It’s sometimes hard to look for the positive in an economic climate like the one we’re currently experiencing. It’s all too easy to focus on the negatives and ignore the positives—positives like the low housing prices for those trying to buy, government assistance like the homebuyer’s tax credit, and the willingness of debt collectors to make unheard of deals.

I spent a lot of time in the collection industry; long enough to see many ups and downs, although what I considered the ups and downs while in the industry were probably the exact opposite of what I see as the ups and downs now that I’m out of that industry. Right now would be firmly in the “down” category if I were still in the business, but from the outside looking in I can certainly say this is a very “up” time for the rest of America. Debt collectors are making unprecedented deals right now, scrambling to collect pretty much anything to stay afloat. That translates into real savings and realistic repayment plans for the people who owe those debts. Companies that once would not consider dipping below 50 or 60% on settlements are now considering all offers, even in the 30 or 40% range. Collectors who wanted nothing but payment in full are willing to enter payment plans for the first time ever in many cases.

The dramatic drop in home prices has been the strongest driving force behind this change. Collectors in most cases no longer have the option of demanding that people draw equity out of their homes or refinance to pay off their debts. Equity has evaporated and refinancing is all but impossible for anyone with less than stellar credit, which people in collections obviously don’t have. The other popular collection method was for debt collectors to demand people pay off their collections with other credit cards, but chances are if you have an account in collections you don’t have another card with an available balance because the credit card issuers have already lowered your credit limits to your account balances in anticipation of the enforcement of the Credit Card Reform Act.

With all this in mind you might be chomping at the bit waiting for the next collector to call, ready to make a deal. Okay, I doubt you’d be chomping at the bit to talk to a collector, but hopefully it gives you some hope. Don’t get carried away though, there are still things that you need to keep in mind so you get the best deal possible. Remember the collector calling you has extensive training; they’re professionals, even if they often don’t act like it. It’s best to arm yourself with some knowledge before plunging into negotiations.

First, make sure you don’t give a collector information. Your first phone contact with a collector should be a fact-finding call for you, not for them. They’re going to ask you all kinds of questions about your income, your employment, etc., things that they will use against you. Don’t arm them, arm yourself. Take advantage of the call to get information about who is calling you and why they’re calling you. Some key information you’ll want is the name of the collector, the name of the collection company, the original creditor, and how much they say you owe. Don’t acknowledge anything, just ask your questions. If they’re a legitimate collector following the rules set forth for debt collections in the FDCPA, the Fair Debt Collection Practices Act, they’ll answer these questions, if they’re reticent to provide the information though, be wary. Once you get the information simply tell them you’d like them to send you a validation letter, a letter they’re required to send you by the FDCPA, then end the conversation. Don’t get belligerent, don’t tell them to stop calling, and don’t send them a cease and desist letter at this point. These are actions that will leave the collector feeling cornered with no options left but a lawsuit. Be sure you take notes during the call, writing down the date and time of the call and all the information you ask for as well as their responses.

Once you’ve requested the letter and ended the call you have some time. They’re not supposed to contact you for 5 days, time to receive the letter and respond to it. If they call you during this time period you can let them know that according to the FDCPA they may not contact you until you have received the validation letter. When you receive the letter you have 30 days to respond, disputing anything that you feel may be in error, such as an incorrect balance, or if you feel the debt is legitimately not yours. At this time you should also request written verification of the debt, verification such as a copy of your bill from the original creditor or a signed contract between you and the creditor. Collection activities must cease until they provide you with this information if you request it. Examine whatever documentation, if any, that they send to you. Keep in mind a collection agency often doesn’t have any of this official documentation, they may just have a list of debts and names, which is insufficient proof for them to collect the debt. Be sure you send your dispute or verification request back to the collector via certified mail. It’s simply amazing how many letters sent to collection agencies get lost in the mail… If the collector contacts you before you receive the verification you have requested you once again have the right to remind them that collection activities must cease until they have provided the requested information. Document any contact from them at this point because they are breaking the law, which could give you grounds for a lawsuit if they persist.

Another thing that you’ll want to do when you receive the documentation from the collector is make sure the debt is still within the statute of limitations. You can find a state by state list of the statute of limitations by clicking here. If the debt is beyond the statute of limitation you can let it go. The collector has no recourse at this point but to sue you, but if they do all you have to do is show up at the hearing and point out that the debt is outside the statute of limitations. You must show up at the hearing though, if you ignore it they’ll get the judgment, the statute of limitations will renew, leaving you be no better off. Also keep in mind that you can often reset the statute of limitations by verifying the debt, which is why I said earlier that you should not provide any information to the collector lest you do this unknowingly.
If you’re still within the statute of limitations and the collector is able to verify the debt you have a few options. First off, if the debt is significant you might want to contact a bankruptcy attorney. They’ll be able to tell you if you qualify and the pros and cons. If that’s not an option for you though, you’re going to need to deal with the collector. When they call back you still want to be extremely careful what you say, making sure you don’t give them anything to use against you, but you also need to establish a bargaining position. Let them know as simply as possible why you cannot pay, or cannot pay the full amount. Don’t give them your life story; just give them the bare minimum of facts as though you’re on the witness stand. A simple “I’m out of work” or “I got divorced and lost part of my income” or whatever your situation happens to be is all you need. If you don’t have the ability to pay simply let them know that you will contact them when your situation changes, then end the conversation. This won’t stop the calls, but it’s all you’ll need to do when speaking to them. Repeat that your situation is the same, you do not currently have the ability to pay, and you’ll contact them as soon as you do.

If you do have the ability to pay though, this is the time to open negotiations. You’ll get the best deal if you can afford to pay a lump sum. I would suggest starting at 25 to 30 cents on the dollar, which still allows the collector to turn a profit since they’ve probably paid between 4 and 18 cents on the dollar for the debt. Let them know that due to your loss of income/job/disability/etc. that you cannot afford to pay anything more than that. They’re going to do everything in their power to negotiate you to a higher amount, but stand your ground and only give in if you can truly afford it. Don’t put yourself in a situation where you make an agreement that you cannot keep. A couple words of caution here. If the debt is outside the statute of limitation this will reaffirm the debt and allow the statute of limitation to renew. Also remember that this is the time to negotiate the deletion of any negative reporting they may have done on your credit report. Be absolutely sure you get this from them in writing before you pay them anything, otherwise the chances of it actually happening are pretty much zero. You can’t make them remove the reporting done by the original creditor, only the reporting the collection agency has done, but even that can help your credit score. Another word of caution, the money you save by settling an account can be considered taxable income, so don’t be surprised if you get a 1099 for the $700 you saved on the $1000 debt.

If a lump sum isn’t an option for you, try to work out a payment arrangement. The collector will probably try to tell you that if they do allow a payment arrangement it must be on the full balance, but don’t fall for it. Get them to make an opening offer then counter with less than what you can afford. It’s often said that the person who makes the first offer in a negotiation is the one who ultimately loses, so start the negotiations off on the right foot. If you can get them to agree to what you can truly afford as well as reducing the balance by at least 40%, you’ve done well, but if not you might want to just let them know that they’re asking for more than you can afford and let them know you’ll contact them when your situation changes, then end the call. Don’t give them information as I stated before, you don’t want to give them any ammunition. Once again, this won’t stop the collection calls, but if you stick to your guns chances are very good that they’ll eventually offer better terms. Also, as I said before, get any agreement in writing before you pay them. The agreement must state what you’ve agreed to pay, that the amount agreed upon will be considered payment in full for the debt, that the remainder cannot be sold to another collector, and that the negative reporting will be removed from your credit report if you were able to negotiate that.

This entire process will probably take at least a month, so keep your eyes and ears open for violations of the FDCPA. The debt collection industry is highly regulated, so if you are being harassed, or threatened, if you’re being denied basic or false information about the company calling you, if they’re misrepresenting themselves as attorneys, police, or other government agents, or if they’re frivolously threatening to sue you when they have no intention of doing so, you might want to contact an attorney. The government takes these suits seriously, and if you have a case you can easily see the debt wiped out and possible be awarded damages as well.

Good luck with your negotiations!

The curtain has parted, albeit slightly, on the mystery of how your credit rating is calculated. Find out what these common credit problems can do to your standing.

By Liz Pulliam Weston

One of the questions I’m asked most often about credit scores is exactly how much certain actions affect people’s scores.

Until now, the best I could do was say, “It depends.” That’s because the company that created the leading credit score, the FICO, has been wary about releasing specifics.

Fortunately, that just changed. At my request and for the first time, the company (also known as FICO) has released details about how specific actions, from maxing out a credit card to filing for bankruptcy, can affect people with different credit scores.

I asked the company to compute the results of those actions for two examples: a person with a 780 score, which is an excellent score on the 300-to-850 FICO scale, and someone with a 680 score. The results:

The results are given in a range because FICO is still a little nervous about revealing too much about its proprietary scoring. But the range is fairly tight, and we can clearly see the disparate impacts of the different actions.

A guide, not a guarantee

Before we go further, I have to make this clear: Your mileage may vary.

People with the same credit score can have very different credit profiles: more or fewer accounts, a different mix of accounts, a longer or shorter credit history, use of more or less of their available credit, etc.

Because of those differences, the same action — maxing out a card, say — can have different effects on people with the same score, depending on the details of their individual credit profiles.

For the sake of this exercise, FICO assumed both people had several active major credit cards as well as a mortgage, a car loan and student loans.

The person with the 780 score:

• Has at least 10 credit accounts in total and a 15-year credit history.
• Uses 15% to 25% of her credit card limits.
• Has no late payments on her credit reports.
• Has no collection accounts or other major negatives.

The person with the 680 score:

• Has six credit accounts and an eight-year credit history.
• Uses 40% to 50% of her credit card limits.
• Was 90 days late on an account two years ago.
• Was 30 days late on another account one year ago.

Here’s what you need to know about each action and the effect it had:

Maxing out a credit card

Using 100% of your limit on any credit card puts you at risk of over-limit fees. It also takes a bite out of your credit score.

Our person with the 680 score might lose 10 to 30 points from this one action, while the 780 scorer could shed 25 to 45 points.

The difference points up an important fact: The higher your score, the more points you tend to lose from “bad” actions. That’s because the scoring formula is sensitive to any sign you’re getting in over your head. Maxing out a credit card is considered one of those signs.

You also should know that it typically doesn’t matter to the formula if you carry a balance or pay off that maxed-out card as soon as you get your statement. What’s usually reported to the credit bureaus is the balance on your last statement. Even if you pay the debt in full before the due date, the maxed-out card will hurt your score.

Skipping a payment

Mailing a payment a few days late normally won’t hurt your score, although you may incur late fees and trigger higher interest rates. The big hurt comes when you miss a payment cycle entirely.

A 30-day-late report would shave 60 to 80 points from our lower-scoring person and 90 to 110 points from our higher scorer. In other words, one lapse of attention could plunge the 680-scorer into subprime credit territory, and our 780-scorer could find credit much harder to get and more expensive.

This is why it’s so important to set up automatic payments to ensure your bills get paid on time, all the time. With credit cards, you can set up automatic payments that take the minimum payment out of your checking account to ward against a late payment. You can always make a second payment that reduces your debt or pays it off entirely. You can sign up for automatic payments on the Web site of your card issuer.

Settling a credit card debt

All the advertisements about “settling your debt for pennies on the dollar” make debt settlement sound like a great solution. But failing to pay what you owe a creditor will take a serious toll on your score.

The 680 scorer would lose 45 to 65 points with this maneuver, while the 780 scorer would shed 105 to 125 points.

Our scenario assumed that our borrowers would miss one payment before settling the debt with their credit card companies. In reality, debt settlement negotiations can drag on much longer, with each missed payment taking another chunk out of your score.

Settling a debt with a collection agency would hurt less, probably much less, because the FICO formula is set up to weigh more heavily what the original creditor says about you than what a collection agency reports. But if our borrowers were settling with a collection agency instead, their scores would be lower to begin with, because they would have collection accounts on their records.

Also, you should know that the amount of debt your creditor “forgives” in a debt settlement solution is typically added to your taxable income. So you may save some money by settling a debt, but you’ll give some of it back to Uncle Sam in higher taxes.

Losing a property to foreclosure

Foreclosure deals a severe blow to your credit score: 85 to 105 points for our person with the 680 score and 140 to 160 points for the one with the 780 score.

Foreclosures have implications for your future ability to get a mortgage as well. Although your score may start to improve as soon as the house is gone, mortgage lenders may not be willing to extend you another home loan until two to four years have elapsed.

In an attempt to protect their credit, many people attempt short sales, selling their houses for less than what’s owed, with the lenders’ permission. Unfortunately, these transactions, even if successful, are often reported as settlements. And a settlement, as you’ve seen, is pretty bad for credit scores. To lenders, a short sale isn’t quite as bad as a foreclosure, though, and it may be easier to get another mortgage once you’ve rebuilt your credit.

Filing for bankruptcy

FICO spokesman Craig Watts once called bankruptcy the nuclear bomb of credit actions. Filing for bankruptcy would shave 130 to 150 points from the 680 score and 220 to 240 points from the 780 score.

This is different from the other black marks, where the higher scorer was still left with better numbers than the lower scorer. In this case, both would wind up near the bottom of the credit barrel. Getting new credit, particularly in the current credit-crunch environment, would be extremely tough.

Sometimes, of course, bankruptcy is the best of bad options. But if you can’t pay your bills, you should at least explore the other possibilities: forbearance, credit counseling or even debt settlement.

Finally, if you have any of these five black marks on your record, remember two things: The impact on your score may differ from what’s shown above, and regardless of how many points you lost, you can rebuild your FICO score over time.

You can start by using a free FICO score estimator, such as this one at Bankrate.com, or MSN Money’s credit score estimator, which similarly models a score on Experian’s 330-to-830 range, to see where you stand.

Or you can sign up for free credit scores from sites such as Quizzle, Credit.com and Credit Karma, which use the actual information on file about you with the credit bureaus. But the scores you get still may not be the ones lenders actually see.

Or you can buy your Equifax or TransUnion FICO score from MyFICO.com. (Experian no longer sells FICO scores to consumers, although it continues to sell the scores to lenders.) With paid scores, you’ll get specific advice about how to improve your numbers. In general, when you’re trying to build a credit score, you should:

• Pay your bills on time, all the time.
• Reduce your credit utilization; below 30% is good, below 10% is better.
• Have a mix of credit on your reports, including installment loans (mortgages, auto loans and personal loans) and revolving accounts (credit cards and lines of credit).
• Refrain from closing accounts.
• Apply for new credit sparingly.

“Debt consolidation.” It has such an alluring ring to it. It creates this fantasy that you can wrap up all your debts into one attractive, low interest package, and everything will be hunky dory with your debt. Sadly, the easy quick fixes are often rather bad for you, financially and credit worthiness-wise.
This glorious idea of an easy fix to being thousands of dollars in debt has been fertile soil (fertile with manure) for an entire industry with fabulous claims of lower monthly payments, low interest rates, and zero hassle.

You know what they say about something being too good to be true though…

So before you jump feet first into debt consolidation, be sure you’re aware of a few things.

• Debt consolidation companies are not nonprofit organizations, they won’t improve your credit, and they won’t do anything you can’t do yourself. Here’s the deal, from an industry insider: you gather all your paperwork and send it to them, they tell you how much to pay them each month, then they’re supposed to negotiate lower payments and interest with your creditors and make the payments for you. The reality is they are notorious for paying your bills late, destroying your credit, they take 10-20% of what you pay them each month for “administrative costs” (it’s not profit, they’re a nonprofit organization, remember), and they once again can’t get better rates than you can by spending some time on the phone with your creditors. Some of the worst of them will even purposely let your debts charge off so they can negotiate a better settlement on your debts once they’re turned over to a collection company, allowing them to take a portion of the money they “save” you. Believe me, with the hit your credit will take by doing that, and the resulting higher interest rates and fees you’ll have on everything after that due to your abysmal credit, you’re not saving anything.
• So what if you’re not going with a debt consolidation company, but are instead getting a debt consolidation loan? Well, that is a much better option, but it’s still not a good option. First of all, chances are good you’ve got some dings on your credit already if you’re looking for a consolidation loan, so the chances of you getting a loan are pretty slim, and if you do get the loan, your interest rate isn’t going to be better than the cards you’re paying off. So you get the convenience of one payment, but no monetary savings, and that’s what this is supposed to be about, saving money, not just convenience. So don’t believe the promises of easy money, it’s just a lure to get you in the door like a wide mouth bass.
• What about flipping your debt from card to card chasing the no interest balance transfers? Well, it’s bad for your credit, the banks will catch on and cancel the cards, it’s illegal, and there is the little thing of our failing economy and the fact that those zero percent interest cards just aren’t available anymore. This solution is so… 2007. Reality caught up to this plan about a year ago.

So what should you do?

• Get a home equity loan. This will have a low interest rate and the interest will be tax deductible. You’ll have the up-front costs of origination fees, insurance, and an appraisal. Warning though, this isn’t as easy as it once was before the mortgage crisis, but if you’re lucky enough to still have equity after the freefall of housing prices, this is an excellent option.
• Negotiate with your creditors on your own. Remember the credit card industry is “losing” tons of money right now because the impending enforcement of the credit card reform act, so they’re probably going to be more willing to bend to keep the paying customers they still have. This gives you leverage. They want you paying, and paying them, not defaulting or taking your business to another bank.
• Refinance your home, cashing out your equity. This is different from a home equity loan and will give you lower monthly payments because you’ll probably get a longer loan term than a standard equity loan. Keep in mind though; this is going to cost you more in the long run because you’re extending the length of your mortgage without lowering the price of the home. If you can get your credit cards debts paid off though, and then apply all or a portion of what you were paying the credit cards companies toward your mortgage, you can minimize or overcome the damage though.
• If you have somehow weathered this without destroying your credit already, a personal loan from a credit union might be an option. You’ll get interest rates in the 10-15% range most likely, but that’s still better than the 24.99-29.99% you’ll be paying on credit cards these days.
• If the situation is truly dire, you might also want to consult with an attorney. It’s sad, but true, that is some situations bankruptcy might be your best option. I strongly advise seeking legal advice before going down this route though.
• Last, but certainly not least, there’s the hardest, yet easiest option. Living within your means. Paying off your debts can be accomplished by putting more money toward them each month. That might mean cutting back on eating out, getting rid of the 300 channels of cable since you probably only watch 3 of them anyway, maybe carpooling to save gas, get a second job, etc. Make a personal budget, find where you can cut back, and put that money toward the bills. This doesn’t require loans or lawyers or anything else because it easy, but living within your means can be so hard. It takes self control and determination, but the rewards are great.