There are some problems money can solve. Plastic surgery may erase some of the damage done by years of bad habits, for example. Hiring a personal trainer to help whip you into shape can be easier than trying to do it yourself. And if you are sick of the problems your car has been giving you, a new set of wheels will put that behind you.
But buying a high credit rating is tough. For the most part, bad credit is not something that, if you throw enough money at it, it will go away.
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In that sense, credit reporting is truly egalitarian. It doesn’t matter how much you make: If you mess up, you’ll pay the price.
There are three reasons why buying better credit is so difficult.
|Paying a Delinquent Debt Doesn’t Make It Go Away|
Under most credit scoring models used today, paying off a bad debt does not remove it from your credit. Sure, you can try to negotiate with a collection agency to remove a collection account if you pay it in full, but they aren’t obligated to do that, and most will tell you that they can’t. (They aren't just making that up; their contracts with the credit reporting agencies prohibit “pay for deletion” deals.)
The same thing goes for judgments. Resolving a judgment is a good idea for many reasons, including the fact that paid judgments are removed from credit reports after seven years, while unpaid judgments can remain a lot longer. And there's the fact that with a judgment, a creditor may be able to seize your bank accounts or garnish your wages. But paying it doesn’t take it off your credit, or even result in a substantial boost your credit scores, unless it’s so old that it drops off after it’s paid.
The exception? Tax liens. Under the IRS Fresh Start program, you may be able to get tax liens removed from your credit reports if you have paid them or if you are making payments on them.
|Your Income Is Not a Factor in Your Credit Score|
I’ve met millionaires whose credit scores were lousy, and who had trouble getting a credit card or a mortgage at a decent interest rate because of their past credit problems. One vivid example was a successful real estate investor who paid cash for his open-heart surgery, but discovered his credit scores dropped when one small bill slipped through the cracks and wound up on his credit reports as a collection account.
"It is often a surprise to people that income is not at all considered in calculating their credit scores. Should income be considered? Absolutely,” says Kate Hao, founder and CEO of Happy Mango, a company that generates credit profiles using cash flow analysis and verified social reference. “For most individuals, income is the dominant factor in determining their future cash flows and consequently their ability to make payments on time. A sound forward-looking credit analysis should consider income along with other financial factors, such as spending and savings behavior, as well as personality traits, such as trustworthiness and reliability. Unfortunately, none of these factors is considered in today's credit scores."
|Credit Repair Can Only Do So Much|
Consumers who are frustrated by the lack of progress they are making in building or rebuilding their credit often turn to credit repair firms. It’s understandable: Credit can seem incredibly confusing, and improving credit scores can feel excruciatingly slow.
But there’s nothing magical about what these firms do. They can dispute items in the hopes that they are not verified, and removed as result. Or they can try to negotiate with collection agencies, but again, the collection agency may not be willing to remove an account in exchange for payment. But any consumer who is willing to learn how credit reports and scores work can do the same – for free. The rules that govern the credit reporting system are based on federal law, and they apply to everyone, regardless of how much they are willing to spend to get better credit.
|Can High Income Mean Better Credit?|
Of course, there are valid arguments that credit reports tend to favor consumers with good incomes who are in a better position to pay their bills on time. Certainly, consumers with plenty of money in the bank and good incomes were in a much better position to weather the financial devastation of the recession, as well as setbacks like unexpected medical bills or home repairs.
But even someone who files for bankruptcy will get a fresh start after 7 or 10 years, depending on whether they file Chapter 7 or Chapter 13 bankruptcy.
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There is a lot you can do on your own to repair your credit. You can get a free credit report once per year from each major credit reporting agency, and you can use free credit score monitoring to find out what steps you can take toward a higher score. Simply paying your bills on time and establishing positive credit references (including a secured card if you need one), will go a long way to toward helping you get back on track.