Does paying old debts help credit score?
Tue, November 11, 2008If you have debts that went to collection agencies, the damage has already been done. You'll help your score more by paying off current balances first, ahead of old debt.
Dear Liz: Over the last year, I have been trying to identify and pay off old debts by getting copies of my credit reports. I've been attacking these old bills one at a time while also sending in extra payments to bring down my credit card balances so that only 10% to 20% of the credit limits are being used. How long will it take before I see my credit score start to go up?
Answer: Paying off old debts doesn't do much, if anything, to improve your credit scores.
Most of the damage done to your scores happened in the months after you stopped paying the bill. The further behind you fell, the more your scores dropped. When the original creditor charged off your account -- writing it off as a bad debt, typically after six months of missed payments -- your scores fell even more.
When the debt was sold to a collector, the debts showed up under the "collections" section of your reports, and your scores took a further hit.
You might be able to erase the effect of this last hit if you negotiate with the collection agencies to remove the debts from your credit reports in exchange for payment.
But you can't change the original creditors' negative entries about the accounts, and what original creditors report actually matters far more in credit scoring terms than what collection agencies say.
That's not to say you should stop paying your old bills. But first you might consider paying off all your current credit card debt and getting out of the habit of carrying balances. In the long run, that will do far more for your financial stability and dramatically decrease the chances of your falling behind again.
Portfolio may not be truly balanced
Dear Liz: I am 62 and had been planning to retire in five years. Although I have lived frugally my entire life and put away 15% of my income every year in a retirement account, my balanced portfolio lost 60% of its value in two months. Should I take out what little remains and put it now into something "safe," or should I just bite the bullet and leave it where it is, hoping for a rebound?
Answer: Neither course makes a lot of sense.
If you sell everything now, you're locking in your losses and precluding any chance of gaining from a rebound. Moreover, most retirees need at least some exposure to stocks if their nest eggs are to survive the erosion of inflation.
But doing nothing isn't a good idea either, because there's obviously something wrong with your investment strategy. There's no way a truly balanced portfolio would have lost 60% of its value in two months.
Retirement accounts have taken terrible hits this year, but balanced portfolios helped shelter investors from the worst damage. Between mid-September and late October, for example, the Standard & Poor's 500 index dropped over 30%, while the Vanguard Balanced Index fund was down 20%. Over the last year, when the S&P lost 40% of its value, the balanced fund was down 25%.
Clearly, you've been taking far more risk than you thought you were. A visit to a fee-only financial planner might have alerted you to this problem in time to reduce the risk in your portfolio.
It's not too late to schedule that visit. Talking with a fee-only planner is a smart idea in any market when you're within five years of retirement, but it's especially wise today when investors face so much volatility.
Source: http://www.latimes.com/
