Active vs Inactive Accounts

Active Accounts

Active accounts are open and can be used to build credit. They may be on time or overdue. If they’re on time, you’ve been making your payments as agreed and you are building credit. Keep it up! If they’re overdue, you’ve missed some payments and it’s starting to lower your credit score.

Inactive Accounts

Inactive accounts are closed and cannot build credit. They might be an old account that you paid off and closed, and it is no longer affecting your credit. Or they might be charge off or collections accounts, in which case they have already had a negative impact to your credit. A charge off account is one that has a balance and the lender is reporting as a loss. This typically happens when the account is 90-120 days past due. Collections accounts are accounts that have been moved out of routine account processing either to an internal collection agency or a 3rd party collection agency. A charge off account may be sold to a collections agency at any time.

Steps to Tackle Debt

Step 1: Pull Your Credit Report

A NWAF financial coach can pull your credit report, or you can pull your own from AnnualCreditReport.com. You can pull your own credit reports from all three credit bureaus once per year. Credit reports from AnnualCreditReport.com won’t have your credit score, just a list of your accounts. You can also schedule a session with a financial coach who can pull your credit report. A credit report pulled by a financial coach at NWAF will have both your credit score and a list of your accounts.

Step 2: Dispute Errors

You may find errors on your credit report. These errors could be a result of identity theft. If that’s case, and you need help dealing with it, schedule a session with a financial coach. You may also see accounts that are yours, but with inaccurate information. If that’s the case, you can dispute the information with the creditor and credit bureau. You will need evidence to support your claim (like proof of payment).

Tip: Dispute errors on your credit report with TransUnion, Experian, Equifax with a letter template.

Step 3: Plan for Repayment of Active (Open) Accounts

Budget for debt payments and compare repayment options. What you’re doing now might be working for you, or you may want to pay off high interest debt more quickly. If you’re struggling to make your payments, you may need to consider a debt management plan or debt consolidation. You may also want to calculate pay off times and total pay off amounts for different accounts.

Step 4: Deal with Inactive Accounts

Deal with charge offs and accounts in collections after having a plan in place for active accounts. Creditors may be open to negotiating a lower payoff amount or a payment plan. Prioritize paying accounts that haven’t been sent to collections yet. If you don’t have the resources to deal with your inactive accounts, prioritize your active accounts and deal with the inactive accounts when you are able.

Step 5: Planning for New Debt

Debt can be helpful when you plan for it. Debt can be a tool to help you get things you need like a car, a house, an education, or assistive technology. Making a plan can help you get ready to take on new debt. Your plan might include building your credit score, comparing interest rates and fees, and including a new debt payment in your budget for a few months before taking out the loan to ensure the repayment plan is realistic and affordable.

Debt Repayment Strategy: Power Paying

Power paying is a debt payoff strategy and can use the debt avalanche or debt snowball method. Power paying focuses on paying off debts one at a time by increasing the monthly payment on a single debt and making the minimum payments on all other debts. When the first debt is paid off, take the monthly payment amount and apply it to another debt. Repeat the process until all debts are paid off. To use this strategy, you must be able to afford at least the minimum payments on all debts.

Option 1: Debt Avalanche Method

The debt avalanche method prioritizes paying off higher interest rates first. Order debts from highest to lowest interest rate and work toward paying off the debt with highest interest rate first while making minimum payments on all other debts. After paying off the first debt, apply that payment to the second highest interest rate and so on. The debt avalanche method results in paying less interest over time.

Option 2: Debt Snowball Method

The debt snowball method prioritizes paying off smaller balances first. Order debts from smallest to largest balance and work toward paying off the debt with the smallest balance first while making minimum payments on all other debts. After paying off the first debt, apply that payment to the second smallest balance and so on. The debt snowball method results in more quickly reducing the number of debts you’re paying off. While the debt snowball method does result in paying more interest than the debt avalanche method, it has psychological benefits in that it can be motivating to see the number of debts going down faster which can help you stay on track.

Some content is adapted and modified from the Credit Builder’s Alliance Credit Building Toolkits.

Additional Resources

Learn more about debt management plans: American Financial Solutions

Create a personalized debt elimination plan: PowerPay

Pull your credit reports for free: AnnualCreditReport.com

Dispute errors on your credit report with the credit bureaus:

TransUnion: https://www.transunion.com/credit-disputes/dispute-your-credit

Experian: https://www.experian.com/disputes/main.html

Equifax: https://www.equifax.com/personal/credit-report-services/credit-dispute/

Sample credit report dispute letters: https://www.consumerfinance.gov/consumer-tools/credit-reports-and-scores/sample-letters-dispute-credit-report-information/