Disclaimer: We are not qualified legal or tax professionals and are not giving advice. Always speak with a qualified professional before making any legal or financial decisions.
Facing the possibility of a lawsuit from a debt collector can be daunting, leaving many to wonder how close they are to this daunting financial challenge.
The line between overdue bills and legal action is often blurred, creating a cloud of uncertainty and stress.
This guide aims to clear the fog, offering a straightforward look at what prompts debt collectors to sue and how you can steer through these troubled waters. With expert advice and actionable strategies, we're here to help you understand your rights and options, providing a beacon of hope in the complex landscape of debt collection.
Ready to take control and ease your worries about debt collection lawsuits? Let's dive in.
Don't want to read through? Speak to a debt specialist
right now.
What is Credit?
Credit is the ability to obtain goods or services without paying in full and upfront. The concept of credit is based on trust that payments will be made in the future. There are three different concepts associated with credit that all combine into whether or not you are viewed as a trustworthy person to lend money to. Learn about
the best ways to use a credit card responsibly to ensure that your credit-building journey is stable and sustainable.
Credit History
The first step in getting credit is to have enough credit history to score. As soon as you use credit cards, take out auto loans, buy a car, or rent an apartment (in some situations), you are building your credit history. Managing existing credit card debts wisely is also crucial in maintaining a healthy credit score. Consider exploring options like utilizing
zero percent APR balance transfers to strategize your pay-off plan and potentially save on interest.
Credit Report
A credit report is sort of like a school report card. Depending on who is compiling your report, it lists your address, name, Social Security Number, date of birth, and other personal information.
A credit report also contains all the credit accounts you have as well as your payment actions on bills like utility payments. It will list the type of credit accounts or loans (secured, revolving, mortgage, etc), the account balance, and if you make on-time payments.
Credit reports are compiled by the major credit bureaus and many "boutique" credit bureaus. The three main ones are TransUnion, Equifax, and Experian. You might wonder why your Equifax credit score is lower than TransUnion, and our article on that topic provides a detailed explanation.
Credit Score
Once your credit history is compiled, it is then scored by one of two systems. FICO and VantageScore provide algorithms that produce your credit score. The credit score is based on five factors.
Payment History
Payment history is the single most important credit scoring factor in your credit score and can tank your credit score quickly or raise your credit score fast. Thirty-five percent of your score is based on payment history and it can make or break your score. When paying bills, every late payment or skipped payment you make dings your credit score.
While maintaining a consistent payment history is pivotal, unforeseen circumstances might hinder your ability. In such instances, it's vital to explore all available options, such as understanding whether
credit card debt forgiveness is a viable option for your situation
Debt to Credit Ratio
Also called credit utilization ratio, the debt-to-credit ratio is the second heaviest weight factor at 30% of your score. This ratio looks are how much of your available credit you are using. For instance, if you have an available credit limit of $10,000 on your credit card and you owe $3,000, your credit utilization ratio is 30% (3,000/10,000 x 100).
An optimal credit utilization ratio is 30% or less. Maintaining an optimal credit utilization ratio might be challenging, especially on a tight budget. Explore strategies on
how to pay off credit card debt even when finances are stretched, ensuring that your credit score is not adversely impacted.
Age of Credit
Age of credit weights 15%. This looks at how long you have had your debts. The older, the better. Building credit takes time.
If you choose not to use a credit card any longer, don't close it. Having it on your report will help age it and it will improve your credit utilization ratio.
Credit Mix
Credit mix looks at what types of debt you have and weighs this at 10%. Creditors like to see a mix of loans and credit cards.
New Credit
The final scoring point takes into account recent credit inquiries and weighs in at 10%. When you apply for credit, the creditor requests a full credit inquiry. Even if you end up not using the new debt or getting the loan, your credit score takes a hit.
This is because applying for credit means you are in some sort of financial difficulty.
What are Credit Scores?
Depending on whether the credit bureau uses FICO or VantageScore the scores vary slightly. In general, a score above 670 is considered good. The higher your credit score, the better terms you will get on any loans or credit cards.
FICO score:
- Exceptional credit: 800-850
- Very Good credit: 740-799
- Good credit: 670-739
- Fair credit: 580-669
- Poor credit: 300-579
VantageScores:
- Excellent credit: 781 to 850
- Good credit: 661 to 780
- Fair credit: 601 to 660
- Poor credit: 500 to 600
- Very poor credit: 300 to 499
Why is a Good Credit Score Important?
Your credit score reflects your financial responsibility. It has nothing to do with your financial success.
Creditors look at your score to get an idea of how well you manage your money and if you have good credit habits. Low credit scores suggest that you are not responsible with bill paying or using credit.
As a result, the lower your credit score, the more you will pay in interest rates or the lower your chance of getting a loan with good terms.
Another consideration is that employers may make a credit check part of your pre-employment process. Low credit scores suggest that you are not a good risk as an employee.
Ways to Build Credit
If you are just starting, you can set yourself up for success by handling your monthly bills and credit responsibly. You must have six months of credit history to be scored. Whether you take out a loan or credit card, what matters is that you pay your bills on time.
If you are just starting, look for the following credit builder techniques.
Report Rent
If you rent, ask your landlord to report your payments to the credit bureaus. You can also pay to have your rent payments reported, so investigate the pros and cons before buying this service.
Secured Credit Cards
When you take out a regular, unsecured credit card, you are given a credit limit. With a secured credit card, you put a cash deposit into a savings account attached to the credit card. This amount is your credit limit. As long as you pay the card each month, the savings account is not touched. If you fail to pay, the secured credit card is paid by the money in your bank account.
The benefit of a secured card is that you develop the habit of paying your credit card. In addition, you will get a better interest rate on a secured credit card than you will on a traditional credit card. This is because the credit card issuer is guaranteed payment.
Student Credit Cards
If you are a student, you may qualify for a student credit card. These usually have low interest rates and no perks but are easier to get than a traditional credit card.
Credit Builder Loan
A credit builder loan is a simple way to build credit. You apply for a credit builder loan and the money is put into a bank account. You pay the loan back and at the end of the loan, you get the money in the account. Credit unions are good places to look for credit builder loans.
Co-sign on a Credit Card Account
Another way is to ask a primary cardholder with a positive credit history to add you to the credit card as a co-signer or become an authorized user. Their good score washes over onto your score. You do not need to use a credit card.
You can use one or all of these loan-building techniques. The most important concept is that you MAKE ON TIME PAYMENTS.
Credit Monitoring Services
Signing up for a credit monitoring service can help you keep an eye on your credit report and score as you build your credit. These services alert you anytime there are changes or new accounts opened in your name, which helps detect identity theft.
Many monitoring services also provide access to your credit reports and scores from all three bureaus - Equifax, Experian, and TransUnion. This allows you to review your full credit profile regularly as you build your history.
Some popular free options include:
- Credit Karma - Provides free daily credit monitoring along with unlimited access to your TransUnion and Equifax credit reports and VantageScore credit scores.
- Experian Boost - Gives you free daily monitoring of your Experian credit report and FICO Score. You can also add on-time cell phone, utility, and streaming service payments to your Experian credit report for free.
There are also paid services like IdentityForce and PrivacyGuard that provide daily monitoring across all three bureaus, alerts for suspicious activity, identity theft insurance, and other protections. Monthly fees range from $8-$30+ depending on the level of monitoring.
Avoid Credit Repair Scams
As you work to build or rebuild your credit, be wary of companies claiming they can remove negative marks from your credit reports through special contacts at the bureaus. No one can get accurate negative information removed from your reports.
Don't fall for credit repair scams promising quick fixes or a new credit identity. These practices are illegal. Any company promising it can remove all negative items for a fee is scamming you.
The best way to improve your credit is to consistently practice good credit habits over time. Pay all your bills on time, maintain low balances, and check your credit reports for errors to dispute. Building strong credit takes patience and diligence.
Check Your Credit Frequently
Once you start using credit, it's important to check your credit reports from all three bureaus several times per year. Signing up for credit monitoring services makes this easy by providing access to your reports and scores.
Review your credit reports closely for any suspicious activity or inaccuracies. If you see incorrect information, dispute it immediately with the credit bureau in writing. Staying on top of your credit helps you detect issues early and build your score faster.
Checking your credit profile frequently is key, especially when first establishing your credit history.
Checking Your Credit Report
Once you have a solid credit history, make it a habit to check your credit report every year. You are legally entitled to request one free credit report a year from each of the big three major credit bureaus.
For instance, you may request one from TransUnion in January, one from Equifax in May, and one from Experian in September, then repeat in January.
Once you get a copy of your credit reports, go over them very carefully. If you see any errors, fraud, wrong address, or other incorrect details, contact the credit reporting agency immediately. One-fourth of all consumers have errors on their credit reports that affect their credit score. You can contact the company directly, use Credit Karma, or visit the
Annual Credit Report.
The contact information is as follows:
- Equifax credit report
- Phone: 866-349-5191
- Mail: P.O. Box 105788, Atlanta, GA 30348
- Experian credit report
- Phone: 888-EXPERIAN (397-3742)
- Mail: P.O. Box 9554, Allen, TX 75013
- TransUnion credit report
- Phone: 833-395-6938
- Mail: P.O. Box 2000, Chester, PA 19016
Send copies of any documentation to the credit bureaus. You may need to be persistent and follow up. Once they have fixed any errors, request another copy with your credit score update.
Now, set up a schedule to check your credit report. If you are a victim of proven identity theft, credit card companies and credit bureaus may offer some financial protection.
Repairing Your Credit
If you have a bad credit score, you can improve your score. It takes about a year to raise a credit score of 100 points. Follow these steps:
- Check all your credit reports and look for errors
- Correct errors on your credit reports
- Make on-time payments
- Pay down balances
- Pay off past-due accounts
- Have rent or utilities reported to the credit bureaus.
- Don't apply for a new credit line, especially retail credit cards.
- Use cash for big purchases instead of getting a loan for something smaller than a car
It will take time to repair your credit but it can be done. You may want to find a non-profit credit counseling agency. They will help you learn financial management skills and set up a debt management plan. Additionally, finding alternative sources of income can help you manage and pay off your debts faster. Consider exploring
work-from-home online side jobs that pay well to supplement your income.
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