Monday, August 08, 2005

Handling Collections

Collections on your credit hurt your FICO score. However, don't pay them off without establishing the effect they are having on your credit report! Anything over two years old has less and less effect. Many lenders will overlook old collections as long as your recent record is good.

Note: Once you've paid a collection, it is virtually impossible to remove from your report and could actually hurt your score in the short term!

Removing Collections from your Credit Report
1. Contact each original creditor listing collections on your report. (They may refer you to their collection agency if they have 'sold' the debt.) If you can afford to settle the debt, negotiate how you will pay it off. Insist that you will ONLY pay the debt IF they agree to REMOVE the item from collections and show the Account "Paid as Agreed" on your credit rerport. You must do everything in writing.
2. Your letter from the creditor (assuming you hounded them into submission) should state the account number, the amount they agree to accept, and their agreement to remove it as a collection and show it as a Paid as Agreed account.
3. Wait until you have a letter agreeing to these terms. Do NOT pay until you have this letter in hand! Use faxes or the mail but get in in writing.
4. After you have the agreement letter, pay it off promptly or as scheduled and keep a copy of your checks and letter of agreement.
5. THEN if your report continues to show these items:

Dispute Items Directly to the Credit Bureaus:
If you've had the fun of trying to negotiate an inaccurate listing with a creditor (big banks can be the worst) as in the above scenario, I suggest you take the matter straight to the Credit Bureaus.

If you manage to get a letter or fax from the creditor agreeing to remove an item from your report (and they have not within 3 months), attach this to a letter of explanation and send it Certified Mail to all 3 Credit Bureaus listed at the bottom of your report: Equifax, Transunion and Experian. Each bureau will need their own letter and copy.
The Bureaus will respond within 30 days. Be sure to offer to fax documentary proof or sending letters again and again until they realize you are not going away.
In the first instance, any dispute will be temporarily removed or listed as a pending dispute on your credit report while they notify the original creditor of your claim. The creditor has 30 days to respond and if they don't voila, it will be removed. You can hope they were as lazy responding to Equifax and friends as they were to you and be done with it. Your FICO score will start recovering from the damage once items are either removed or listed as Paid as Agreed with zero balances owing. The recovery takes longer than the original damage, so plan on three to six months if matters were serious. I've seen clients raise their scores in 3 months over 40 points, but your success will depend on the number and heft of issues.

What's serious? Each Credit Bureau has a slightly different pirority list and that is also listed in order of importance on your Credit Disclosure which your lender should supply when they give you a copy of your credit report.
Credit Reporting Bureaus:
Equifax Information Services: 800 685 1111
TransUnion Customer Relations: 800 888 4213
Experian: 888 397 3742

Credit Bureaus are legally required to act on your behalf in the case of disputes. The Bureau will notify you of the action taken. If collections agents are really sneaky, they may send the item to another collection firm and the same collection could land on your report again...which is why you need that letter with the account number and amount due as well as the amount paid AND their agreement to remove it as a collection and show it as a PAID AS AGREED account.
Beware of firms offering Rapid Rescoring. This real service can also be real expensive. In some cases, your mortgage broker can remedy an inaccurate item or two by paying for a supplemental report (small fees here). We have the ability to report obvious duplications or inaccurate accounts to clear items from your report for a lender's review. This does NOT improve your score, but clarifies if such things as collections have been paid. You will need to provide your broker with any proof of such payments or Schedule F in the case of items discharged in a bankruptcy. Bankruptcy issues naturally take longer for your score to recover, so a very thorough lawyer is worth their salt here.
Don't freak if your Credit Report shows a mortgage late in the last year while you were on vacation. Most lenders will overlook one and if it's more than a year ago they are less concerned. It's when a pattern of irresponsible behaviour is shown that they get worried.
Professional credit counseling firms charge around $75 - $100 and upwards per item to remove derogatory items. Some charge a flat monthly fee. These firms vary tremendously in the results achieved. Some firms allow your credit to lapse--which causes your score to plummet while they negotiate your payments down. At that point, a creditor is probably sure you will never pay and may agree to pennies on the dollar. They make their cut on the difference in your settlement and what is actually paid.
If your problem is more serious than a few overdue collections, speak to a good accountant and consider your options.

Wishing you every credit sanity! Loannetter
©2005 susan templeton