3 Things You Must Do Before You Lease a Car

Three Things You Must Do Before You Lease a Car

I tend to drive my cars until they die, and a couple of years ago that’s what happened. In need of a new car, but not sure what I wanted for the long-term, I considered leasing a vehicle. But if buying and financing a car seemed confusing, leasing seemed even more overwhelming. I ended up buying instead.

Turns out, though, that while leasing isn’t for everyone, it can have some advantages. Lower monthly payments and more flexible credit score requirements may be two of them.

If you are thinking about leasing, here are three things you can do to help improve your chances of getting approved.

1. Check Your Credit

Your credit score plays a key role in the lease you get. “There are going to be different tiers of credit that will be evaluated,” said Scot Hall, Executive Vice President of WantALease.com, an online marketplace for new lease deals. “If you have better credit, you will get better rates unless it’s a dealer-subsidized lease.”

Checking your credit reports at least a month before you plan to start shopping is ideal, since that will give you time to dispute and fix mistakes. While you are at it, check your free credit scores as well (you can access two of your scores free on Credit.com). You will get an idea of where you stand and whether there are potential issues with your credit.

What kind of credit scores are required to qualify for a lease? “(If) you do have good credit it really unlocks the door to the best lease deals. You’ll be able to take advantage of some of the lease specials,” said Edmunds.com Consumer Advice Editor Ron Montoya.

In addition, it may be easier to qualify for a lease than a loan on certain vehicles, at least when it comes to your credit scores. The make and model of the vehicle you choose will also affect your options. Experian Automotive found, for example, that the average credit score of someone who took out a loan for a new Jetta in the fourth quarter of 2014 was 716, while the average credit score for someone leasing one was 692. But for someone driving a new Grand Cherokee, the average credit score for a loan borrower was 735, while the average credit score for a lessee was 728.

average credit score

2. Know Your Cash Flow

One of the distinct advantages of leasing is that it may allow you to pay less per month than if you financed the same vehicle. According to Experian Automotive, the average monthly payment for a new lease was $420 in the fourth quarter of 2013, and the majority of leases (66%) were for a 24- to 36-month term.

But your lease payments may be lower than a loan payment for a similar vehicle. For example, the average lease payment for a Jetta was $287 while the average loan payment was $389. And for a Grand Cherokee, the loan payment averaged $611, compared to $470 for the lease payment.

average payment

Keep in mind that these monthly payments don’t take down payment or trade-in into account. And if you lease, you’ll either have to turn in the vehicle or purchase it when the lease term is up. “Consumers need to fully understand any potential cost on the back-end and be sure they can meet the terms of the lease – such as mileage limits and wear and tear,” said Melinda Zabritski, senior director of automotive credit for Experian Automotive.

3. Don’t Just Shop for a Car, Shop for a Lease

Unlike auto loans (which are available from a variety of sources including banks, credit unions, dealers and even online), leases today are largely controlled by the manufacturer. “Nearly all leases are done on a captive basis,” said Hall. For example, “Ford Motor Credit Company does most of the leases for Ford vehicles.”

That means you may be able to get a better deal if you are flexible and willing to consider a vehicle from a different manufacturer.

In addition to credit, the company offering the financing looks at your debt-to-income ratio and the “lease-to-value” ratio – in other words, how much you are financing compared to the value of the vehicle, said Hall. If you are having trouble qualifying, you may need to put additional money down or get a co-signer, he adds.

The good news is most people who apply for a lease qualify for one. Lease approval rates during the month of January were above 70%, according to SwapALease.com. Though that’s down from 73% in December of 2013, it’s up from September 2013 when a little more than 62% of applications were approved.

And there’s still another option: If you’re not ready to commit to a two- or three-year lease, you can consider taking over the remaining term on someone else’s lease. As long as your credit is in the same “tier” or better than the person whose lease you are assuming, you shouldn’t have much trouble qualifying, says Hall. Sites like SwapALease.com and LeaseTrader.com help bring together consumers who want to get out of leases and those who want to assume one and allow you to try out leasing without a longer-term commitment.

Image: Len44ik

This article has been updated. It originally ran on March 20, 2014.

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Help! My Tax Refund Was Taken to Pay My Student Loan Debt

Help! My Tax Refund Was Taken to Pay My Old Student Loan Debt

Every year, many people file their taxes expecting a refund … only to discover the money’s been taken to pay off their student loan debt. The bad news: The government can take that money if your federal student loans are in default. The better news: You can contest the seizure. And, if it was taken in error, you should be able to get your refund back. If it wasn’t an error, well, it can be very, very difficult to get those dollars released. However, we have heard anecdotally from readers who contacted the Education Department, demonstrated hardship and had at least part of their refund returned. The process appears to take awhile — and, again, there’s no guarantee Uncle Sam will comply — but it is an option someone can pursue if money is particularly tight.

Now, let’s delve a little deeper into why refunds get withheld — and what you can do if yours was one of them. (Psst: We’ll also provide some tips of what to do about those delinquent student loans.)

Why Was My Tax Refund Taken?

If you are in default on your federal student loans (which by definition means you are behind by 270 days or more), the Education Department can take your tax refund using the Treasury Offset Program. This program authorizes federal payments such as tax refunds or Social Security income to be intercepted in whole or in part to pay debts owed to other federal agencies. There are some limited consumer protections, but debtors aren’t always aware of them.

What Can You Do if Your Refund Was Seized?

We spoke with Jay Fleischman, a student loan and bankruptcy attorney, about what people can do. First, he said that by federal law, people who have student loans in default get a notice that they are at risk of having any potential tax refund seized for student loan repayment. That notice contains instructions for a review of your loan information and how to avoid the offset —so, in other words, if your student loans are in default and tax season is coming up, be sure to watch your mail.

If your refund is taken and you don’t believe it should have been, you can contest the offset by contacting the Education Department. If it was taken in error, the money will be refunded. However, be aware that an error does not generally include not getting a notice; it typically would require that you be able to prove your student loan was not in default.

As we mentioned earlier, if you were in default, you probably can’t get your refund back. The one case in which you are likely to be able to recover the money is if you filed jointly with a spouse, and it was his or her student loan that was in default.

“You may be able to make an injured spouse claim,” said Fleischman.

How Can I Keep a Tax Refund From Being Taken for Student Loan Debt?

Fleischman said it’s a good idea to adjust your withholdings whether you’re subject to a tax refund offset of not. A large tax refund means you overpaid your taxes during the year, he notes. If you are in default on your federal student loans you probably need that money. But at this point, there is nothing you can do to change the over-withholding from last year. Still, revisiting how much you’re having withheld for taxes is a smart move for anyone who got a large refund.

The bigger problem is how you are going to deal with the default on your student loans from now on. You’ll want to get out of default and stay that way. (Here’s an explainer on how to deal with student loan default.) In some cases, you may be able to get an income-based repayment plan in which your monthly payment can be set as low as $0. And “if your circumstances are dire and expected to remain so,” bankruptcy and the discharge of student loans might be options, Fleischman said. (Yes, that can be done.)

For most, what is done is done. The best thing you can do is to look ahead. And if you haven’t filed your tax return and expect a large refund, you may want to see what options you have to get out of default first. Being in default on a student loan can not only squeeze your budget, it can hurt your credit and cost you thousands of dollars in higher debt costs over a lifetime. You can get two of your credit scores for free on Credit.com to track your standing.

Got a question about your student loans? We want to help. Ask away in the comments section below and one of our experts will try to get back to you. In the meantime, visit our student loan learning center for more info.  

This article has been updated. It originally ran on March 9, 2015.

Image: iStock

 

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Creditor Gets a Judgment Against You — Now What?

overdraft fees

It’s a scary prospect: a creditor securing a judgment against you — which is probably why we get so many reader questions about the issue. A judgment represents a legal obligation to pay a debt, meaning a creditor or collector sued you over an outstanding debt and won. But that court win isn’t necessarily written in stone. Judgments can be appealed, reversed, amended or, at the very least, settled for less, depending on the circumstances and what you do next. (First step: Consider visiting a consumer attorney. Some offer free consults —and many will represent you for free if they think a collector has broken the law.)

If you’re dealing with debt collectors and facing a judgment — or are already (perhaps unexpectedly) saddled with one — we’ve pulled together answers to all the major questions that may be on your mind and where you can go from there.

How Does a Creditor or Collector Get a Judgment Against You?

In order to get a judgment against you, the creditor or collector must take you to court. If you don’t respond to a summons, or if you lose, the court will issue a judgment in favor of the creditor or collector. The judgment will be filed with the court, and once that happens, it is public record. That means it will likely end up on your credit reports as a negative item. (You can check your credit for judgments by viewing your free credit report summary on Credit.com.)

How Are Judgments Collected?

One of the main reasons you want to try avoid getting a judgment against you is that creditors may have additional ways to collect once a judgment has been issued. As we mentioned earlier, depending on your state’s laws, they may include going after your bank accounts or other property, or trying to garnish your wages. But as the saying goes, “you can’t get blood from a stone.” As the National Consumer Law Center points out in its book, “Surviving Debt:”

Even if you lose a lawsuit, this does not mean you must repay the debt. If your family is in financial distress and cannot afford to repay its debts, a court judgment that you owe the money may not really change anything. If you do not have the money to pay, the court’s judgment that you owe the debt will not make payment anymore possible.

If you aren’t sure what a judgment creditor can do to collect from you, it’s a good idea to consult a bankruptcy attorney who can help you understand what may be at risk if you don’t pay. The attorney can explain what property you own is “exempt,” or safe from creditors. You can also check out this article on how to get out of debt.

Can a Judgment Be Reversed?

Yes. In certain circumstances, you can ask the court to re-open a judgment or you can formally file an appeal. t’s also possible to have the terms of a judgment altered. And, with a few exceptions, a judgment can be discharged in bankruptcy. However, laws (and the timelines for their implementation) vary by state, so, again, if a creditor secures a judgment against you, it can be in your best interest to consult a local consumer attorney. You can find more about your legal rights post-judgment here.

Can I Settle a Judgment?

The answer to this question is often “yes.” Most judgment creditors know it is often difficult to collect judgments, especially if the debtor doesn’t have wages that can be garnished or assets they can go after. If you are able to get a lump sum of money from, say a relative, you may be able to offer that to the creditor to pay off the judgment. Just make sure you get any agreement in writing before you pay. Make sure the agreement spells out all the terms of the settlement, including the fact that you will not owe any more money after you make the agreed upon payment.

Can I Avoid a Judgment?

Another option is to settle the debt before it goes to court. The creditor may be willing to settle for part or all of the money you owe. Of course that only works if you can manage to pull together money to pay them. If you can, make sure you have a written agreement from them that states they will not pursue the debt in court if you make the payment as agreed. Then check with the court to make sure the matter has been dropped.

How Long Can Judgments Appear on Credit Reports?

Unpaid, they can remain on your credit reports for seven years or the governing statute of limitations, whichever is longer. Once judgments are paid, they must be removed seven years after the date they were entered by the court. But soon those parameters are changing: Beginning in July, the credit bureaus will exclude judgments that don’t contain complete consumer details or have not been updated in the last 90 days. (Wondering how long other stuff stays on your credit report? We’ve got you covered here.)

How Long Can Judgments Be Collected?

There is a specific time period for collecting judgments, and it also varies by state. This “statute of limitations” is often 10-20 years long. In addition, in most states it can be renewed. For that reason alone, it’s best to try to avoid getting a judgment against you in the first place. And if it does happen, it’s best to try to resolve the debt.

Can Interest Accumulate on a Judgment?

Yes. In most states, interest may be charged on a judgment, either at any rate spelled out in state law, or at the rate described in the contract you signed with the creditor. In addition, the judgment may include court costs and attorney’s fees.

Anything Else I Should Know About Judgments?

A debt collector that threatens to get a judgment against you or to garnish your wages or seize your property may be making an illegal threat. Talk with a consumer law attorney to find out if that’s the case.

And just because you haven’t heard anything about a judgment in a while, that doesn’t mean you should assume it has gone away. It’s possible that the creditor could decide at a later time to try again to collect from you. Plus, an unpaid judgment may prevent you from buying a home or getting credit at a decent interest rate. So it’s a good idea to try to resolve the judgment, either by filing for bankruptcy or by paying off or settling the judgment when you are able to.

Remember, when dealing with debt collectors, it pays to know your rights. You learn more about them in our Managing Debt Learning Center.

Reminder: This post is meant as educational information, not legal advice. Please consult an attorney for legal advice.

This article was updated. It originally ran on January 25, 2012. 

Image: walknboston, via Flickr.com

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7 Things You Need to Know About the Statutes of Limitation for Debt

statutes of limitation for debt

You may not know this, but, yes, debt does technically have an expiration date. It’s subject to a statutes of limitations, which limits how long a creditor or collector has to sue to recoup an unpaid balance. Statutes of limitations (SOL) vary by state and debt type. They’re usually between 3 to 6 years, but some longer windows do apply. Of course, you shouldn’t treat the SOL as a solution to your money woes. For starters, those expiration dates have nothing to do with how long a unpaid debt can appear on your credit report (that’s generally around 7 years — more here) and it’s possible for a court to award a judgment to a creditor on time-barred debt if you don’t show up to raise the issue. Plus, there are ways to unwittingly restart the SOL clock. Having said all that, if you have old unpaid debts, it can be helpful to know the statutes of limitation that applies to them. (You can check your credit for outstanding accounts by pulling your credit reports for free each year at AnnualCreditReport.com and viewing your free credit report summary on Credit.com.)

Here are the seven most common questions we’ve received from readers about the statutes of limitation for debt.

1. How Long Is the Statute of Limitation for my Debt?

The time period typically either starts when you fall behind on a debt, or from the date of your last payment, and the length of time depends on state law for that type of debt. This chart is a guide to state statutes of limitation. Unfortunately, it is not always clear-cut. So it’s a good idea to check with your state attorney general’s office, a consumer law attorney or legal aid, especially if you are being threatened with legal action.  

2. Can a Debt Collector Try to Collect After the SOL Has Expired? 

In many cases, yes. However if you tell the debt collector not to contact you again, they must stop. It’s a good idea to put your request in writing. Once they’ve received it, they can contact you only to confirm that they have received your request or to notify you of legal action they are taking to collect. In some states, however, trying to collect a time-barred debt is illegal and a creditor who attempts to do so is breaking the law. 

3. If the SOL Has Expired Can I Still Be Sued? 

It is not uncommon at all for consumers to be sued for time-barred debts. If you are sued for an old debt and the statute of limitation has expired, you can raise the expired statute of limitation as a defense against the lawsuit (here are some other debt collection defenses you can use, too). However, many consumers do not appear in court and therefore the creditor or collector gets a judgment against them. That is why you should not ignore a legal notice about a debt, even if you think the debt is too old. A consumer law attorney or bankruptcy attorney can help you figure out how to respond. 

4. Should I Pay an Old Debt? 

That’s something only you can decide. However, keep in mind that if you pay anything — even a small amount — on an old debt, you may restart the statute of limitation. That’s why it can be risky to pay an old debt if you can’t afford to pay it in full. You could open yourself up to collection efforts, or even a lawsuit, for the entire amount the collector says you owe. 

5. Can a Debt Still Appear on my Credit Reports After the SOL Has Expired? 

In many cases, the answer is yes. The length of time that negative information may be reported is governed by the federal Fair Credit Reporting Act. Most negative information can be reported for seven years. The statutes of limitation for most consumer debts, on the other hand, is four to six years. So you could have a situation, for example, where the statute of limitation expired on a debt in four years but the related collection account still appears on your credit reports for another three years after that. And, yes, collection accounts can do serious damage to your credit scores.

6. I Took Out a Debt in One State but Moved. Which State’s SOL Applies? 

That can be a difficult question to answer. Consumers can generally be sued in the state where they took out the loan or the state where they currently live. Sometimes the statute of limitation will be based on the laws of the state described in the contract (in the case of credit cards, that will be spelled out in the credit card agreement). 

When it’s not clear which state’s SOL applies, it is often up to the court to decide. In a number of court cases, the statute of limitation that was shortest was applied. But that’s not true in all cases. That’s why it is helpful, if you are being sued for a debt, to consult with a consumer law attorney who can help you understand whether the statute of limitation has likely expired.

7. What Is the SOL for Court Judgments? 

If a creditor or collector has obtained a court judgment there is often a separate statute of limitation that applies to judgments. (Tip: If you have unresolved debts, be sure to at least get your free annual credit reports, as we mentioned, to see if any judgments are listed.) In many states, that time period is 10 years or longer, and judgments may be renewed. Learn more about how about judgments work here.

Dealing with debt? if you’ve got questions about how to best manage those burgeoning balances, ask away in the comments section below and one of our experts will try to get back to you. In the mean time, feel free to check out of Managing Debt Learning Center

This article has been updated. It originally ran on April 20, 2015.

Image: iStock

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The Wackiest Things Small Business Owners Try to Deduct

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As a small business owner, you want to take every legal tax deduction you can to lower your tax bill. But lingerie? A petting zoo? Daily breakfast eaten at your desk? As it turns out, one of those three items passed IRS scrutiny, proving that what’s crazy for one business to try to deduct could turn out to be fine for another.

Firearms was a popular response mentioned by several experts asked to share some of the unique items for which they’ve seen business owners try to get a tax break.

“A client tried to deduct the cost of a shotgun,” says Steven J. Weil, Ph.D., EA, president and partner of Fort Lauderdale firm RMS Accounting. “The reason given was, ‘I am a pharmacist and I need to protect myself in case someone wants to break into my house looking for drugs’.”

Another small business owner tried to deduct the cost of a concealed weapons permit class because they claimed it would allow them to “protect their office,” says Jeffrey Beebe, a CPA in Boise, Idaho. The problem? “They didn’t do anything that represented any kind of special risk,” he says.

And Thomas J. Williams, a tax accountant who operates Your Small Biz Accountant, LLC, said a client thought their “concealed weapon and permit would be deductible since it would be used for security purposes at the office.” He had to point out to the client that for an item to be deductible, it “must meet the necessary and ordinary test for the industry type. The client did not keep cash on site, nor were they located in an overly crime-ridden area; a general sense of feeling safer by owning a gun would not qualify as reasonable business expense.”

Off the Wall … But Deductible?

“A purchase from SexyHighHeels.com,” says Donna Merrill, business coach, tax expert and founder of Business Untangled, describing surprising items her clients have tried to write off. That purchase turned out to be a personal gift, purchased on a business credit card (another no-no). It didn’t fly. But two other unusual ones did:

  • A petting zoo for a direct sales home-based business. “Positioned strategically on the tax return with very visible notes to be seen upfront, this deduction continued to be accepted by the IRS for numerous years,” she says.
  • A Playboy subscription. “This expense was actually put through the scrutiny of an audit,” says Merrill. “It was a legitimate expense for the taxpayer, who was a photographer who did boudoir photography.”

“Clothing and shoes” are the ones that top the list of creative deductions Andrew G. Poulos, principal of Atlanta-based Poulos Accounting & Consulting, Inc., sees clients try to take. “Other crazy deductions I have seen include expensive gifts to their spouse, which include jewelry, lavish trips and even lingerie as a ‘gift.’ ”

Meals and entertainment deductions can trigger an audit if the business owner isn’t careful. “In my experience, the most abused expense is meals and entertainment,” according to Williams. “Clients are under the wrong impression that it’s a free for all. I once had a client try to deduct their daily breakfast because he happened to be speaking on the phone with a customer or sitting at his desk completing paperwork.”

Folasade Ayegbusi, founder of Accountingwithfolasade.com, says she’s seen a business owner try to deduct the occasional “alcohol run” under meals and entertainment. “Now, if the doctor prescribed you alcohol, then yes, we can deduct it,” she says.

Is Fido Deductible?

Pets can be expensive, and no doubt a tax deduction to lessen the burden would be nice. Some entrepreneurs do try. One of Weil’s clients, for example, tried to deduct the cost of their dog saying, “He is the company mascot, and we provide medical coverage for our employees.”

Joshua Zimmelman, owner of Westwood Tax & Consulting, says he’s had clients try to deduct vet bills and the cost of pet food by claiming their dogs were doing double duty as “guard dogs.” Beebe also had a client who tried to deduct the cost of their pet German Shepherd by claiming it was a guard dog.

Hobby or Business?

“People try to wrap their hobbies — from a kid’s soccer team to auto racing — into their business,” says Crystal Stranger, EA and president of 1st Tax. “It’s a thin line often between what does and does not fly when it comes to making something personal be business-related by calling it advertising or marketing,” she warns.

One test: Is it highly related to your business? She gives this example: “If you have a steer-roping team and run a business that builds saddles for steer roping, then the activities of competing your team and traveling to events are likely to be fully deductible. Whereas if your business is insurance, you will have a harder time connecting that to being a profit center.”

Vacations & Beach Homes

Personal vacations disguised as a business trip are another potential tax trap, warns Avo Asdourian, EA and founder of VirtualTaxAccountant.com. “If the deduction is for a convention and you are audited, the IRS will require the conference name and supporting registration documents, and proof that you attended the conference at least eight hours a day,” he explains. He adds, “If you call your vacation a business meeting, then you need to provide the people you met with and a synopsis of the business meeting and the outcome of the business meeting.”

One of Beebe’s clients tried to deduct a $600,000 catamaran used to entertain clients once or twice a year. Another hoped to get a tax break by claiming a deduction for a cabin deep in the woods, as well as the snowmobiles used to get there in the winter, because it was used occasionally to entertain clients.

Clients have tried to come up with “elaborate schemes” involving ”foreign companies owning nice houses on even nicer beaches,” says Austin Carlson, a CPA and associate at Gray Reed & McGraw. His answer is “not deductible,” he says.

Protect Yourself

For an expense to be deductible, the IRS says “it must be be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.” But in many cases, business owners attempt to deduct a purely personal expense, says Williams.

As seen from the example of the Playboy subscription, some unconventional purchases may be deductible in the right circumstances. Make sure you keep good records and consider working with a qualified tax professional with experience helping small business owners.

But beware tax preparers who promise big deductions before reviewing your situation. “Don’t use anyone who suggests that you hide income or take write-offs you know you aren’t entitled to — this is a tip-off that the preparer is shady,” warns Asdourian. “If the IRS catches the preparer, all the preparer’s clients may come under audit.” Conversely, the wrong preparer could mean you miss out on deductions you are entitled to take.

Just remember the consequences if you come under the microscope of the IRS. The agency could put a lien on your business, which can have a major negative impact on your personal credit (if you’re a sole proprietor) and your business credit scores.

“There are always opportunities to plan legally within the law,” says Carlson, “but if it sounds too good to be true, it’s probably a one-way ticket to a massive IRS headache.”

Image: filadendron

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You May Be Able to Get Collection Accounts Off Your Credit Report Sooner Than You Think

A collection account can drag down your credit score for several years — but not always.

While shopping for a home to buy, Ryan discovered through his credit monitoring service that a collection account had hit his credit reports. His credit score dropped, and he was worried it could jeopardize this ability to get a mortgage. “I had no idea what it was,” he says. He wanted it off his credit.

After doing some research online, Ryan (he asked his last name not be used to protect his privacy) connected with Michael Bovee of Consumer Recovery Network, who helped him negotiate with the collection agency to resolve the account.

Bovee had good news for Ryan: The collection agency that had the account, Midland Funding, had recently made changes to their credit reporting policy. Because the account had been delinquent more than two years prior, if he resolved it he could get it removed from his credit reports and continue looking for a home to buy.

Collection Accounts Can Damage Your Credit for Years

One of the most frustrating things about collection accounts is that once they are on your credit reports, the damage is done. You can resolve them — settle them or pay in full — but they still can remain on your credit reports for many years, affecting your credit scores and flagging you as a higher risk to lenders. (You can see how much collection accounts are harming your credit by reviewing two of your credit scores for free on Credit.com. The scores are updated every 14 days.)

It can be a long time before you completely put them behind you. By law, collection accounts may be reported for seven years, plus 180 days from the date you first fell behind with the original creditor. So if you stopped paying a department store card in January 2015, for example, and it later wound up in collections, that collection account could be reported until June 2022. Ouch!

While the newest credit scoring models — FICO 9 and the latest version of VantageScore — ignore collection accounts with a zero balance when calculating credit scores, most lenders are using older credit scoring models that treat all collection accounts as negative, whether they are paid or not. That means consumers trying to get a mortgage, car loan, credit card, or auto insurance may wind up paying more because of a collection account that perhaps was resolved some time ago.

Worse, most consumers seem to believe that paying a collection account will help improve their credit scores and are often shocked to learn after that fact that it doesn’t.

So when Encore Capital, which owns Midland Funding, Asset Acceptance and Atlantic Credit and Finance, quietly changed its credit reporting policy late last year, consumers who were the beneficiary of this new, more lenient policy may not have realized how fortunate they were to have these items removed from their credit reports, sometimes years before they would have been previously.

Specifically, these companies announced they would:

  • Stop reporting accounts that were more than two years old if the account was paid in full or paid for less than the full balance, and
  • Not report new accounts if payments are made within three months of the initial notice and are made on time thereafter until the account is paid in full or paid for less than the full balance.

According to one source familiar with this action, over 1 million of these derogatory accounts have already been removed from credit reports as a result of this change. There are at least 30 million Americans with accounts in collection, according to the FTC, but some estimates put that number as high as 77 million.

Changes on the Consumer’s Side

Bovee has been encouraging the industry to adopt new reporting policies for some time. “If the newer (credit scores) say paid collections don’t really matter, then keeping them on there is just punitive,” he says.

It’s not just consumers that can be hit by collection accounts. According to a National Federation of Independent Businesses survey in 2012, nearly half of small business owners use their personal credit in some way, shape or form to finance their company, so entrepreneurs with collections on their credit reports may struggle to get credit when their business needs it because of a mistake years prior. (You can check your business credit reports for collection accounts that may be hurting your business credit scores.)

Last year, Rep. Maxine Waters (D-Calif.) proposed a bill that would have reduced the time negative information stays on credit reports to four years and required that paid and settled debts be removed from credit reports within 45 days. However, that legislation stalled in Congress. (You can read more here about how to repair credit report issues and possibly improve your credit.)

Credit reporting is a voluntary system and no lender is required to report. But generally credit reporting agencies (and even some regulators) frown on removing accurate information early, as it may increase risk to lenders who are unaware of the consumer’s full credit history. So far, the change in collection account reporting by these major debt collectors hasn’t been met with public opposition from the bureaus.

Ryan appreciates this change. He knows that not all collection accounts are removed so quickly. “It’s very good to find out this will come off completely,” he says, “and makes you feel as if paying it off is well worth it.”

Bovee believes that other collection agencies are likely to follow suit in the not-too-distant future. After all, they want to get paid, and if consumers know that resolving their collection accounts will help get them removed faster, they are more likely to try to strike a deal.

“The cat’s out of the bag, and it needs to stay that way,” he says.

Image: PeopleImages

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Does Starbucks Have a Good Credit Score?

You may know you have credit scores, but did you know businesses do as well? Find out Starbucks credit score and that of some other popular coffee chains.

Coffee lovers tend to pledge strong loyalties to their favorite coffee shop, often stronger than loyalties to a professional sports. Sound familiar? Well, if this is you, could your allegiance to your favorite coffee shop be swayed by knowing how it treats its suppliers and contractors?

What if you knew their business credit scores, which are a reflection on how they handle their finances and debts? If so, take a look at the scores of major coffee shops Starbucks, Peet’s, Philz, and Dunkin’ Donuts to find out which has the best business credit score. (Note: Representatives for the companies did not immediately respond to requests for comment.)

What’s a Business Credit Score?

Similar to personal credit, business credit scores and reports offer one way to determine the credibility of a company by looking into how it has handled debts and obligations in the past.

As a business makes payments on business credit cards, loans, trade accounts with suppliers, etc., those payments may be reported to various warehouses that collect business data. Business credit reporting agencies use that data to create a score, which suppliers, vendors and even business partners can look up.

These scores can determine a business’s ability to qualify for funding or trade terms, large work contracts, rates on insurance premiums and more.

How did we get our hands on these coffee giants scores? Well, here’s a wild fact: Anyone can look up a business’s credit score, any time they want, without notifying or getting permission from the business. Here are the scores (and what they mean) for the four major coffee shops we mentioned. (Note: All scores are on a 0 to 100 range and are as of Nov. 17, 2016.)

Starbucks

Starbucks Corp.’s business credit score was a 50, putting it in a medium risk category. The national score average is 56.8.

starbucks_score

The most important factor influencing this score is payment status, which accounts for approximately 50% or more of the score. Payment status, however, works differently from that of personal credit — instead of a 30-day grace period, a payment that is even one day late can be reported on a business credit report as a slow or delinquent payment.

The report shows that of all the accounts listed for Starbucks, close to 30% of them have a delinquent status. Starbucks is also using 50% of its total available credit. Both the high number of delinquent accounts and the high debt usage can signal financial risk and reduce the score.

The report also shows that Starbucks Corp. has 361 derogatory marks, 277 of which are accounts that have been turned over to a collections agency. Derogatory marks are also likely bringing down their score. Of those collection accounts, 238 of them are listed as paid in full. More than 200 of them are from the Environmental Control Board. It’s important to know what these accounts are — they could even be duplicates or mistakes negatively affecting the score.

The other derogatory remarks include 60 state tax liens — tax debts that have not been paid in full — and 23 judgments, which indicate a financial obligation to pay any court-ordered damages following a lawsuit in which the business was the defendant. Both of these can hurt a business’s chances of qualifying for the best financing products and most flexible terms.

Peet’s Coffee & Tea

peets_scorePeet’s Coffee & Tea’s credit score was a 75, putting it in a low- to medium-risk category, well above the national score average.

Of Peet’s 56 accounts reporting, 16 of them show a delinquent status. There are seven tax liens and 12 derogatory UCC filings, as well as one account that has been turned over to a collection agency and is listed as paid in full (these can stay on business credit reports for more than six years, even if paid).

This score shows that Peet’s generally pays its creditors on time or just a few days late, which is usually an indication that a business is financially healthy and considered low risk.

Philz Coffee

philz_scoreComing in hot with a score between that of Peet’s and Starbucks is Philz Coffee, with a score of 65. This score puts Philz in the same low- to medium-risk category as Peet’s.

Philz has a smaller number of accounts than the above competitors, with 15 accounts reporting and only one showing a delinquent status. Other factors that might be bringing down Philz score include one state tax lien, UCC filings that are listed as derogatory and even the age of the credit file. Philz has 11 years in business, according to the business credit report, while Peet’s and Starbucks each have more than 30 years. A credit file showing fewer years in business can indicate less certainty about the future of the business.

The payment trends section of the report shows that Philz pays its bills approximately on time or only a few days late. This is a good indicator of financial health to creditors and is likely having a positive effect on the score.

Dunkin’ Donuts

dunkin_scoreDunkin’ Donuts’ score is a 24, which puts the business in a medium- to high-risk category.

Dunkin’ Donuts has one account that is beyond the terms of the agreement, according to the report. The report indicates that the low number of active accounts in the past 12 months could be a factor bringing down the score, as well as the multiple tax liens, derogatory UCC filings and a judgment.

Although Dunkin’ Donuts is carrying revolving debt (29% debt usage), it is likely low enough not to have a large negative impact on the score (however, it is always best for businesses pay balances in full, if possible). Dunkin’ Donuts also has a long established credit history, which predicts continued success and has a positive impact on its credit scores.

Another Scoring Factor

One interesting factor that may influence how each of these coffee producers is viewed in the eyes of lenders is their industry classification, or SIC and NAICS codes. Dunkin’ Donuts, for example, has an SIC code associated with “doughnuts,” which is a low-risk industry, while Peet’s, which is listed under “coffee, roasted,” is a medium-risk industry.

Some small business SIC codes that are higher risk can trigger a reduced credit limit recommendations or even an automatic decline from lenders. If you’re a small business owner checking your scores, you’ll want to know how the bureaus are classifying your business and what impact it might have on your credit.

Score Higher Than Your Favorite Cup of Joe

For most businesses, establishing business credit is the first step toward building strong credit scores. Separating personal and business expenses, as well as obtaining a business credit card or accounts with vendors and suppliers that report to commercial credit agencies are great first steps. As you start to make payments on your accounts, be sure to make them on time or even early.

It’s important to check your credit scores. (You can see two of your personal credit scores for free, updated every 14 days, on Credit.com.) Be sure to look for any errors or misinformation — make sure the accounts listed are associated with your business, and make sure you don’t have any tax liens, collections accounts, judgments, bankruptcies or UCC filings that shouldn’t be there. Inspect your company information, like your SIC code, to make sure you aren’t incorrectly identified as a higher-risk business.

Next time you sit down with your favorite cup of joe, consider setting your news app aside and take a close look at your credit reports and scores instead. Knowing where you stand and taking steps to improve it will energize your business and help keep you ahead of the pack.

Image: Georgijevic

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