There’s a lot of information floating around out there about how loan modifications affect your credit score.  Some people say yes it does, and some say not at all.  The answer really lies in how the lender decides to report it and also in what type of modification a borrower is getting.

To put it in the simplest of words, getting a loan modification means that the lender is not getting as profitable of terms as the original agreement.  The lender almost always loses because they are reducing principal balances or interest rates.  Because of this fact alone, the lender will usually report something negative to your credit report.  So, most of the time, obtaining some sort of loan modification should affect a borrower’s scores because they are not meeting their original obligation.

There currently is no ‘code’, or specific way, for a lender to report a loan modification to the credit bureaus.  I’ve seen it report in the form of late payments, charge-offs, settled debts, or just as comments in the comment section.  If a lender reduces the principal amount of the loan, they sometimes report it as ‘paid for less than the balance owed’, which is not good. If the principal balance isn’t being reduced, and just the payment / rate is changing, this could have no effect on your credit since payments and rates are not part of the credit scoring model.

Some lenders won’t even consider a loan modification unless a consumer is 90 days late – and getting to that point definitely hurts your credit.

I’ve heard of larger lenders like Chase and Citi give their 3 month trial period, telling consumers that they’ll stop reporting to the credit bureaus during that period, and then afterwards reported that whole time as late payments….so you have to be careful.

Once many loan modifications are complete, the lenders will report the loan as ‘current – pays as agreed’. However, that will not remove any derogatory history that occurred before that.  If a borrower had late payments, etc., that will still report negatively on the credit report.  Also, the amount delinquent plays a role in the credit score too.  If someone went 90 days late before the modification, his or her credit will be hurt far more than a borrower who only went 30 days late.

My advice: Negotiate with your loan holder exactly how the modification will be reported to the credit bureaus.   Sometimes they’ll agree to keep it clean and then it won’t affect your credit score one bit.

If you think this then you’re making a big mistake!  Those of you who have FICO scores in the mid 600’s were considered golden 36 months ago. Today, you’re considered too risky and the credit market has largely passed you by. Conversely, if you have FICO scores above 720 AND are on the buyer’s side of the credit equation then you are in the catbird seat. Auto loans are at or near 0%. Mortgages are at or below 5%. Credit cards issued by credit unions are at or below 9.9%. It’s a great time to be a borrower but only if you have strong FICO scores.

What’s considered perfect today? Shoot for a 750 and that will get you the best deals on almost everything.  Better credit means more leverage. You’ve heard to term “it’s a buyer’s market.” You’ve also heard the term “It’s a seller’s market.” Well, for the first time in almost three years it is now a buyer’s market in the consumer credit environment. But, it’s a buyer’s market only if you have good enough credit to deserve the very attractive rates offered by almost all lenders. If you’ve been putting off paying down credit card debt now may be the time as paying down credit card debt is the fastest way to significantly improve your credit scores.

So work on getting that credit score up today!  If you want to do it yourself, check out our FREE e-book with tons of information.  If you need help, Wellness Credit is a credit repair company located in Colorado that serves credit needs nationwide.

For consumers, 2009 will always be known as the year of the ‘credit crunch’.  One of the biggest things consumers will remember is how poorly their credit card companies treated them.  Almost everyone received letters in the mail about their credit limits decreasing, interest rates rising, and the like.  Of course, this abusive behavior led to the passage of the Credit Card Responsibility, Accountability and Disclosure Act of 2009, or CARD Act for short.

Here’s a brief summary of what this Act does for cardholders, among others…

• Credit card companies cannot increase interest rates on existing credit card balances unless a customer is at least 60 days late.
• A guaranteed 21 day grace period on payments.
• 45 days advance notice of any interest rate increases.
• Tough rules around issuing credit cards to consumers who are under 21 years old.
• In the event of an interest rate increase, the credit card company must revert to the original rate after the customer makes six months of on-time payments.  Clearer disclosure of account terms before an account is opened.
• Restrictions on over limit fees. If a consumer has not “opted in” to allow a credit card issuer to approve a transaction that puts you in an over limit positions, they have to either decline the transaction or not charge you the over limit fee.
• No additional fees because of the method of payment.
• Billing statements must be mailed 21 days prior to the due date, and companies cannot charge a late fee if a payment is late due to a delay in processing.  Applications of payments above the minimum now have to be applied to the balance with the highest interest rate.
• A credit card company cannot raise interest rates in the first year of a customer relationship, and promotional interest rates must last at least six months.

So what should I do in 2010 in order to position myself in the best place?  You can find yourself almost completely exempt from the credit crunch by doing two things:

1. Getting out of credit card debt, and
2. Increasing your credit scores.

By getting yourself out of credit card debt it allows you to escape the abusive treatment by lenders. Remember, things like interest rate and minimum payment increases only matter if you carry a balance. Getting out of and staying out of credit card debt puts you in a very enviable position.
A second byproduct of getting out of credit card debt is the significant benefit to your credit scores. “Debt” makes up a whopping 30% of the points in your FICO® scores, which places it a close second behind whether or not you have negative information on your credit reports. And as many people have learned the hard way, the minimum score requirements to not only qualify but also qualify at the best interest rates have become more difficult to satisfy.

This means higher FICO scores equals approvals where in the past a higher FICO score meant an approval with the best rates.