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That feel-good credit score may still disappoint

Consumer Reports News

If you ever failed to pay a bill that was subsequently sent to a collection agency, it can still hurt you even if you pay it off. That's because any blemish can stay on your credit report for up to seven years.

So the press was abuzz lately over the fact that the new VantageScore 3.0 model released in March ignores paid collection items and thus boosts your credit score.

But there's one big problem: Most lenders don't actually use VantageScore. For example, only 1,300 of its client lenders use it, according to Experian, one of the big three credit bureaus. Instead, most use their own credit scoring systems, which can produce scores meaningfully different than the ones that consumers can buy.

So a more consumer-friendly VantageScore, which you can buy for $8, might make you feel good about your creditworthiness--at first. But if you apply for credit from a lender who uses a different scoring system that does penalize you for collection items, you could be charged a higher interest rate or turned down for the loan in the first place. Since the lender score is the only one that counts, why buy the VantageScore in the first place?

One solution was re-introduced in Congress in late April. As reported in Consumerist, the Medical Debt Relief Act, would require credit bureaus to remove medical-related collection items under $2,500 within 45 days of their being paid off. Consumers Union, the advocacy arm of Consumer Reports, supports the legislation, as they did an earlier version that was introduced in 2009 but failed to become law.

Until Congress acts, consumers can take self-help steps to improve their score. When negotiating to pay off any collection account, try to make your payment contingent on removal of the collection item from your report--and get that agreement in writing before you pay.

If your bad debt was sold to a collection agency, you must also deal with the original account, which is likely now also listed as "charged off" or "sold to collections." Ask the collection agency for the name and phone number of the person with the original creditor who has authority to remove the item.

Explain to the original creditor that you're working to repay your debts, and ask that the item be removed, advises Margaret Reiter, an attorney and author of Credit Repair (Nolo Press). In pleading your case, draw on any illnesses, accidents, job losses, divorce, or other hard luck that honestly contributed to your situation.

Look for more information about credit scores in the July issue of Consumer Reports.

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