Woo Hoo! You Qualify… But…
You’ve decided to buy a home, and your lender informs you of collections on your credit report and are told by your loan officer to pay them off. You couldn’t be more excited, you you do qualify, but they want to get a better score so you can get a better rate or maybe you need a better rate to qualify for that wee nicer home you’ve been looking at.
Who’s the expert, your lender of course.. so you run right out and pay off those collections… Sigh. Oh my! Yes this age old advice is still being dispensed by loan officers far and wide. So what does actually happen when you pay them…
After you submit a payment to the collection company, what happens is SO unpredictable. here’s a list of some of the things that COULD happen as a result of you acting on your lender’s ill-dispensed advice.
- The collection agent (CA) verbally says they will remove the item. In my 30 years experience I’ve found those guys will tell a consumer ANYTHING to get the cash. Don’t count on it, if they don’t put it in writing it’s not likely gonna happen.
RESULT: Score will likely drop.
- The CA does give you a letter, but it’s not a deletion letter. Yeah, they TOLD you it was a deletion letter but it says “Paid/Satisfied/Settled/0 Balance or some other non-deletion verbiage.
You’ll send in the letter but the bureau will update the item as PAID and they won’t delete it.
RESULT: Score will likely drop.
- The CA actually deletes the item from the credit. Wow, this is so rare and it happens less and less because of blow-back from the credit reporting agencies (CRA’s) against the CA’s.
- The CA does nothing. You have a receipt for the payment, but no deletion letter and they don’t update to the bureaus.
RESULT: Your score didn’t change at all.
Penalty for good behavior.
In almost every case the credit score drops or stays the same as a result of paying off a collection. Now, instead of getting closer to that dream home, you’ve potentially just screwed yourself out of it. But don’t worry, your idiot lender will now tell you you only need just a few points and do this or that and we’ll get you qualified again… <clunk>
In part two we’ll talk about good deletion letters and why oh WHY does the score go down with a payoff….
Yours in Wealth!
Credit Guru Ruiz
Another common question from our clients:
I received a collection letter in the mail, what should I do now to protect my credit rating?
There are several steps here, so please follow them closely.
Step 1. Identify the letter.
Often what appears to be a letter from a collection company is actually a bill from the provider or original creditor (OC). If it’s a bill then read on, otherwise skip to Step 2.
Your options here are to pay the bill in full, or call the OC and make payment arrangements because the goal here, is to keep the bill out of the debt collector’s hands and off your credit report.
Some techniques for negotiating bills not in collection yet:
- If you have a past due medical bill and make small payments EVERY 25 days (not 30) it will usually keep the bill out of the collection system.
- You can also have a large hospital bill audited which will usually reduce the bill significantly.
- All hospital bills should be detailed and you should be able to identify every charge, if they won’t give you one or help you understand it, ask for an ombudsman from the hospital. It’s been well documented that most hospital bills contain MANY overbilling errors.
- Negotiate for a cash payment, often you can get a significant reduction for cash.
If it’s not a bill and it really is a collection letter follow these rules then continue to Step 2.
- RULE #1 Never contact a collection company, especially by phone (except by mail: Cease and Desist, Validation, Intent to Sue letters and Settlements)
- RULE #2 Never make a payment to a collection company (without professional help)
- RULE #3 Never trust a collection company or their employees
- RULE #4 Document/record everything you do regarding this collection.
- RULE #5 Never volunteer ANY information to them, ever.
Step 2. Identify who the OC is:
If the collection letter doesn’t clearly reference who the OC is, then they probably can’t prove it either. Often a debt is sold many times and that is why you can find several listings on your credit report from the same debt. Figure out who this debt was originally owed to without violating Rule #1.
Step 3. Identify if the debt is past the statue of limitations (SOL)
There is an SOL for reporting to the credit bureaus, and there is another SOL for the time the debt collector (DC) can bring an action against you (sue you in court)
The statute for reporting to the credit bureaus for private debt is 7 years from the first date of continuous delinquency. Any private debts still reporting after 7 years have been re-aged and must be removed from your reports.
The statute for collectibility (through an action in court) varies from state to state from 3-15 years. If the debt has passed the SOL for your state, you have NO LEGAL responsibility to pay it and if you ask them to, the DC’s must cease all collection activity. So do that with a Cease and Desist letter.
Often dirt-bag DC’s will attempt to collect on a debt that you no longer owe (Stale debt). Since many states have different laws regarding their SOL, you should do your due-diligence. This website would be a good start. SOL in all 50 States. It’s important to know that if a DC offers you a payment plan on a debt on the last month before the expiration of the SOL; and you make a payment, (or even in some states “acknowledge the debt on the phone or in writing”) the statue of limitations will be reset and that clock starts over again! Again, DO NOT contact the DC under any circumstances.
Step 4. Use Validation, Failure to Validate and Intent to Sue letters
Send lots of certified mail on each of your debts that have reported to the bureaus, if the collection letter comes from a new company you know isn’t on your credit report, VALIDATE the debt within the first few days you get the dunning letter, most of the collectors that get a validation letter right away, never report it to the consumers credit bureau. If the debt is stale debt, send them a Cease and Desist letter.
Step 5. Sue them if they break the law
If they miss a step and the debt is less then $1,000, sue them. But you only have 12 months to start your lawsuit after they violate the law.
Step 6. If the DC validates and the debt is within the SOL, Settle it.
First off, never settle a debt with a DC without a deletion letter.
If you owe the debt and are financially ready to take care of paying it off make sure you settle the debt and request a deletion letter so that the listing is removed from your credit report otherwise it will still hurt your credit score even if you pay it off. Why? Because the date of activity on the credit report is updated on your credit report thus appearing as “recent collection activity” which will often cause a drop in the credit score.
Remember Rule #3? Don’t trust them to “send an update in the next 30-90 days”, they won’t and don’t, you’ll need the letter. Often they will tell you they will give you a deletion letter, but the wording on the letter will say “paid”, “settled”, or “satisfied”. That verbiage will NOT get you a deletion from the bureaus. Don’t give them money till you have a “good deletion letter”.
Although this process is daunting for many people, you can do it yourself if you have deep discipline and focus. If you don’t’ think you can “stay the course” and finish this process alone, you should hire a professional at the start to help you through the process. Feel free to contact us at any step you find yourself in, we’ll be glad to assist you.
Credit Guru Ruiz
I was recently asked a few questions by another client about paying off credit cards. So today’s post will talk about my payoff guidelines for revolving credit that will help you max that portion of your FICO score. (Paying off installment loans will help your score, but I don’t recommend you do that, keeping the full term on an installment loan will benefit your score far more then paying off a loan before the end of it’s term)
Are there any techniques to paying off credit cards or can I just pay them all off?
Yes, there are several guidelines to paying those nasty cards down.
RULE #1 Never pay 100% of ALL your credit cards off, keep at least $50-150 on one card at all times. You can accomplish this by using a gas card each month or putting a recurring bill on auto-pay from one of your credit cards (but NEVER put utility bills or groceries on a credit card!)
RULE #2 If you are paying off a debt you’ve been carrying on a credit card, there will be additional interest due on the next statement that won’t be apparent by looking at your last online or paper statement, you must call the bank to get a full payoff, or manually calculate the additional unbilled interest due and include that amount in your payoff, I also, always recommend paying an additional amount on top of the balance + additional interest.
So, for example, if the balance is $1,000 and the additional interest is $10, I recommend adding 2x’s the additional interest for a payoff of $1,030. This will create 2 changes for you:
1. It will insure you get a fully paid off account on your bank’s next report to the credit bureau by forcing the bank to make that report. (I’ve seen situations where a bank won’t report the payoff to the credit bureaus for several months and could result in you not getting the desired score bump in time for your financing without doing a rapid re-score, but if there is a credit on the account, they will ALWAYS create one… I suspect it has something to do with accounting regulations)
2. Will generate a refund check from the Bank to you for the over payment. (I use this technique to get a “balance transfer interest rate, albeit delayed, for a cash advance” on credit cards by over paying a credit card using a balance transfer. Sneaky, isn’t it
…what if I find I don’t have enough money to pay them ALL off, are there any rules of thumb to know which ones to pay off to get me a better score bump?
RULE #3 Pay off at least one bank card to zero (Visa, MC, AMEX, Discover, etc.)<br>
RULE #4 Pay off at least one retail card to zero (Any other open-ended credit card not issued by a bank, a Target VISA card is NOT a retail card)
RULE #5 Pay off all cards below 45% of their limit (don’t leave any one over 45%)
RULE #6 Pay off the aggregate debt to limit ratio below 18% (18% of the total credit limits vs total revolving balances)
#5 and 6 can also be achieved by increasing the credit limits of existing cards, or by getting additional credit cards, but there are many, MANY ways attempting this technique without professional help will end up creating a score decrease than the desired increase.
RULE #7 WAIT! for the banks to issue you a new statement before you look for the score increases, pull a free credit report (won’t cause a “hard inquiry” to confirm the balances got updated before you ask your lender to pull credit for the scores.
For your Health, Wealth and Liberty