If you were thinking of using your tax refund to pay off items on your credit report, or you have been told by a credit repair company to do so,
STOP!!!
Don’t Do I
t!!!
OK, you are probably thinking, “Is this guy nuts?
Why wouldn’t I want to pay off items on my credit report so I can either get out of debt or clean up my credit report?”. And that, unfortunately, is what most people that are working on credit restoration think. And that is step number one in shooting yourself in the foot. So you understand, this post strictly relates to credit restoration and increasing your credit score. It is not specific to financial planning. If it were, I would highly advise you to pay off any and all debt that you can so you can get out of debt as quickly as possible.
In this case, however, I am speaking strictly of restoring credit and increasing your credit score. So, let’s examine why you don’t want to use your tax refund to pay off items on your credit report.
In the last several weeks, I have had numerous clients tell me that they were going to use their tax refund to pay off items on their credit report. When I hear this I just cringe. It is like hearing nails on a chalkboard (which incidentally doesn’t bother me. What I can’t stand is the metal sound of two forks that are stuck together being pulled apart. Hey, I never promised I wasn’t weird. I only promised to give you accurate information). So, back to the nails on the chalkboard, why does hearing people say this make me cringe?
For starters, if have read my prior posts, you know why Tax Refunds Are ONLY For The Financially UNEDUCATED! and why Rapid Refunds are only for the GALACTICALLY STUPID and why you are so fortunate to be among the top 3% of Americans in your financial education because you read my highly intelligent posts. 
Beyond that, let’s take a look at a few real world examples from real clients just like you. Ok, so a few weeks ago, in one of my posts I asked my readers what they were going to do with their tax refunds and one of the answers I got was the typical, “I want to clean up my credit report”, answers. In theory this sounds great and someone is attempting to demonstrate responsibility and take action towards “cleaning up my credit report”.
Unfortunately, the method used can be disastrous and actually make your credit worse. Here’s the actual comment post and my reply:
“I’m looking to repair what I can of my credit with my refund so that I can get into your rent to own home program….”.
To which I replied, Yvonne, that is a wise decision but only if you do it the right way which is why we developed Credit Repair College. So you understand, our program is a No Credit Qualifying Rent To Own Program so your present credit isn’t an issue. If you meet the other criteria, we can get you into a home today.
To see the criteria, simply go to our Enroll Now page and it will illustrate exactly what we are looking for BEFORE you enroll or pay any money. Essentially, you approve or decline yourself. You can see the requirements here: Program Requirements .
Your Enrollment also provides you with a free 2 week trial to Credit Repair College. What concerns me is that it sounds like you are going to take tax refund money and pay off old collections and charge offs. If this is done improperly (as in you just pay them), it has an immediate negative impact to your credit report and will refresh the date of last activity thereby showing the collection or charge off for ANOTHER 7 years. Not what you want. Before you pay anybody anything, you need to examine these options, all covered at Credit Repair College: Dispute, Debt Validation, 6-2-3 Method and Pay for Delete.
It simply goes against the grain of logic and reason that paying off derogatory items would actually make your credit score worse in the short term and cause you to have derogatory credit for a longer period of time, but unfortunately, that’s the truth. It isn’t simply paying off your derogatory credit that is important, it is
HOW YOU PAY OFF YOUR DEROGATORY CREDIT that is important.
So, now, hopefully you understand why I cringe when people tell me that they want to “clean up my credit” or “clean up my credit report”. That being said, I often get asked, “what if I don’t have derogatory credit? What if I have loans in good standing that I want to pay off, like a car loan, student loan, installment loan or credit cards? Then, can I use my tax refund to clean up my credit and if not, can you show me how to clean up my credit report the right way?
The answer is: Yes and No!
To understand why you Don’t Want To Use Your Tax Refund To Pay Off Positively Reporting Items On Your Credit Report!!! and why it actually hurts your credit score……………check out my next post on how to clean up my credit report.
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Hi
Here’s my situation. I have a student loan from over 3 years ago that was never repaid back. I am just now hearing about it, this time from a debt collector. It is for $1,000. I am unable to pay it at this time, but they keep calling and sending letters, just within the last month (guess they found me :/ Anyhow, what do you think the chances of them suing me for $1,000 of unpaid student loan debt is? What should I do, continue to avoid them since I cannot pay at this time? Please advise on your help.
Bill:
The good news is there is hope. There are options that it sounds like that you are not aware of. To answer your questions:
Q: “what do you think the chances of them suing me for $1,000 of unpaid student loan debt is?”
A: I think the chances are so infinitesimally remote that I wouldn’t worry about it on that small of a debt. The amount is simply too small and would cost too much in attorney’s fees for a $1,000 student loan
Q: “What should I do, continue to avoid them since I cannot pay at this time?”
A: Absolutely not! You need to hit them right between the running lights and end the harassment now. Here’s how, first you need to dispute the debt with all 3 credit bureaus (yes, even though you admit that you owe it and are desirous of paying it back, we are going to attack this on multiple fronts). If you have the address of the collection agency, you need to send them a certified letter advising them that going forward, you only want to be contacted in writing via mail and that they are to immediately cease and desist all phone contact (which, once notified in writing, they are required by law to do). If you don’t have their address, answer their call next time and get it. In many cases, the collectors will try to be crafty and NOT provide you with the address because they know what you are going to do. I have had them hang up on me numerous times. If they refuse to provide it, you can find it one of two ways, either by searching the Internet OR by looking at your credit report. It will show the collection agency and their address. You can get the exact letter to send them with all instructions through your Credit Repair College Membership
Then, you want to hit them with a Debt Validation letter. With this letter you can require them to provide written proof that they own the debt, their contracts with the original lender, copies of the original signed loan application and loan documents that YOU signed, their license to do business in the state you live in and a host of other things. 99% of the time, they don’t have the documents, can’t get the documents and will go away. Watch the Debt Validation video here: Clean Up My Credit Debt Validation Video
Seriously, would you want to have to collect all that documentation and send it to someone who owes you money?
I wouldn’t!
So, now that we have stopped the harassment, we still have to deal with the fact that the student loan is an unforgivable loan that will never go away since it is federally insured. In other words, Uncle Sam isn’t going to let you off the hook and just write it off. He is going to hound you until the day you die or pay the loan off. The good news is, there is a great solution that most people don’t know about and most collectors never inform you of because they are paid on a commission basis. It is called a student loan rehabilitation agreement. Handled properly, this is an excellent opportunity to repay the loan AND improve your credit.
Why is this?
Because if you follow the repayment schedule, after 12 months of on time payments, they are required to remove the derogatory credit from your credit report. In other words, all those payments that you didn’t make that are negatively reporting on your credit report and absolutely destroying your credit score….. GONE! See Ya! Adios! Peace Out! Don’t let the door hit you on the way out.
Here’s the actual statute:
Section 674.39 Loan Rehabilitation
REHABILITATION OF LOANS
(A) IN GENERAL- If the borrower of a loan made under this part who has defaulted on the loan makes 12 on time, consecutive, monthly payments of amounts owed on the loan, as determined by the institution, or by the Secretary in the case of a loan held by the Secretary, the loan shall be considered rehabilitated, and the institution that made that loan (or the Secretary, in the case of a loan held by the Secretary) shall request that any credit bureau organization or credit reporting agency to which the default was reported remove the default from the borrower’s credit history.
You’re lovin’ me now, aren’t you?
Want to hear the best part?
They are required by law to allow you to rehabilitate the loan. There is no approval process. All you have to do is have the right documentation and request it. You can get what you need through your Credit Repair College Membership
So, in summary, you:
1. Can stop worrying about a lawsuit
2. Can end the harassing collection calls
3. Can require them to jump through a myriad of hoops to provide you documentation
4. Can rehab your loan and get the derogatory credit removed and add new positive good credit
Problems Solved
Let me know if that helps you.
Hello,
Wow, is all I can say. I’ve asked this same question on another forum and only received one response (get a part time job and pay it, that’s the only solution). You provided a lot of details and help which kind of helps me to sleep at night now since I don’t have to worry about a suit. Thanks a bunch for your informative post and I can tell that your clients and future clients is in great hands!
Kudos to you friend.
Bill
I forgot one thing. I was re-reading your post above and it stated to PROVE the debt. I got sent a letter stating that I had 30 days to dispute the validity of the debt, however I got sent this letter in November of last year. That’s over the 30 days. Is there still hope to dispute/PROVE this debt as you stated above?
Thanks,
Bill
Bill:
Thank you for the kind words. The letter that you received that you are referring to is a letter required by law that the lenders and collection agencies have to send to you BEFORE they can begin other collection efforts and BEFORE they can post it to your credit report. In other words, they have to inform you in writing and give you a chance to dispute the validity of the debt up front, otherwise, you could get hammered with a collection on your credit report and be harassed by collectors because your name is something common like Bill Smith. The law is designed to ensure that if you aren’t the Bill Smith that owes the debt, you don’t have to endure the harassment or negative credit.
So, with the lapse of the 30 days, they began collection efforts and probably reported a collection on your credit report. It is their reporting of the collection on the credit report, along with the original loan that you will want to dispute and use the debt validation method on. You can also use the 6-2-3 method on the original lender.
So, to answer your question, yes, there is still hope to dispute the debt that the collectors have filed and get it removed using the methods I described. The next step is to get the loan rehabilitated.
With that you accomplish multiple things:
1. Presently, you probably have two different derogatory accounts for the same debt. One by the original lender (probably Sallie Mae) and the other by the collector. So, your credit score is probably getting hammered because you have two negative items reporting. So, the dispute and debt validation methods should get rid of the derogatory account the collection agency is reporting.
2. When you rehab the loan, the derogatory account that the original lender is showing will be erased and replaced with a new perfectly paid loan.
Hi,
I have a question, I was gonna use my tax return to clean up my credit, but the right way by sending validation letters and intent to delete letters, but my question is, once its deleted off of my credit report does the score stay the same, does it go upor down even further? Also, once the negative remarks are removed does it show that I have a shorter time length of credit history? And, I bought my house a couple of years ago and when I was in the approval phase of the whole homeownership process, I had to pay up a couple of things, and come to find out I didn’t do it the right way by sending the letter thing and the items I paid up says paid but still is reporting negatively, can I get those removed also? Oh, and how do I get the account numbers from the collection agency without admitting to the debt, because on my credit report it shows x’s instead of account. Last thing I promise, how long will it take for my score to improve? I am in the middle of selling my house to buy another one WITH my husband. Hopefully in a year…..
Candace:
You asked some really great questions. Because you asked so many and there is so much information that you need, I created a 3 part series at Credit Repair College to answer your questions in detail and provide the solutions you are looking for. You can see the part 1 of the series here:
How Do I Clean Up My Credit?
the links to parts 2 & 3 are at the bottom of each post. I hope this helps. Let me know if you have any additional questions.
Vincent