debt

Utility charge off could hurt credit score

Steve Bucciq_v2.gifDear Debt Adviser,
I have a charge off from a utility company for $900. I really want to get rid of it as I want to buy a house in about three years. What's your advice?
-- Trish

a_v2.gifDear Trish,
Three years is a good time frame for what you want to do. Generally, the last two years of a credit history counts the most in a credit decision. So you have time to straighten out this little bump in your financial life before you try to borrow for a home.

One thing, though: You won't be able to get rid of it. Negative items like this stay on your credit report for seven years and cannot be erased or eliminated. However, you can minimize the effect on your credit.

When an account is charged off by a creditor, the balance owed is no longer an asset of the company and is charged off its financial ledgers as a bad debt for tax purposes. Most creditors who charge off balances owed report it to the credit bureaus. So you will want to do everything you can to avoid a charge off.

Here's how to begin to turn this item into the "incredible shrinking negative entry" on your credit report. If you haven't already, you need to pay what you owe on the account. Next, I want you to check your credit reports from all three reporting agencies to see if the charge off shows. You can get a free copy from each bureau once a year at AnnualCreditReport.com.

Most people don't know that many utilities never bother reporting to the credit bureaus, so the item may not appear at all. There are two main reasons for this. First, utilities don't see themselves as extenders of credit. Second, they don't want to pay the fee charged by the credit bureau for credit reporting. Yes, the bureaus charge a fee to take in data, and then they charge you and the lender again to get the data out. What a deal!

If the charge off appears in your report, your credit score will not improve by paying what you owe on the account. The damage to your score has been done, and paying the account does not remove the fact that it was charged off. The credit scoring models calculate only what is included in your credit report. Paying the account, unfortunately, does not remove the charge off designation.

However, a mortgage lender is not going to make a lending decision by viewing only your credit score. The lender is going to review your credit report as well.

When a lender reviews your credit report, he or she understands that mistakes with credit are common. What matters is whether you have done what you can to correct the mistake and, most importantly, have paid what you owe. Paying late is not ideal, but paying any outstanding accounts is critical to qualify for a mortgage loan in today's tight credit environment.

To minimize the effect of the charge off and ensure you can successfully qualify for a mortgage, continue to add positive information to your credit history. Pay all your accounts on time and as agreed. Open new accounts only as you need them, and don't make any large purchases like a car or furnishings for an entire house just before you apply for your mortgage loan. For more tips on managing your credit score, I recommend that you read this "5 steps for improving your credit rating."

Finally, you can ask the utility if it can remove the charge off from your report in return for a prompt payment. The company may not allow this. If they do not agree, you will need to pay them anyway. Should they agree, ask them to put it in writing that the charge off will be removed once payment is received. Don't make the payment until you receive the document. If you don't have the agreement in writing and make the payment, you have no leverage with the company should they refuse to comply.

The more time that goes by after your charge off issue is resolved, the less impact it will have on your credit score and the greater your chances of getting the mortgage you want. Just keep current with all your credit obligations and make smart financial decisions moving forward.

Good luck!

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