Lesson 7: How To Handle Bad Credit
Summary:
- Bad credit should not ruin your life, joy will come in the morning
- Learn your legal rights before attempting to deal with bad credit
- The Fair Credit Reporting Act can be used to protect you from debt collectors
- Yes, debt collectors violate laws all the time because people do not understand their rights
- You have the right to dispute anything on your credit report
- Debt collectors often do not correct mistakes after the first dispute
- Debt Management Plans (DMPs) help people who are behind (or soon will be behind) on debt without going through bankruptcy
- Debt Management Plans can be initiated by a Certified Credit Counselor
- Credit Repair Organizations (CROs) are legal (according to Federal Law) and are usually run by Attorneys or former finance professionals
- Consumer Protection Attorneys can not only perform the same functions as a CRO but also sue for your rights in court (up to $1,000 per violation)
- Chapter 13 Bankruptcy Protection is good for people who are behind on automobile or house payments because it can stop lenders from seizing those assets
- If you need help, you should contact a Wise Credit Professional for a free consultation
Wise Credit Management is a free Bible-based class that teaches how credit really works by showing factual information directly from the Credit Bureaus and FICO, and simplifies the subject to show everyone how to build good credit or handle bad credit. The class is fairly comprehensive and focused on getting good credit to qualify for a good mortgage rate and terms. WiseCreditManagement.com is a free community for members to take the class, join local groups (online or in person) for mutual support, and to find local professionals who volunteer to use their skills to assist members to success.
I am not a lawyer or Credit Repair Organization.
Home ownership is the way most Americans build wealth and a lack of education about credit is a huge contributor to the growing “Wealth Gap” in our country. Wise Credit Management is focused on teaching how to get good credit and qualify for a good mortgage rate and terms.
My work is protected by the “fair use” section of U.S. Copyright Act.
Mortgage Approval
Getting approved for a mortgage can be a daunting process. We will cover that in detail in Lesson 10, but for now we will discuss the minimum you need to get approved. For mortgages made under the Federal Housing Administration (FHA) you will need a minimum score of 500 (FICO® mortgage score) with a 10% down payment. To be eligible for a mortgage with a 3.5% down payment you must have at least a 580 score. Most lenders want to see a 640 score, but 580 is the lowest you can have per the FHA guidelines and still get a 3.5% down payment.
If you do not have any credit on your report you will be referred to as a “No Score”. There is nothing “wrong” with that except many lenders will not be able to prequalify you for a mortgage. Additionally, you can expect to have to pay a higher interest rate of perhaps 1.5% to 2% on your mortgage. For a $300,000 home loan that could increase your payment by about $300 per month.
If you do not have any positive credit on your credit report but have even one collection you will have a credit score. That score is likely below 580 and you will have to provide at least 10% down on your home.
As we discussed in Lesson 4, you can easily build credit before you attempt to buy a home. Please speak to a Mortgage Professional in our Professional Member Directory before you begin. Our Professional Members signed up to serve their community and will give you a free consultation.
Deuteronomy 15:1 ~ At the end of every 7 years you shall grant a release of debts. ~
Many people find it interesting that the concept of letting past bad debt be forgotten is biblical. It is Jewish Law that loans made to poor people who couldn’t repay them were to be forgiven after 7 years so that the debt was not slavery. Fast Forward to modern times and lending is a profitable business and governed by commercial laws. However, we have kept the 7 year rule in our commercial laws (in Canada it is 6 years).
Setbacks happen to almost everyone. One morning there was a CBS News story about a woman who became sick with an appendicitis. She was a struggling small business owner without insurance and needed to pay $31,000 to the hospital. She was sued for the debt and her family faced losing everything because of her surgery.
“I told my husband, ‘I wish you’d have let me die,'” KC said to CBS News Consumer and Investigative Correspondent Anna Werner. “I’ve said, ‘Honey, I love you and I love my family, but if you had let me go, today you would not be going through this.'” (https://www.news9.com/story/5ec5a0f52ac80d591f2614c4/alabama-couple-struggling-after-hospital-sues-over-medical-debt:-i-wish-youd-have-let-me-die)
When you face financial hardship, it is often the result of other problems. In this case, a life-saving medical procedure. Sometimes financial difficulty comes from divorce or job loss. Maybe a car broke down. There is already a lot of stress and anxiety which, added to the financial strain, can become overwhelming. Lesson 7 is meant to help members understand how to handle bad credit and it introduces several options they can take to help recover from the credit implications of their financial situation.
Federal Trade Commission Laws
It may be of some comfort that you have Biblical Law and U.S. Laws on your side. The Federal Trade Commission (FTC) enforces Federal consumer protection laws that prevent fraud, deception, and unfair business practices. It enforces several laws that deal directly with consumer credit.
The Consumer Credit Protection Act is a broad piece of legislation that includes several different laws aimed at protecting consumers from bad lending.
The Truth In Lending Act requires written disclosures about loans, such as the Annual Percentage Rate (APR) to help consumers more easily shop for the best loan. It also protects against unfair billing practices.
The Fair Debt Collection Practices Act provides protection from “abusive, deceptive and unfair debt collection practices.” It provides a list of what debt collectors can and cannot do and provides civil penalties for violations. Debt collectors cannot:
1 Threaten you with harm
2 Use obscene language
3 Repeatedly call to annoy
4 Misrepresent the amount
5 Misrepresent themselves as attorneys or government agents
6 Threaten you with arrest
7 Collect more fees or interest than the contract allows
8 Deposit a post-dated check early
9 Threaten to illegally take property
A debt collector should never discuss the collection account with anyone except you. You can request that debt collectors not contact you at work, or even not at all. Debt collectors are not supposed to contact you before 8 a.m. or after 9 p.m. If they contact you at work you can tell that collector that you cannot take personal calls at work. And yes, it is possible to get the collector to stop contacting you completely, however be cautious about when you make this request. If a debt collector cannot legally contact you about a debt, that leaves that collector with two options to continue collection efforts: sell the debt to another collection company or sue you. If you are within your State’s Statute of Limitations and you request not to be contacted by writing that request to the collection company by Certified Mail with a Return Receipt Requested, their only remaining option to collect from you is a lawsuit.
The Fair Debt Collection Practices Act (FDCPA) protects you from harassment and deception by debt collectors. You have the right to dispute the debt with the collector before they report it to credit bureaus. This right aligns with the biblical principle of fairness found in Proverbs 22:22-23: ~ Do not exploit the poor because they are poor and do not crush the oppressed in court, for the Lord defends their cause and does not bless those who exploit them. ~
The Fair Credit Reporting Act (FCRA) governs Credit Bureaus and establishes the consumer right to a fair and accurate credit report. It also establishes rules for reporting adverse information and specifically excludes Chapter 11 Bankruptcies over 10 years old and many other debts that “antedate” the report by more than 7 years. In other words, page 26 of the Fair Credit Reporting Act is where you can find the U.S. Law that people think of as the 7 years rule. The FCRA also gives consumers the right to dispute inaccurate information and requires the bureau reporting the information and the collector to perform an “Investigation” for accuracy.
The Economic Growth, Regulatory Relief, and Consumer Protection Act gives you the right to place a security freeze on your credit report and fraud alerts will stay on your credit report for 1 year.
The Consumer Financial Protection Bureau (CFPB) works with the FTC to create and enforce compliance with rules regarding personal finance. The CFPB is one option you have for handling complaints with the credit bureaus or debt collectors. They handle 10,000 complaints per week. In general, when you file a complaint with the CFPB it contacts the company with your complaint and waits for a response. The company you file a complaint against will respond with some type of boilerplate language basically saying they are in compliance with laws, leaving you with the burden of following up with another response and proof of a violation. The company denies it and sooner or later you give up and seek to handle it another way or accept the problem without resolving it.
It seems like the CFPB exists to monitor complaints and take action if only enough complaints get filed, rather than resolving individual complaints. If you have a complaint, you should definitely file it, but don’t expect results or action to be taken on your behalf. If you have a positive story about the CFPB, feel free to let me know.
The Debt Collection Process
Most collections begin with an application for a new debt obligation, new utility service or the need for a medical procedure. If your collection is based on a credit card or similar obligation, usually making a payment on that obligation out of your bank account will “verify” that the account is yours, otherwise why did you make a payment on it instead of reporting it as fraud immediately.
When you become 30 days late, it gets reported to credit bureaus as late, and if you do not bring the account to current status thereafter, that date will be your account’s “date of first delinquency”. Late fees and higher interest rates usually follow as the account falls further and further behind up to 120 to 180 days when the original lender usually hires a debt collection company or sells the debt to a collector.
The debt collector has laws to follow when contacting you and reporting your debt to the credit bureau. The collector must give you notice and the right to dispute the debt with them before they report it. If you don’t respond it is assumed to be valid. Now you have bad credit on your report from the original creditor and a collection from a debt collector. The collector must determine the most profitable way to get money from you. It might just report your debt for 7 years and hope you need to buy a home within that period of time so you contact them to pay it off. Or, the collector may gather the documents necessary to sue you in court and get a judgment. Later we will discuss the Statue of Limitations (SOL – I know it usually is the acronym for something slightly different), but for now just know that it is a time limit in which you can be sued for a bad debt and differs according to your State Laws. A lawsuit will most likely result in a Judgment in that County and the collector can then place a lien on your house, levy your bank account, garnish your wages, etc. U.S. Law differs from biblical law in that according to the Bible, debtors who cannot repay have to be forgiven after 7 years, but a court Judgement can be renewed indefinitely (see your State’s Laws).
If you are overwhelmed right now and want to speak to someone, there are people who can help. Please consult with a Wise Credit Professional for free.
Your Options:
- Let time work for you.
If you have collection accounts, time might be on your side. If you do not get sued within the Statute of Limitations then the account should be removed from your credit report after 7 years from the date it was written off to profit & loss (becomes a collection account). If you build good credit now, it will be the only thing left when the bad credit “falls off”. Your credit will improve as your collection gets older and older. How long ago was your last payment on the account? Can you prove that?
Statute of Limitations (SOL) basically sets a time limit on when a collector can file a lawsuit against you based on the date of your last payment or activity. The SOL is determined by State law and can vary from State to State. After the SOL has passed, the debt is called “Time-Barred”, however debt collectors can still contact you, try to collect and report the debt to the credit bureaus.
In Texas, a debt collector can file a lawsuit against you within 4 years of the date of your last activity. And here’s something to complicate it… Did you make a payment on it or even say to a collector that you intend to pay the debt? That can restart the clock on the SOL.
Do not talk to debt collectors! Everything must be in writing. Everything they say is a trick to get you to say something that can and will be used against you.
Do not write a letter of explanation or try to get them to empathize with you, they don’t care! I may be a little harsh here, but this is the real world, and the only thing debt collectors want is your money.
Some debt is exempt from any SOL. Student loans are the most obvious example. There are certain exceptions, but there are some debts you can’t simply let 7 years go by and it will disappear. Consult with a Professional Member who is a Consumer Protection Attorney if you have questions.
Should you establish good credit while you have bad credit? How old is the bad credit? If it is past your State’s Statute of Limitations, the collector is unlikely to sue you for it. Will you need to pay off the collections before they “fall off” your credit after 7 years? Establishing new credit signals to a debt collector that your credit is important to you, and they might ask for more money to settle the debt.
Establishing a Credit Strong account with a 10-year long term loan will rebuild your credit and last longer than your collection accounts, so when those collections fall off your credit report, you will have a history of good credit. Secured cards can be used the same way. Open them now to have good credit waiting for you when your collections fall off.
- You can settle bad debts.
Some collectors will settle for between 40% and 60% of the outstanding debt. When you get a tax refund you can pay off the collection and all is right again, right? There are benefits to paying off a collection, mainly that you won’t be sued, and it might be required as a condition of closing on your mortgage. Furthermore, it won’t be sold again and again just to add more negative accounts to your credit report. Usually, if you can settle you should.
There are some things you need to know before choosing to settle. Make sure the balance shows as $0 (zero) on the account. Settled or paid in full does not matter, it still affects your Mortgage FICO® Scores the same. A collection account will weigh down your FICO® 2, 4 & 5 Scores until it falls off. However, the effect will diminish over time. Collection accounts from the original creditor can be reported as constantly +180 days late for the entire 7 years. Also, collections from the original creditor will affect your Debt Utilization Ratio, so your overall Utilization Rate will be bad until the debt falls off. Finally, any amount you settle for that is less than the entire balance will be reported to the IRS as income on a 1099 MISC (miscellaneous income) which must be added to your taxable income, thereby adding to your taxes or reducing your refund. Please contact a Professional Member who is a Tax Return Professional.
- You can dispute anything on your credit report.
Disputing is a right given to you in the Fair Credit Reporting Act in which you can require a bureau or company to “Investigate” the information for accuracy. If a company cannot “Verify” its claim within 30 to 45 days it is supposed to remove the information from your credit report.
A good first step in disputing is to get all of your credit reports from the credit bureaus and lock them. The three major bureaus are obvious, but also request your reports from and lock Innovis, LexisNexis and CoreLogic. Then dispute any old addresses, jobs, names, phone numbers, etc. on your files. Make sure to dispute anything that is tied to the old account(s) you will eventually want to dispute off. It is very easy to dispute old addresses online with the major bureaus, but disputing with the others takes some work. Once your old information is removed, the bureaus will have a more difficult time verifying any old information from accounts that may or may not be yours.
What information can you dispute? Bogus inquiries, collection accounts, late payments, etc. can be disputed. Some companies turn down a credit application just because there are too many inquiries. If a car dealership ran your credit application through different companies looking for the lowest rate for you, it can result in too many inquiries. You should dispute those, except for the company that your loan is with.
A good way to handle a late payment on a current account is to call the creditor and ask for a “goodwill” removal. If the account is closed, you can dispute the entire account, but you will lose the good credit history with the bad. If your student loan is reported as late, you can bring your student loan up to current by making several months of payments on it and requesting the late payments be removed from your credit history. Do this before you refinance your student loans.
You can submit disputes by phone or using the credit account with the bureaus that we set up in Lesson 2. If the account is not yours it should easily come off your credit report. However, if a company insists the account is yours you need to take more deliberate measures.
The CFPB has sample letters to dispute information (https://www.consumerfinance.gov/ask-cfpb/what-should-i-do-when-a-debt-collector-contacts-me-en-1695/). One sample letter goes into detail about how to request more information about a debt that a collector claims you owe. Another sample letter discusses the best way to negotiate a settlement. You can also find a sample dispute letter here (https://consumer.ftc.gov/articles/sample-letter-credit-bureaus-disputing-errors-credit-reports). Please see the sample letters near the end of the book.
To successfully dispute bad credit, you need to write a letter to the bureau(s) specifying the information you believe is inaccurate and request it be removed. You should include a copy of your credit report with the information in question circled, a copy of your government ID with your current address, a current utility bill, a copy of your Social Security Card and a letter stating what about it is inaccurate. Consult the bureau’s website for any additional information they require to process your dispute. A form letter is located at (consumer.ftc.gov/articles/3284-sample-letter-desputing-errors-your-credit-report). Send the entire package by Certified Mail with Return Receipt. The reason you take the extra, and expensive, step of Return Receipt is to be able to show a Judge that you sent the letter and it was received on a certain date. Without that, you lose the ability to sue and prove your case in court.
During COVID, bureaus were reportedly discarding millions of disputes (https://www.cnbc.com/2022/10/17/transunion-equifax-experian-may-have-violated-credit-reporting-rules-rep-jim-clyburn-says.html). Many of the disputes were discarded because they were suspected of coming from an unauthorized third party (a Credit Repair Organization). If you have proof that you sent the dispute and they discarded it, the bureau discarded your dispute in violation of the FCRA and can be civilly liable. If you want to be taken seriously, you must be able to prove the dispute actually happened in the first place.
When the bureau receives the dispute, it will “Process” your dispute by assigning it a dispute code and begin to verify its accuracy by conducting a “Reasonable Investigation”. That usually includes contacting the collector and asking them to verify the accuracy of the information reported. If a debt collector does this correctly, the company will have the contract, a payment ledger, a record of all the times you spent money on the account, your address(es), etc. That’s most of the information needed to file a lawsuit against you in court. If the debt you are disputing is accurate, then they compiled (at your request) all the information they need to sue you and get a judgment against you.
You can request a “Reinvestigation” if the credit bureau responds with its boilerplate language of being verified. Remember that credit bureaus see investigating as an expense and if you dispute the same item multiple times it could be dismissed as “frivolous”. The objective of a credit bureau is to maintain compliance with the FCRA. You have to force them to do the right thing under the FCRA and follow all the right procedures to get any results.
What is a Metro-2 compliance dispute? This is a method of disputing information on credit reports that does work and is growing in popularity, which involves using the reporting format that bureaus use to your advantage. There are almost always small discrepancies between the information on the different credit bureaus because they have slightly different coding systems. When there are discrepancies in information reported by the bureaus, the Metro-2 compliance standard requires the bureau to either get the information verified without discrepancies or remove the entire entry, thereby “cleaning” your credit report. All you really have to do is know how the coding system works and point out the discrepancies. Any discrepancies are not compliant with Metro-2.
Buying A Dispute Letter
Can you buy a “special” 609 dispute letter? Sure, but it probably won’t work any better than the form dispute letter I give you at the end of the book. If you read Section 609 of the FCRA, you will not see a requirement about a “wet signature”. Seriously, google the FCRA in a .pdf file and search for the words “wet” and “signature”. Is the person who claims this will work simply trying to sell you something you want to be true? Is that person committing fraud?
If you are reading all of this, hopefully you trust me enough to protect you from things that could do more harm than good.
IMAGINE… you mail in this “magical” dispute letter claiming that because the bureau can’t produce your “wet signature” or something to that effect, now they have to remove it from your credit report. BUT, you did everything (application, approval, spending and making payments until you couldn’t keep paying) electronically, like we have been doing for decades, so you know there is no wet signature on anything.
Now IMAGINE suing the bureau and debt collector (who have lawyers that do this for a living) in court and having this conversation with a Judge… You say: “Judge, please order the bureau to remove this account from my credit report because it is not mine and they don’t have my original signature.” The bureau and collector respond by saying: “Judge, we verified by payment ledger that this person made payments on this credit card using their personal checking account for XXX months until they stopped on this **** date. The account clearly belongs to the person who stands before you today, which is why we are countersuing that person for the debt” (and for being foolish enough to drag us into court because of something they saw on the internet without even getting a free consultation from a Consumer Protection Attorney).
Finally IMAGINE… the Judge says: “Do you still claim this debt isn’t yours even though you spent money on the card, then paid for the card out of your personal bank account for XXX months until **** date?!?” The guy who sold you this magical letter is nowhere to be found and you are on the verge of committing perjury while getting a judgment against you. WOW!
I live in the real world. Yes, disputing works for debts that are not yours. Yes, disputing can clean your credit even if the debt is legitimate. Please be careful about who you listen to and what you say to credit bureaus and debt collectors who do this for a living.
Even if you get the information taken off your credit report, a debt collector can still take steps to collect the debt including suing you if it is within the SOL.
A nightmare scenario could involve getting your credit report “cleaned”, signing a contract on a house and having the debt reappear before closing and have your loan declined. Or you might wind up having to pay the collection anyway, and because it affects your credit score, you will almost certainly have your credit downgraded and pay a higher interest rate. Or you may lose contract on the house and any security deposit. What if the collector files a lawsuit against you after you close? Now they can attach a lien on your new house while trying to collect the debt. The post Judgment interest rate in Texas is 10% per year and it will compound.
My point is that you might wind up disputing the account successfully only to wind up having to pay for it later.
You can settle a collection account and then dispute the account. If it is removed, the collection account will not impact your mortgage FICO® Scores.
You could pay a smaller amount than you originally owed, then begin disputing the bad credit resulting from the account. If you are dealing with a collection account, the debt collector has no financial interest in keeping the account on your credit report and they will likely fail to verify the account. It should be far easier to get the account removed when a collector has no reason to continue to report it.
With the newer versions of FICO® Scores (9 & 10), paying old collections can improve your score. However with the FICO® 8 and the mortgage FICO® Scores (2, 4 & 5) getting a collection reported as paid does not have a positive impact on your score (myfico.com/credit-education/blog?-common-collection-questions). However, if the collection is the original creditor, a paid collection will reduce the balance to zero and be considered in your Debt Utilization Rate which will increase your score.
Can debt collectors offer a “Pay For Delete”? Yes, but they are not supposed to. The contract a collection company signs with a credit bureau demands complete and accurate information be provided to the bureau. If a debtor pays the debt and the collector removes it, the collector is not providing complete and accurate information when they remove the fact that the debt was in collection before it was settled.
Disputing “Rounds”
As we will discuss toward the end of the book in the Bonus Lesson: DIY Disputing, many times you have to dispute the same problem multiple times to get the bureaus or debt collectors to take the appropriate action. I recently read in a FCRA lawsuit that it was the practice of the debt collector to only verify the identifying information, such as the Social Security Number of the debtor, regardless of the wording of the dispute until the fourth dispute is filed. This means that, no matter how legitimate your dispute is or what proof you provide, you will not have a proper investigation until you dispute four times.
Don’t back down and keep disputing. These companies do not make it easy for you. I have definite opinions on these companies. Sometimes the only way to handle things is to sue them to keep them from violating your rights.
Wise Credit Professionals
Mark 2:17 & Luke 5:31 ~ Those who are well have no need of a physician, but those who are sick do. ~
If you are sick, go to a doctor. If you need legal help, go to a lawyer. If you need credit help, go to a Wise Credit Professional. Our credit system is almost as complicated as working on a new car. Do you even change your oil yourself?
If you are confused or overwhelmed by this information, don’t worry. There are several types of credit professionals available to help you. Until now we have only discussed things you can do yourself. Now, as was suggested, we are going to talk about going to a professional and which one provides which services.
Certified Credit Counselors are Not-For-Profit professionals who work for entities that are compensated by creditors based on how much you pay back while in credit counseling. They will usually be able to work out a Debt Management Plan (DMP) with your creditors. They can also help with disputing but usually do not provide disputing services. A reputable credit counselor can help you with budgeting, managing debt and provide free education and material to assist in overcoming financial problems. They are usually members of the National Foundation for Credit Counseling (NFCC.org). These plans are usually best if you are currently behind or about to fall behind on your debt payments.
Debt Management Plans are similar to Chapter 13 bankruptcy. We will discuss DMP’s and bankruptcy in detail in Lesson 8. This lesson is about handling bad credit.
Credit Repair Organizations (aka. credit repair companies or CRO’s) are a legitimate and well-known part of the credit industry. They even have their own law that governs their operations called the Credit Repair Organizations Act. They offer to do most of the work I outlined above for you. Many CRO’s are professionals from related industries who are already familiar with credit repair and can competently offer services. Most legitimate CRO’s are for profit and usually charge about $100 per month for their services. They usually have a separate entity that is Registered and Bonded through the State they operate in. Some States have actual licensing requirements and others have no requirements to start or operate a CRO. In other words, in many states anyone can legally call themselves a CRO with no experience, training or qualifications whatsoever. Be very careful when looking for a CRO. There are several well-known companies that are legitimate but offer questionable results.
These are the names of the highest rated companies:
Lexington Law
Credit Saints
Sky Blue Credit Repair
They all have +A ratings with the Better Business Bureau. Reputation is important but results are what you pay for. In my opinion, CRO’s who work for themselves and are experienced in the industry are the ones who get the best results. Google ratings matter, but professional references matter more. You can probably find a good CRO in the Professional Member Directory.
In my opinion, good CRO’s are similar to Paralegals because they have a working knowledge of all the credit repair laws and regulations governing the credit bureaus and debt collectors. However, they are NOT similar to Paralegals because there is no direct supervision of an attorney.
Consumer Protection Attorneys are the lawyers that can sue a credit bureau for violating the FCRA. They specialize in credit law, disputing, debt negotiation and settlement. These are actual lawyers you need to fight for your rights in court. Many of them will provide disputing services like a CRO for free and hope that the bureau will commit a violation which allows them to sue to recover damages and their legal fees.
CRO’s and Consumer Protection Attorneys can both be found in the Professional Members Directory.
Next: Complete the Lesson 7 Quiz (first make sure you completed the Lesson 6 Quiz)