Ask Me Help Desk - Paying off OLD stuff

My question is:
Our credit stinks - mid 500's. A series of difficult situations dropped our very near perfect score to this in a matter of five difficult years.
Our situation has finally come around and we're able to make some changes in our financial picture. The question is how?
We just refinanced our adjustable loan to a fixed 30 year, we paid a ton of points, but are down to a 6.5% and are happy and comfortable with that.
Now we're on to a car loan. We presently own both our cars - 02minivan and a 01 taurus. The Taurus is the one we need to replace - recent accident.
ANYWAY - we're looking into a home equity loan. IF we were to do this, we would be able to pay off the VERY OLD stuff on our credit. We have arranged for some settlements and paid off some stupid little sutff. I just want to get some advice on this. Should we pay off all this stuff that would have dropped off our credit in a few years? Will that make it take a whole other 7 years to drop off? Will it raise our score significantly? If we could (which I'm not sure if we can) would it be a dramatic difference if we paid off in full vs settle? Keep in mind these are all closed accounts, closed for more than 3 years. We're not talking a TON of stuff - there are three - if settled for a total of just under 5000. If paid in full 9000. Does anyone have any input for us. We are desperate to start fresh and get off to the best start - we just want to do it right this time. We were kind of screwed on the mortgage thing and just want to be sure we're making the best decisions. Thanks for your help ALT

Quote:

Originally Posted by alt

My question is:
Our credit stinks - mid 500's. A series of difficult situations dropped our very near perfect score to this in a matter of five difficult years.
Our situation has finally come around and we're able to make some changes in our financial picture. The question is how??
We just refinanced our adjustable loan to a fixed 30 year, we paid a ton of points, but are down to a 6.5% and are happy and comfortable with that.
Now we're on to a car loan. We presently own both our cars - 02minivan and a 01 taurus. The Taurus is the one we need to replace - recent accident.
ANYWAY - we're looking into a home equity loan. IF we were to do this, we would be able to pay off the VERY OLD stuff on our credit. We have arranged for some settlements and paid off some stupid little sutff. I just want to get some advice on this. Should we go ahead and pay off all this stuff that would have dropped off our credit in a few years? Will that make it take a whole other 7 years to drop off? Will it raise our score significantly? If we could (which I'm not sure if we can) would it be a dramatic difference if we paid off in full vs settle? Keep in mind these are all closed accounts, closed for more than 3 years. We're not talking a TON of stuff - there are three - if settled for a total of just under 5000. If paid in full 9000. Does anyone have any input for us. We are desperate to start fresh and get off to the best start - we just want to do it right this time. We were kind of screwed on the mortgage thing and just want to be sure we're making the best decisions. Thanks for your help ALT

Just my thoughts... stay away from a 2nd mortgage or home equity loan, putting your place to live on the line if something were to happen such as loss of job or illness, etc. The $9000 you speak of is not really a lot of money... Is there any way to generate more income, say for example, a 2nd job with most of that income going to the $9000 in debts... if you could make just an extra $500 a month and if you negotiated down the interest rate with those 3 creditors, you might have that debt eliminated in 20, 22 months... and save your credit... I know you probably need a 2nd car but can you make it with just one vehicle until the debt is eliminated... my thinking is that shifting debt from one place to another and perhaps jeopardizing your home is not a good idea, takes a lot of willpower not to go out and create new debt. By the way, if you do follow my suggestions, don't create any new debt ! Cash is king !

Thanks for your input - that was our initial concern. Income isn't the problem any longer - my husband is in an excellent paying job now and between the two of us - I do home daycare we pull in over 3 figures soooo we could probably just be diligent and pay it off with cash. However, we were told that a part of why our credit wasn't getting better (because we've been on time with our mortgage for over 2 years now with very little upward movement in our score) was because we had no other credit with current positive information reporting. Also, for the amount of the loan we were talking about the payment with principle and interest is 250 ish. Not a huge nut to crack every month even if something did happen especially knowing all we have is our mortgage, and then this payment and of corse normal utilities / groceries etc. I appreciate your advice, we have definitely followed that thought process through the past 3 years or so and it has gotten us to this point where now I'm thinking we need to take a little risk in order to get ahead. What do you think? Also I should note, we live in extremely rural country. There would be no way to live with one car. I couldn't safely run my daycre without having access to a vehicle for safety / bus stop etc reasons and my husband would never be able to find a ride in to work way out her and there's no public transportation for about 15 miles at the least. AND we can't get approved for a car loan, so that's where the whole home equity loan can into play AND they won't approve without us paying off the old "stuff" AND so here we are. I really appreciate your advice, if you have any further comments with this information please post. Thank-you ALT

First a closed account may have different meanings. To the account holder being closed may mean that it can't be used anymore. To the creditor, being closed might mean that the balances were written off. So what you really need to determine is the status of the accounts as far as the creditors are concerned. Are they in collection? Is there a possibility of a judgement being obtained against you? If there is, then I would pay off those debts BEFORE a judgement can be entered.

It will look better on your credit report to have the accounts paid in full then settled. But it might be a while before any payment raises your score significantly.

As to the car, see what interest rate you can get from the dealers or banks. You might find that you can get a decent rate. Otherwise, I would go for the equity line and use that to buy the car.

Try to contact those creditors and ask if the negative entry can be removed by them completely if you pay an agreed amount immediately. They will most likely say no, but if they do say yes, have them send you a letter to that effect (in case they lied to you). One weird thing about credt scoring is that the date of "last activity" on a derogatory account has a great affect on your score. The further in the past the less affect it has. This means that if you paid off a five year old collection/charge off today it could actually lower your score because the last activity would be more recent. Also, that entry would remain on your credit for 7 years from the pay off date, rather than dropping off in 2 years. Kind of a catch 22. I have been trying to decipher the mysteries of credit scoring for perhaps the last 10 years (ever since the mortgage industry started using them), and am still only able to give vague answers. If it were me, I would tend to leave 5 or 6 year old items alone, and pay off more recent ones. For paid collections, perhaps older than 3 years old, you stand a fair chance of removal by disputing them, because old paid accounts get purged from the system. Good luck.