throughout the process, your sanity will thank you later.
How to Secure Home Financing with Bad Credit
To qualify for a bad credit home loan, you will need to be willing to put in the time. Finding the best option for your situation may require some patience. Not all options will work for everyone, but it is likely that at least one option will work for everyone.
See Where You Stand
Before you start looking for homes, take a closer look at your financial health.
Start by checking your credit score. A free way to do this is through Credit Karma. Once you know where your credit score is, take the time to find your credit report. Once you have your credit report, read through for any errors. A mistake on your credit report may be dragging your score down. If you find any mistakes, you can dispute them.
After digging into your credit score, take a step back. Assess your savings. Have you grown it steadily? Either way, it is crucial to understand exactly how much house you can afford.
Consider Saving for a Larger Down Payment
One way to secure a mortgage loan with more favorable terms with bad credit is to provide a larger down payment. Bigger down payments give the mortgage lender reassurance that you are able to repay the loan.
For conventional loans, banks typically require a down payment of at least 20%, but there are many options for a lower down payment. But you can usually secure better terms if you wait until you’ve saved a sizable down payment.
Find A Lender that Will Work with You
Not every lender is willing to work with bad credit borrowers. Although, you may not be able to secure a conventional loan from a well-known bank, it is entirely possible to find a lender.
If you have bad credit, you’ll need to find a lender that offers subprime home loans or that works with government-backed programs.
Luckily, many mortgage lenders are likely willing to work with you. The tricky part can be finding your choices. Check out our top mortgage lenders to get started.
Financing Options for First Time Homebuyers with Bad Credit
The federal government offers several assistance programs for buying your first home. Take a minute to find out if you qualify for any of these programs.
FHA Loans
If you have bad credit, an FHA loan might be your best option. The minimum credit score to qualify for an FHA loan is just 500! Of course, some mortgage lenders may require a slightly higher score to approve you. But you can shop around to find a lender willing to work with you.
If your credit score is between 500 and 579, the Federal Housing Administration (FHA) requires a minimum down payment of at least 10%. However, if you have a minimum credit score of 580, you’ll only be required to put down 3.5%.
With FHA loans, a mortgage insurance premium (MIP) is required along with an upfront MIP fee of 1.75% of the loan amount.
As a first-time homebuyer with bad credit, the benefits of this program can help your home purchase go smoothly.
USDA Loans
If you are willing to live in a rural community, a USDA loan could be a suitable option. These loans are guaranteed by the United States Department of Agriculture, and don’t private mortgage insurance (PMI).
Typically, you’ll need a minimum credit score of 640 to score a USDA loan. However, a lower credit score does not automatically disqualify you.
If you have a low credit score, then the lender will look more closely at other contributing factors before deciding on your loan application. You may need to prove that your credit was damaged by something outside your control or provide credit references like utility statements to prove your creditworthiness.
VA Loans
A VA home loan is guaranteed by the Department of Veteran Affairs. If you meet the requirements of service, then you could qualify for a no down payment option to secure the home of your dreams.
In contrast to traditional lenders, the VA home loan program has less strict requirements when it comes to their loans. The goal of the program is to get the bravest in our nation into a safe home. With that, lenders that provide VA-backed loans can offer loans to borrowers with lower credit scores.
Almost every member or veteran of the military, reserve, or National Guard is eligible to apply for these loans. The first step you should take is to secure your Certificate of Eligibility. With that, you’ll be able to apply for a VA loan with an approved lender.
See also: How to Get a VA Loan with Bad Credit
Research State Assistance Programs
The U.S. Department of Housing and Urban Development works to provide affordable homeownership options throughout the country. In many states, they offer first-time homebuyers assistance.
Depending on your area and income, the type of assistance may vary. For example, in some areas, you may qualify for a down payment grant that will help you secure your home purchase. With a higher down payment, you may be able to offset the negative effects of your poor credit score.
Compare Mortgage Rates
Once you have determined the best path for you, it is time to compare lenders. If you take the time to shop around for the best loan terms, you stand to save thousands of dollars over the course of your loan.
Shopping around for the right lender might be the most important part of your entire home buying process. Find a lender that you are comfortable with and that is willing to work with your poor credit score.
Work on Your Credit Score
A surefire way to secure better mortgage terms is to improve your credit score. If you can wait on your home purchase, then you might have a stronger loan application.
Improving your credit score will take time. But if you put in the effort the long-term benefits are worth it. Not only will you be more likely to be approved for loans, but also will likely pay less in interest payments.
To start improving your credit score make sure to pay bills on time and work towards paying off your debt.
First-Time Home Buyer with Bad Credit FAQs
Can I buy a house with bad credit?
Yes, it is possible to get a home loan with bad credit. However, the interest rate and other loan terms may be more expensive than if you had good credit.
You may also need to have a bigger down payment and show proof of income. However, there are also lenders who specialize in offering mortgages to people with low credit scores.
What are the requirements for getting a mortgage with bad credit?
Have a steady income: Lenders want to know that you have a consistent income, so they will want to see evidence of your income such as pay stubs or W2s.
Have enough money saved for a down payment: With poor credit, most lenders will require a down payment of at least 5-10% of the purchase price.
Accept higher interest rates and fees: With a weak credit history, you may be required to pay higher interest rates and fees.
Find a cosigner: Having a cosigner can help you get approved for a mortgage with bad credit. The cosigner will be held responsible for the loan if you are unable to make your monthly mortgage payments.
What do mortgage lenders consider a bad credit score?
Lenders generally consider a credit score below 580 to be bad credit. Lenders may also consider scores between 580 and 669 to be fair credit. Credit scores of 670 or higher are typically considered good credit.
What is the minimum credit score needed for a mortgage?
Minimum credit scores needed for a mortgage varies by lender, but typically a score of 620 or higher is required for conventional loans, and a score of 500 or higher is required for FHA loans.
The minimum credit score needed for USDA loans is typically 640, and the minimum credit score needed for VA loans is typically 620.
What type of mortgage loan is best for someone with bad credit?
The best type of loan for someone with bad credit is usually an FHA loan. These loans are typically easier to qualify for than other types of loans, as they have more lenient credit score minimums and down payment requirements.
What other factors do lenders consider when evaluating my loan application?
Lenders will typically look at your credit score and credit report to assess your creditworthiness. They may also consider your down payment, debt-to-income ratio (DTI), income, employment history, and assets when evaluating your loan application.
Your down payment can show lenders that you are committed to the loan, and can also help to reduce the amount of the loan. Your DTI ratio is a measure of how much of your income is going towards paying off your existing debts. A higher DTI ratio can indicate to lenders that you may not be able to afford a loan.
Your income, employment history, and assets provide further evidence that you are a reliable borrower, and can help to establish your ability to repay the loan.
What is a conventional loan?
A conventional loan is a type of loan that is issued by private lenders and purchased by government-sponsored enterprises such as Fannie Mae and Freddie Mac.
How can I improve my credit scores?
Pay your bills on time: Payment history is the most important factor in your credit score, so be sure to make payments on all your bills on time.
Keep credit card balances low: Your credit utilization ratio, or the amount of available credit you are using, makes up 30% of your credit score. Try to keep your credit card balances low by using no more than 30% of your credit limit.
Don’t open too many new accounts: Opening too many accounts in a short period of time can be a red flag for lenders and can hurt your credit score.
Check your credit report: Make sure to regularly check your credit report for errors or other negative information that can hurt your score.
Consider a credit builder loan: Credit builder loans are designed to help people with no or low credit build a payment history and improve their credit score over time.
Bottom Line
Purchasing the home of your dreams with bad credit is not impossible. You will need to put in the time to figure out which path is the right one for you.
Once you see your financial path to your home, make steps towards that goal every single day. Your new home is not as far away as you think!
Medical debt is an unfortunate reality for millions of Americans. As healthcare costs continue to rise, it becomes increasingly important to understand the financial implications of medical debt and its impact on your credit score.
This article will delve into the world of medical debt and provide you with strategies to manage and minimize its effects on your credit score.
How Medical Bills Affect Credit Scores
Unpaid medical debt can have a significant impact on your credit scores, especially when it becomes delinquent or goes to collections. Here are some key points to consider:
The role of medical debt in credit score calculations: Medical bills, like other types of debt, factor into your credit score calculations. Late or missed payments and unpaid bills can lower your credit scores, making it more challenging to obtain loans, credit cards, or favorable interest rates.
Late payments and unpaid medical bills: Late payments on medical bills can be reported to the three major credit bureaus, which may negatively affect your credit scores. If unpaid, medical bills can eventually be sent to collections, further damaging your credit.
Impact of medical debt on different credit scoring models: Unpaid medical debt can affect your credit score differently, depending on the credit scoring model being used. For example, newer credit scoring models like FICO Score 9 and VantageScore 4.0 give less weight to medical debt compared to other types of debt, while older models treat medical debt more harshly.
The Medical Debt Collection Process
Understanding the medical debt collection process can help you take control of the situation and potentially minimize its impact on your credit scores.
How medical debt becomes a collection account: When a medical bill remains unpaid for an extended period, the medical provider may sell the debt to a collection agency. The collection agency then reports the debt to credit bureaus, which can cause a significant drop in your credit scores.
The role of collection agencies: Collection agencies are responsible for recovering unpaid medical debts. They may contact you through phone calls, letters, or even legal actions to collect the outstanding balance.
Statute of limitations on medical debt: The statute of limitations for medical debt varies by state, ranging from three to ten years. This is the time frame within which a collector can sue you for the unpaid debt. It’s important to know the statute of limitations in your state, as it can help you strategize your approach to dealing with unpaid medical debt.
Medical Bills Grace Period and Reporting
A grace period can provide some relief when dealing with medical bills, but it’s crucial to understand its impact on credit reporting.
How grace periods work with medical bills: Some medical providers may offer a grace period, typically 30 to 180 days, during which they will not report late or missed payments to credit bureaus. This gives you time to resolve any disputes, work with your health insurance company, or make arrangements to pay the bill.
Impact of grace periods on credit reporting: Even if your medical provider offers a grace period, it’s essential to pay your medical bills promptly. Once the grace period ends, late payments can be reported to credit bureaus, negatively impacting your credit.
Changes in medical debt reporting rules: Recent changes to credit reporting rules have made it more difficult for medical debt to impact your credit scores. These changes include a 180-day waiting period before medical debt can be reported to credit bureaus and the removal of medical collections paid or settled by insurance.
Can medical bills be removed from my credit report?
If you believe a medical collection on your credit report is inaccurate or unfair, you are entitled to dispute it. To dispute a medical collection, you’ll need to contact the credit bureau reporting the debt and provide supporting documentation to prove that the collection is inaccurate or unjust.
First, you’ll need to gather all relevant documents, such as medical bills, insurance Explanation of Benefits (EOB), payment records, and any correspondence with the medical provider or collection agency. This evidence will help you build a strong case when disputing the collection.
Then, once the credit bureau receives your dispute, they typically have 30 days to investigate the matter. If the dispute is resolved in your favor, the medical collection will be removed from your credit report, which may result in a boost to your credit score.
Does paying off medical collections improve my credit?
Paying off medical collections can have a positive impact on your credit, but the extent of the improvement depends on various factors.
The importance of paying medical debt: Paying off medical debt shows financial responsibility and can help prevent further damage to your credit.
How payment history affects credit scores: Your payment history makes up a significant portion of your credit score calculation. Settling medical debts can have a positive effect on your payment history, potentially improving your credit.
Settling medical debt for less than the full amount: In some cases, collection agencies may be willing to accept a lower amount to settle the debt. While this can help you save money, keep in mind that the partial payment may still be reported to credit bureaus, which could have a less favorable impact on your credit score compared to paying the debt in full.
Strategies for Managing Medical Bills
Effectively managing your medical bills can help prevent them from damaging your credit scores.
Negotiating medical bills with healthcare providers: Before a bill goes to collections, you may be able to negotiate with your healthcare provider to lower the cost, set up a payment plan, or request financial assistance.
Repayment plans and options: Many medical providers offer payment plans that allow you to pay your medical bills over time. This can make it more manageable to handle large medical expenses without hurting your credit scores.
Hiring a medical billing advocate: A medical billing advocate can help you review your medical bills for errors, negotiate with medical providers, and even guide you through the insurance claim process.
Seeking financial assistance and grants: Look for financial assistance programs, grants, or charities that may help cover the cost of your medical bills. Some hospitals and clinics also have programs for eligible patients.
Weighing the pros and cons of personal loans or credit cards: Using personal loans or credit cards to pay off medical debt can be an option, but consider the potential impact on your credit scores, as well as the interest rates and fees associated with these forms of borrowing.
What to do if You Can’t Pay Your Medical Bills
You have certain rights under the Fair Debt Collection Practices Act (FDCPA), which protects you from abusive or deceptive debt collection practices. Make sure you understand your rights and options when dealing with medical debt.
Keep an open line of communication with your medical provider and debt collectors. Discuss your financial situation, ask for assistance, or negotiate a payment plan to help manage your medical bills.
In extreme cases, bankruptcy may be a viable option to address overwhelming medical debt. However, it’s essential to consider the long-term implications, as bankruptcy can have a significant and lasting impact on your credit.
Preventing Medical Debt from Damaging Your Credit
Taking a proactive approach to managing medical expenses can help protect your credit score. Review your medical bill and insurance statement carefully for errors, and address any discrepancies promptly. Keep track of due dates and submit insurance claims as soon as possible to avoid late payments or collections.
Maintaining a record of your medical expenses can help you budget effectively and ensure you don’t miss any payments. Consider using financial management tools, apps, or a simple spreadsheet to stay organized.
You should also regularly review your credit report for any inaccuracies. By catching errors early, you can dispute them and potentially prevent damage to your credit score.
Keeping Your Credit Score Healthy
Some strategies for maintaining a healthy credit score include making timely payments on all your debts, keeping your credit utilization low, and diversifying your credit mix by using different types of credit responsibly.
Establishing a solid credit history takes time and consistent effort. By using credit responsibly, making timely payments, and avoiding high levels of debt, you can build a strong credit history that will serve you well in the long run.
Having a financial plan and an emergency fund can help you handle unexpected medical expenses without relying on credit, which could negatively impact your credit. Aim to save at least three to six months’ worth of living expenses in an emergency fund.
Conclusion
Unpaid medical debt can have a substantial impact on your credit, but understanding how it works and taking proactive steps to manage it can help you minimize its effects. Stay on top of your medical expenses, communicate with medical providers and debt collectors, and maintain a healthy credit score by following the strategies outlined in this article.
Remember, your financial health is just as important as your physical health, and taking control of your medical debt is a crucial step toward financial well-being.
Frequently Asked Questions
What happens when medical debt is sold to a collection agency?
When medical debt is sold to a collection agency, the agency becomes responsible for recovering the unpaid debt. They may contact you through phone calls, letters, or even legal actions to collect the outstanding balance. The collection agency also reports the debt to credit bureaus, which can cause a significant drop in your credit score.
What are the consequences of unpaid medical collections over $500?
Unpaid medical collection accounts over $500 can stay on your credit reports for up to seven years and have serious consequences, such as:
Significant damage to your credit score
Difficulty obtaining loans, credit cards, or favorable interest rates
Potential legal actions or wage garnishments
Increased stress and financial burden
It’s crucial to address unpaid medical debt promptly to minimize these consequences.
What should you do if you can’t pay a medical bill on time?
If you can’t pay a medical bill on time, consider the following options:
Communicate with your medical provider about your financial situation and ask for assistance or a payment plan.
Explore financial assistance programs, grants, or charities that may help cover the cost of your medical bill.
Negotiate with the medical provider to lower the cost or set up a payment plan.
Hire a medical billing advocate to help you review your bills and negotiate with the medical provider.
How can you negotiate medical bills?
To negotiate medical bills, follow these steps:
Review your bills and insurance statements for errors or discrepancies.
Research the average cost of the medical service in your area.
Prepare a case, explaining why you believe the bill should be reduced.
Contact your medical provider’s billing department and discuss your concerns.
Be prepared to provide documentation and evidence to support your case.
Remain polite and persistent throughout the negotiation process.
How can I get medical bills off my credit report?
To get medical bills off your credit report, the first step is to review your credit report for inaccuracies and verify the legitimacy of the medical collections listed. Inaccurate or unjust collections can be disputed, and if the dispute is resolved in your favor, the medical debt will be removed from your credit report.
To dispute a medical collection, contact the credit bureau reporting the debt and provide supporting documentation, such as insurance Explanation of Benefits (EOB), payment records, and any correspondence with the healthcare provider or collection agency. The credit bureau typically has 30 days to investigate the dispute, and if successful, the medical collection will be removed, potentially improving your credit score.
Another approach to getting medical debt off your credit report is by negotiating a “pay-for-delete” agreement with the collection agency. In a pay-for-delete agreement, you offer to pay the outstanding medical debt in exchange for the collection agency removing the collection from your credit report. This strategy, however, isn’t always successful, as collection agencies are not obligated to agree to such terms.
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If you successfully dispute a charge, the bank will notify the merchant and return funds to the issuing consumer via a chargeback. From here, merchants can decide if they want to dispute the chargeback or not.
If you file a dispute for a credit card charge with a bank, that bank will quickly notify the corresponding merchant that you’ve initiated this process. From here, the merchant can review your claim and decide whether or not to accept or deny your dispute.
Disputing a credit card charge can be a lengthy process with sweeping ramifications. That’s why it’s important to understand what a credit chargeback is and whether this tool is the best option at your disposal.
Key Takeaways:
Merchants may want to cancel a chargeback even if your bank sides with you.
Your bank will initially cover the cost of a chargeback until the matter is settled.
It’s often best to contact a merchant before initiating a chargeback.
What Is a Chargeback?
A chargeback occurs when you successfully dispute a charge on your credit card. The charge is taken off your credit card account and the money paid to the merchant is reversed (or “charged back” to the merchant). Many people dispute credit card charges for services not rendered. For example, there was a strong link between COVID-19 and chargebacks throughout 2020 as many companies struggled to keep up with demand.
A chargeback can be a powerful tool for consumers who do not receive products or services they paid for, but it comes with several caveats. Even if the credit card company sides with you, the merchant may not—and they may try to collect the chargeback funds.
What Happens When You Dispute a Charge?
The Truth in Lending Act is the federal law that gives consumers the legal right to dispute credit card charges if there is a billing error, as outlined in the Federal Reserve’s Consumer Compliance Outlook. This law defines a card issuer’s responsibilities when cardholders file disputes.
When you dispute a charge with your credit card company, it must conduct what the law calls a “reasonable investigation” to determine whether the charge was correct. It must also present you with the result of the investigation within 90 days.
During that process, the credit card company typically reaches out to the merchant involved in the charge. It requests documentation from the merchant regarding the transaction in question, and the merchant may be able to state why the charge was correct.
If the credit card company sides with you, it removes the charge from your credit card statement, and you do not need to pay the charge on your credit card.
Can a Merchant Try to Collect the Money From You After a Chargeback?
The Truth in Lending Act covers your right to dispute a credit card charge, but it doesn’t define what merchants are obligated to do—nor does it bar a merchant from trying to collect the money from you later. Instead, merchant agreements outline what actions a merchant can and can’t take concerning a dispute.
A chargeback means that the credit card company decides in your favor regarding the dispute. It doesn’t mean the merchant agrees or that they’ll return your funds.
Merchants can engage in “chargeback representment” to challenge your chargeback request and prove the original payment was valid. This process can be challenging, and merchants must decide if the potential loss of revenue is worth it—or if they might lose consumer trust with an aggressive approach without evidence.
The merchant might also seek to recover its loss by invoicing you for the charges. If you don’t pay, it might threaten collections activity or even sue you. Understanding your debt collection rights is pivotal if legal action seems imminent.
What’s the Difference Between a Refund and a Chargeback?
Chargebacks are granted by card issuers, while refunds come directly from merchants. While chargebacks can become lengthy and complicated processes, refunds are often straightforward.
So long as your claim aligns with a merchant’s terms and conditions, you’ll likely receive a refund shortly after the merchant receives the product you wish to return.
How Do You Manage Chargebacks?
No one wants to deal with an issue only to have it pop up unexpectedly in the future—especially financial issues that could affect credit scores. Here are some tips to avoid future issues when you request a chargeback.
Only Dispute Credit Card Charges If You Have a Legitimate Reason
Unfortunately, some people request chargebacks even if they received the goods or services in question. They might do so because they have a problem with the vendor or simply because they don’t want to pay for the products. That last instance counts as fraud, and it could lead to your credit card account being closed or other legal consequences.
Reach Out to the Vendor First
Before you file a chargeback, give the merchant a chance to make the issue right first. Many merchants are willing to work with you and might refund the money, offer an exchange, or work to resolve your specific grievance.
As part of your chargeback process, you’ll want to demonstrate that you attempted to contact the merchant about the issue. If you file a chargeback without working with the vendor first, you give the vendor more of a reason to insist that you still owe the money.
Act Quickly
You must dispute a credit card charge in writing, and your letter should reach the credit card company within 60 days of the first bill or statement with the error on it. This short timeline means knowing how to read a credit card statement is critical.
Keep an Eye on Your Account
According to the Federal Trade Commission, you can withhold payment for disputed charges while the investigation is underway. Your credit card company can’t penalize you with late fees, interest, or reports to the major credit reporting agencies regarding nonpayment of those charges.
That doesn’t, however, extend to your account in general. Implementing relevant tips for improving your credit history can keep your score from falling during the investigation. If you do pay your credit card charges and then realize something isn’t right, you can dispute that error. A decision in your favor might result in a credit to your account.
Save the Documentation
Don’t toss receipts, emails, or other evidence just because the chargeback occurred. You might need the documentation again if the merchant decides to try to collect from you. Typically, the higher the amount in question, the more important it is to maintain your documentation.
Monitor Your Credit With Credit.com
Chargebacks won’t affect your credit score alone, but there’s a margin for error while investigation is underway. In addition to reviewing your statements regularly, ensure you’re familiar with the laws that protect you and how you can assert your rights.
If any type of inaccurate negative reporting dings your credit—whether it’s related to a chargeback collection or not—tools like credit repair letters can be vital. One way to help protect yourself is to stay on top of your credit and invest in products and services that let you easily monitor your credit, such as ExtraCredit®.
I’ve been in the real estate world since 2002 as an investor, agent, broker, and even author. Real estate has changed over the years but I still love it and still invest today. Over the years, I have learned many things and evolved from trying to rent and screen tenants based on gut feelings to developing systems that work much better!
Being a landlord can be rewarding, but navigating the world of rentals also comes with its share of challenges. To be successful and avoid unnecessary headaches, it’s crucial to avoid these common pitfalls.
Table of Contents – Top 5 Mistakes Landlords Make
1. Skipping Thorough Tenant Screening
Rushing to fill a vacancy almost always backfires. A proper screening process, including checking references, credit reports, and employment history, helps identify responsible tenants who are likely to pay rent on time and respect your property. Gut feelings are not the best way to choose tenants, even if they are friends or family, especially if they are friends or family! Don’t rush to rent a place to the first people who apply because you don’t have the time. If you don’t have the time, you should not be the one leasing the property.
I use DoorLoop for all of my tenant applications and screening. It makes managing background checks very easy.
You can read more about how I screen for tenants.
2. Neglecting the Lease Agreement
A clear, detailed lease agreement is what protects you when a dispute arises, including evictions. If you don’t have a lease or the right lease, it can make eviction take much longer and cost much more money. We try to avoid evictions but that is not always possible even with proper screening.
It must outline expectations, responsibilities, and procedures for rent payment, repairs, maintenance, and dispute resolution. Vague agreements lead to confusion and potential legal issues.
Either get a lease from a local attorney or use a high-quality online legal document generation tool. I use Legaltemplates.com. Using a local real estate attorney will be helpful in case a dispute arises later.
See my tips for the best ways to manage rental properties.
3. Ignoring Maintenance Issues
Ignoring leaky faucets, malfunctioning appliances, or minor repairs can snowball into bigger problems down the line. Prompt maintenance not only keeps tenants happy but also prevents costly damage and potential legal action. You cannot rely on your tenants to tell you about every issue. It is also important to schedule regular inspections to see if there are any major issues in the property and that the tenants are taking care of it.
See my article on how to find contractors for house flips and rentals.
4. Setting Unrealistic Rent Prices
Overpricing your property can lead to long vacancies and lost income. Research fair market rents in your area and consider factors like amenities, location, and condition before setting a price. Remember that asking price for other rentals is not always the best way to gauge market value. Those properties could be for rent for months and overpriced. Pay attention to the market to see which ones are being rented and which ones are sitting.
Zillow provides fairly accurate rent estimates (rent is easier to estimate than value).
Once you have an idea of market rent, you can use my Rental Property Cash Flow Calculator to understand your financials.
5. Failing to Communicate Effectively
Communication is key to a healthy landlord-tenant relationship. Be professional, responsive, and address concerns promptly. Ignoring tenant issues or being dismissive can create frustration and escalate into bigger problems. Ignoring tenants can also get you in trouble with the city or county where you reside.
I don’t personally deal directly with issues. I instead chose a great property manager to ensure communication is open and issues are handled promptly. They typically charge a percentage fee, which I simply build into my expenses.
Read my article on how to find a great property manager.
Conclusion
By avoiding these common mistakes, you can create a positive rental experience for both yourself and your tenants, leading to a smoother, more profitable investment.
The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
VantageScore® and FICO® use somewhat different factors to determine credit scores. They also have separate requirements for credit history and distinct credit score ranges.
VantageScore® and FICO® are both accurate credit scoring models with unique nuances. For example, FICO treats credit mix and age of credit as two separate categories, while VantageScore lumps them into one category (mix and age of credit).
Lenders can use your FICO score and VantageScore when deciding to approve or decline your loan applications. Learning how both models work can help you have a positive impact on your credit. We’ll compare and contrast FICO and VantageScore to help answer questions like “Why are my credit scores different?”
Key takeaways
VantageScore and FICO are both accurate scoring models that use different factors to calculate your credit score.
FICO was established in 1981, while VantageScore was founded in 2006.
Payment history impacts VantageScores and FICO scores the most
Table of contents:
What is a FICO score?
Your FICO credit score is a credit scoring model created by the Fair Isaac Corporation (FICO) that is based on information in your credit reports with the three major credit bureaus—Equifax®, Experian® and TransUnion®. FICO score 8 is the most popular version of this model, and other versions can specifically weigh your habits with auto loans and credit cards.
What is a VantageScore?
Your VantageScore is also based on information in your credit reports with the three major credit bureaus, and it was created by those same credit bureaus as an alternative to the FICO scoring model. VantageScore 3.0 is the most commonly used version of this tool, which debuted in 2013. VantageScore 4.0 incorporates machine learning to analyze a person’s credit habits over time.
Why are my FICO score and VantageScore different?
There are multiple reasons why your FICO score and VantageScore may differ, and it comes down to the way each model calculates scores. Here are several ways that these popular scoring models differ from each other.
Creation and history
The Fair Isaac Corporation was founded in 1956 (then called Fair, Isaac and Company), and they created the FICO score model in 1981. The corporation’s long-standing history is one of the reasons why so many lenders use its scoring models.
VantageScore Solutions, LLC, created the VantageScore model to gauge your creditworthiness using a different formula than FICO. This model was created in 2006, and many lenders have adopted it since.
Minimum scoring criteria
FICO requires at least six months of credit activity to generate a credit score. Moreover, your credit report must display a tradeline (which refers to an item such as a credit card or line of credit) with at least six months of activity.
VantageScore simply asks that clients have at least one tradeline item on their credit reports. There’s also no minimum monthly requirement for that item.
Credit score values
When comparing your VantageScore vs. FICO score, knowing which factors affect each model is important.
FICO Score 8 consists of the following five factors:
Payment history (35 percent): Gauges how often you make payments on time.
Accounts owed (30 percent): Weighs how much of your available balance you’ve used.
Credit age (15 percent): Measures the average age of your open credit accounts.
Credit mix (10 percent): Indicates how diverse your open credit accounts are.
New credit (10 percent): Looks at any new credit accounts you’ve applied for.
VantageScore 3.0, on the other hand, looks at these six metrics:
Payment history (40 percent): Weighs your on-time payments and your missed payments.
Depth and age of credit (21 percent): Measures your credit mix and the average age of your credit.
Credit utilization (20 percent): Is the same as FICO’s “accounts owed” category.
Total balances (11 percent): Looks at your outstanding balances across all accounts.
Recent credit (5 percent): Examines your behavior with new credit.
Available credit (3 percent): Refers to how much credit you currently have available.
Based on these factors, it’s easy to see why your FICO score and VantageScore can differ. Credit mix is scrutinized by VantageScore far more than FICO, which is why it can help to responsibly manage different credit accounts. FICO, on the other hand, weighs new credit activity more heavily—so pace yourself when applying for new credit.
Is your FICO score or VantageScore more important?
Your FICO score and VantageScore are both important because they can help you get a sense of your current credit habits. However, auto loan lenders, commercial banks and landlords favor FICO. This means that your application for a new rental property will likely be approved or declined based on the strength of your FICO credit score.
There’s a lot of overlap between FICO and VantageScore, so most credit-building tips apply to both models. For example, payment history is the most important factor for both FICO and VantageScore, so making timely payments will positively impact both scores.
Several other ways to increase your credit scores include:
Frequently check your credit report to dispute errors and review your habits.
Limit the number of credit cards or loans you apply for all at once.
Learn how Lexington Law Firm’s focus tracks can help you rebuild your credit after major life events.
Monitor your credit with Lexington Law Firm
Responsible credit habits will build your credit no matter which model is being taken into account. Lexington Law Firm can help you better understand your current credit habits, help you manage account inquiries and address errors on your credit reports.
Learn more about our services and see if they will suit your needs.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
Reviewed By
Sarah Raja
Associate Attorney
Sarah Raja was born and raised in Phoenix, Arizona.
In 2010 she earned a bachelor’s degree in Psychology from Arizona State University. Sarah then clerked at personal injury firm while she studied for the Law School Admissions Test. In 2016, Sarah graduated from Arizona Summit Law School with a Juris Doctor degree. While in law school Sarah had a passion for mediation and participated in the school’s mediation clinic and mediated cases for the Phoenix Justice Courts. Prior to joining Lexington Law Firm, Sarah practiced in the areas of real property law, HOA law, family law, and disability law in the State of Arizona. In 2020, Sarah opened her own mediation firm with her business partner, where they specialize in assisting couples through divorce in a communicative and civilized manner. In her spare time, Sarah enjoys spending time with family and friends, practicing yoga, and traveling.
The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
If you’re planning to buy a house in the near future, you may be paying extra attention to your credit. While good credit can help you qualify for the best terms and interest rates, bad credit can stand in the way of your dream home.
If your credit could use a little TLC, continue reading to learn more about credit repair for first-time home buyers and discover helpful tips to improve your credit.
Table of contents:
1. Pay your bills on time
2. Look for errors on your credit report
3. Dispute any inaccuracies
4. Lower your credit utilization
5. Consider consolidating your debt
6. Leave old credit accounts open
7. Avoid opening new credit accounts
8. Get help from a credit repair company
1. Pay your bills on time
Since payment history is the number one factor that affects your credit score, the first step in repairing your credit is getting current with your bills. Late payments, especially those over 30 days past due, can cause your credit to take a significant hit. Not to mention late payments can stay on your credit report for seven years and continue to negatively impact your credit, although the effect lessens over time.
If you’ve missed payments in the past, it’s important to get back on track with making your payments on time. Consider creating a budget, making a list of all your bills, noting their due dates and setting reminders so you don’t forget to pay them. Set up automated payments wherever possible.
Pro tip: Build an emergency fund so you’re still able to pay your bills even if you get hit with an unexpected expense.
2. Look for errors on your credit report
Errors on your credit report could negatively impact your ability to secure a mortgage. In fact, a recent study by Consumer Reports found that 34 percent of participants had at least one error on their credit report.
According to the Consumer Financial Protection Bureau, common errors to look for include:
Identity errors: These include inaccuracies regarding your personal information. For instance, your name, address or phone number may be incorrect or misspelled. Make sure to look for accounts that don’t belong to you and could be the result of identity theft.
Reporting errors: These are errors regarding the state of your accounts. For example, accounts you previously closed that are inaccurately reported as open.
Data errors: These could be duplicate accounts or incorrect information that had previously been corrected.
Balance errors: These include wrong balances or credit limits.
While not all errors affect your credit score, incorrect payment dates or account statuses can have a significant adverse effect, so it’s important to review your credit report before buying a house.
Pro tip: You can get a copy of your credit report from each of the three credit bureaus for free at AnnualCreditReport.com.
3. Dispute any inaccuracies
If you identify any errors on your credit report, you will want to get the inaccurate information removed if you can. File a dispute with the credit bureau via their website, mail or phone.
Regardless of the method you choose, make sure to clearly state what items you’re challenging and why the information is wrong. Consider including a copy of your credit report and highlighting or circling the errors.
Once you file a dispute, the credit bureau has 90 days to complete an investigation into your claim. If the bureau confirms that the error is inaccurate, they will remove it from your credit report. You should see the correction reflected in your score within a few weeks.
Pro tip: Use the Federal Trade Commission’s sample letter as a guide when writing your letter.
4. Lower your credit utilization
Credit utilization is another factor that influences your credit. Your credit utilization ratio is the amount of credit you’re using in relation to the amount of credit available to you.
Keeping your credit utilization low shows mortgage lenders that you aren’t too reliant on credit. Meanwhile, a high credit utilization ratio could indicate that you may struggle to pay your mortgage.
Here are a few strategies to lower your credit utilization ratio:
Pay off large purchases immediately: If you make a large purchase on your credit card, consider paying it off the same day if possible.
Make multiple payments each month: Get in the habit of paying your balance multiple times each month so the credit bureaus are more likely to see a lower number when your credit card issuer reports your statement balance.
Request a credit limit increase: Contact your credit card issuer to see if you qualify for a credit limit increase. Keep in mind that this may result in a hard inquiry, which could temporarily lower your score.
Lower your spending: Consider switching to cash or a debit card to decrease the amount of money you charge to your credit card each month.
Pro tip: Generally, experts recommend keeping your credit utilization below 30 percent. For example, if you only have one credit card and the limit is $10,000, you should aim to spend less than $3,000 each month.
5. Consider consolidating your debt
If you struggle to keep track of your different credit accounts and their due dates, consider consolidating your debt into a single monthly payment. This strategy can help you pay off debt quicker and avoid late payments. However, in order for debt consolidation to make sense, you should aim to get a lower interest rate.
There are a few different ways to consolidate your debt, including:
Zero-percent APR balance transfer credit card: Transfer your credit card debt to a new card, specifically during the 0 percent APR introductory period. Aim to pay down your debt before the introductory period ends—typically between 12 and 21 months.
Debt consolidation loan: Get a debt consolidation loan from a bank, credit union or online lender. Compare options to find the lowest interest rate.
Home equity loan: A home equity loan involves using the equity in your home as collateral to borrow money. While home equity loans typically have lower interest rates, you could end up losing your home if you fail to make payments.
401(k) loan: If you have a retirement account, you can borrow money from your savings. Keep in mind that taking out a 401(k) loan can hurt your retirement savings since you cannot continue to invest until you pay back the loan.
Pro tip: Weigh the benefits and drawbacks to find the best debt consolidation option for your financial situation.
6. Leave old credit accounts open
You may consider closing old credit accounts that you don’t use anymore, but that can actually hurt your credit. FICO® takes into account your length of credit history when calculating your score.
A long credit history signals to mortgage lenders that you have experience using credit and provides a more thorough track record of your credit history.
You should leave old credit accounts open unless you have another reason for closing them, such as an annual fee.
Pro tip: If your oldest account charges an annual fee, consider calling the credit card issuer to see if you can get it waived.
7. Avoid opening new credit accounts
Opening too many credit accounts in a short time frame can be a red flag to lenders. They may come to the conclusion that you’re financially unstable and are relying on credit to get by. As a result, they may consider you more likely to fall behind on payments.
Additionally, too many hard inquiries can hurt your credit. While a single hard inquiry typically only lowers your score a small amount, multiple hard inquiries may cause a noticeable drop in your score.
Pro tip: Try to wait six months between credit card applications.
8. Get help from a credit repair company
If you need help repairing your credit in preparation for buying a house, consider looking into credit repair services. A credit repair company can closely examine your credit report and help you identify negative items that might be wrongfully hurting your credit. The company will then challenge the inaccuracies on your behalf so they might no longer impact you.
Pro tip: Research each company and read reviews to avoid running into credit repair scams.
Why is credit important when buying a home?
Credit is important when buying a home if you plan to take out a mortgage. A good credit score will boost your likelihood of qualifying for a mortgage with a lower interest rate and better terms. This can end up saving you thousands of dollars over the course of your mortgage.
What does your credit score need to be to buy a house for the first time?
The credit score needed to buy a house varies depending on the type of loan you want. For most conventional mortgages, borrowers need a credit score of 620 or higher to qualify. Meanwhile, an FHA loan requires a minimum credit score of 500. Generally, the higher your credit score, the more favorable interest rates and terms you’ll be approved for.
Need help repairing your credit before buying a home? Lexington Law Firm could help you identify and address inaccurate negative items that may be damaging your score. Sign up for a free credit assessment to establish your starting point and see what services may be right for you.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
Reviewed By
Brittany Sifontes
Attorney
Prior to joining Lexington, Brittany practiced a mix of criminal law and family law.
Brittany began her legal career at the Maricopa County Public Defender’s Office, and then moved into private practice. Brittany represented clients with charges ranging from drug sales, to sexual related offenses, to homicides. Brittany appeared in several hundred criminal court hearings, including felony and misdemeanor trials, evidentiary hearings, and pretrial hearings. In addition to criminal cases, Brittany also represented persons and families in a variety of family court matters including dissolution of marriage, legal separation, child support, paternity, parenting time, legal decision-making (formerly “custody”), spousal maintenance, modifications and enforcement of existing orders, relocation, and orders of protection. As a result, Brittany has extensive courtroom experience. Brittany attended the University of Colorado at Boulder for her undergraduate degree and attended Arizona Summit Law School for her law degree. At Arizona Summit Law school, Brittany graduated Summa Cum Laude and ranked 11th in her graduating class.