One of the more common misconceptions in the world of credit reporting is that once an item is closed or paid in full, it is removed from your credit files.  This is, of course, incorrect.  Paying off an installment loan, selling a car or home, closing a credit card, paying off a collection, and satisfying a judgment or a tax lien are all ways to exhaust their balance and your obligation to the lender.  And in every case above, your credit reports should reflect the fact that the obligation has been satisfied.  But in most cases the reporting of the item will continue long after the balance has been satisfied.

This is actually good news in most cases.  You don't want good account information to come off of your credit reports.  Old car loans, old mortgages, old credit cards – these are the types of accounts you want on your credit reports.  They serve several purposes.  First, they help to show that you have a long and old history of properly managing several types of loan obligations.  And second, they help to offset any negative impact "bad" items may be having on your credit reputation.

The next time you take a look at your credit reports, grab a highlighter.  Now, strike through every single obligation that has been satisfied.  What most of you will be left with is an empty highlighter and a very short and young credit history, and that's not a good thing.  In fact, credit scoring systems reward you for having a lot of old and positive credit obligations.  This is why you should never argue with the credit reporting agencies about removing old good accounts;  that would be shooting yourself in the foot.

Of course, this cuts two ways.  When you pay off collections or satisfy any of the other possible negative credit obligations, that doesn't mean they will be removed.  Again, the credit reporting agencies are well within their rights to maintain that information as long as it's accurate and isn't older than its prescribed reporting statute of limitations, which in most cases is 7 years, but there are exceptions.  Bankruptcies, for example, can stay on longer than 7 years.

So if you don't want something on your credit report, it's easier to simply avoid the obligations altogether rather than attempting to get it removed simply by paying it.  This is applicable more so to things like collections and late payments.  Those are easier to avoid than they are to remove once they're on your files.  But please, stop trying to get those old car loans off of your credit reports.  Once they're gone, they're gone permanently.

 

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

 

Most homeowners have their story – often a harrowing one – on the grueling process of getting a mortgage.  For them, the story's over once they sign the papers and get the money.  But that's just the beginning of a sometimes long and winding journey for the mortgage.

Today, Credit.com (with thanks to Loans by CreditLoan.com) takes a look at the many hands a mortgage passes through once the ink on the borrower's signature dries.

Also, we take a look at the federal government's failing Home Affordable Modification Program (HAMP), which was meant to “support a recovery in the housing market,” and “help up to 3 to 4 million at-risk homeowners avoid foreclosure,” according to the U.S. Treasury Department [pdf], by allowing borrowers to re-negotiate the balance on their mortgage, and lower their monthly payments.  The Wall Street Journal reports that "Overall, around half of the 1.3 million borrowers put in trial modifications since June 2009 have had their modifications canceled."

Congresswoman Jackie Speier introduced the Protecting Homeowners' Credit History Act on July 15, stating, "Homeowners shouldn't have their credit scores damaged for doing the right thing. Rather than rewarding responsible homeowners who modify their mortgage payments to keep their homes, the credit reporting system punishes them."

Of course, she's partially right and partially wrong.

The loan modification process has largely been a train wreck since day one. Originally mortgages were reported to the credit bureaus as a "Partial Payment Plan" – which is considered a major derogatory item in your credit scores. Further, delinquent payments now pollute credit reports thanks to the mortgage lender requiring the homeowner to make less than their contractual payment just to prove that they can. Add to that the workload disasters that are causing some loan modification applications to take 6-9 months to be processed, and then denied, and you have a failure of epic proportions, which is considered a major derogatory item by credit scoring models.

While shielding a consumer's credit report from the fallout of a loan modification is a solid hypothesis, it might not be the right thing to do. If research yields findings that consumers who modify their loans are an elevated credit risk then the negative credit impact was warranted. But we don't know this yet because we've yet to see whether there is sufficient performance among consumers who've modified loans.

What we do know is this: Many consumers are simply trying to lower their monthly payments through a formal process with their mortgage lender. Does that sound familiar? It should, it's called a refinance. Assuming that the desire for a lower payment equates to a riskier borrower has not been proven and seems misplaced considering that we'd all like lower payments, for everyone.

What the legislation should include, and I don't believe it does, is a requirement that ALL loan modification applications must be fully processed within 30 days. That would all but guarantee no credit impact at all. The requirement to prove that you can pay less than you have been paying is comical and shouldn't be a requirement of the program. This would get HAMP back on the right track.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

You've done everything right. You had your service pre-authorized, you remembered to bring your insurance card, you paid your deductible — you’re a good patient. But when the doctor’s office attempts to file a claim to cover the cost of services, the insurance company refuses to pay. Now the doctor’s office is after you for payment.

This story is all too common and can lead to medical collections polluting your credit reports and negatively impacting your credit scores. But it wasn’t your fault, clearly. So should medical collections be counted in your credit scores? As of today, they are. And they’re counted exactly the same as a collection for any other unpaid debt. The consumer is screaming foul, but is his anger justified?

There are two sides to this argument. The consumer side, which clearly believes that medical debts should not even be reported to the credit bureaus in the first place. Then there’s the industry side, which believes there is empirical value to the collection, regardless of why it’s on your credit reports.

FICO partially addressed this issue with FICO 08, which ignores all collections with an original amount less than $100. But does that go far enough? Maybe, maybe not. I would argue that it’s not FICO’s place to get involved with credit reporting issues. That’s not their “sandbox.” This is a credit bureau issue clear as day.

The Medical Debt Relief Act would require the credit bureaus to purge medical collections that are paid or settled, regardless of how old they are. This is a clear win for the consumer but is it a loss for the lenders who depend on full and accurate credit reporting to make loan decisions? Is there a difference between an insurance snafu like the one above and a consumer who wrote a bad check for his deductible? Of course there is. One would seem to be a more elevated credit risk than the other. But from a credit reporting perspective, they look identical. So, removing both collections when paid or settled would be good and bad, right?

This is a slippery slope. Already insurance regulators have watered down what can be used from a credit report to calculate your insurance risk score. In some states inquiries can’t be counted while in other states they’re fair game. Nobody has ever argued that inquiries are not predictive of elevated risk. This was a political decision plain and simple. What’s next? Can’t consider foreclosures, bankruptcies, charge offs, or repossessions? If so, what’s the point of your lender buying a credit report?

And for those of you who would love to see this Brave New World sans credit reports and scores, best of luck trying to get any loan of any type. You’ll find yourself making 50% down payments and paying 75% interest to subsidize the risk. The grass isn’t always greener on the other side, my friends. Beware the restrictions on credit reporting.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Reduce Debt, Reduce Stress: Real Life Solutions for Solving Your Credit Crisis.