I think we all make mistakes with credit cards at one point or another.  I made mine in college, and paid for those mistakes for years.  The trick is to learn from those mistakes—or better yet, learn from other people’s mistakes and never make them yourself.  Here’s a list of what I think are the 4 biggest mistakes.

1. Taking what the credit card companies give you.

I don’t understand why people just take what the credit card companies offer them.  Interest rate is going up?  Okay.  Your credit limit is being lowered?  That’s fine.  This attitude baffles me.  You, yes YOU, can negotiate with credit card companies.  I know this from experience on both sides of the issue—both from working for Household Bank and later HSBC, and from being a consumer myself.  Call the credit card companies and talk with them about better rates.  The credit card industry is a business, and like any business they want to keep their customers.  It’s cheaper for them to give you a better rate than it is for them to find a new customer to replace you.  Advertizing is expensive.

2. Paying late because you forgot.

This is something we’ve all done at one time or another I think.  You get your statement, you open it, and you see the due date is a couple weeks out, so you set it aside intending to mail the payment Friday after you get paid.  Then Friday comes and goes and that bill you set aside is out of sight, out of mind.  A week later you’re opening up a new bill and you go to set it aside and what do you find?  The bill that you set aside 2 weeks ago that’s now late.  It’s a slippery slope; because once you start paying late you open the door to penalty fees and rate changes.  Find an organizational system that works for you.  One thing that works for me is having a file box with 31 folders in it.  When I get a bill that I am not going to pay immediately I decide when I am going to pay it and put it in the appropriate file folder.  I check the folders each day to make sure there isn’t anything there that I forgot about.  This system works for me, but you might be different.  Either way, find fail safe that will keep you from paying a bill late just because you forgot about it.

3. Not paying your balances in full each month.

Hopefully it’s not too late, but if you’re not already in the situation where you are carrying balances on your cards, don’t!  The temptation can be so great.  You know you have the money to afford something if you save up for it, so you justify putting a large expense on your credit cards promising yourself you’ll pay it off quickly.  But like the slippery slope of paying late, this is a slippery slope coated in Teflon and you’re wearing silk.  Use your cards responsibly, don’t put yourself in a situation where you’re carrying a balance and making minimum payments.  Before you know it you’ll look at the new section on your credit card statement that tells you how long it will take you to pay the card off and you’ll be sick to your stomach.

4.Last but not least, denial.

Just like with alcoholism or gambling problems, or any issue really, you first have to acknowledge that you have a problem.  If you’re deep in credit card debt and unwilling to admit to yourself that you have an issue, you’ll never be able to get out of the pit of debt.  You need to honestly evaluate your credit card situation and figure out what needs to change.  Are you in massive debt because you spend money on credit cards because the cost is less real to you because you’re not physically handing someone cash?  Are you addicted to the convenience of cards?  Are you just living beyond your means because you want to keep up with the Joneses or you just have to have the latest gadget?  Whatever the reason is, you have to first admit you have a problem, identify the underlying cause, and work out a solution.  If this is something you need help with, give us a call here at NCS, we can help.

Myth #1: Checking your credit hurts your credit score.

Depends on what type of report is pulled. If you obtain a copy of your report on your own to review from the credit bureaus you will be doing a “soft inquiry” which does not affect your score. If you have a lender pull your credit than you are doing a “hard inquiry” which may negatively affect your score. One thing that I have seen happen frequently is a process called “shotgunning” your credit to potential lenders when you apply for financing on a car or mortgage—you apply for financing at a car dealership and they “shotgun” it to all the lenders that they work with who all check your credit, thus putting in some cases dozens of “hard inquiries” on your report simultaneously. Protect yourself and make sure you know what a company is going to do with a credit authorization form before you fill it out. My best advice for protecting yourself is to line up your own financing through your credit union before purchasing a big ticket item, that way you know exactly who pulls your credit and why.

Myth #2: The higher your income, the better your credit score.

Higher income can translate to buying power, but that doesn’t mean it translates to financing power. You could make $200k a year and still have terrible credit if you pay your bills late. I’ve seen it a thousand times. It almost seem like credit scores are inversely proportional to income because people in higher income brackets seem to be so caught up in the job of making the money that they don’t have time to keep their personal finances tidy.

Myth #3: Closing a credit card will boost your credit score.

All I can say here is NO. I see so many people who are confused by why their scores went down, rather than up, after they paid off their debts and closed their cards. Simply put, if you close your cards you destroy your “utilization ratio”, the comparison between your credit limits and how much of them you have used.
Consider this scenario. You have 3 credit cards with $1000.00 credit limits. All three have $500 balances. Your utilization ration is 50%. Now say one of the cards raises your rate and you decide to close it. So you transfer that $500 balance to your other two cards and close it. Now instead of having $3000.00 in credit with $1500 in balances, you now have $2000 of credit with $1500 in balances, increasing your utilization ratio from 50% to 70%. You want your utilization ratio as low as possible.

Myth #4: All creditors and lenders use the same credit score.

There are a variety of credit report types that give added weight to different aspects of your credit history. A mortgage enhanced report would allow your payment history on mortgages more strongly impact your credit score, while an auto enhanced report would give more power over your score to you payment history on automobiles. In addition to that complication, there is also the fact that there are three different major credit bureaus with their own scoring models.

If you know that your score with one bureau is higher than your score with another, is may behoove you to find out which report a lender looks at before applying for financing. Many banks only look at one bureau, use that to you advantage by finding the one that looks at the credit report that’s most favorable to you.

Myth #5: If you pay your bills on time you’re credit is fine and you don’t need to monitor it.

Fraud is rampant, and even more importantly creditors make mistakes. Just like you count your change after you pay for something with cash to make sure the cashier got it right, check your credit report regularly to make sure your credits got it right, and to make sure someone isn’t opening credit in your name.

Myth #6: Delinquent debts are removed from your credit report when paid off.

Sadly this is not true at all. Keep in mind a credit report is about your credit history, not just your current situation. That means the report is going to show that you missed a car payment 5 years ago just like it will show that you’re currently a month behind on your credit card payment.

Another myth directly related to this is that the negative items on your credit report come off after 7 years. The truth is, they often remain on credit reports far, far longer than that because bad debts gets moved around and update, and each time that happens the timer on the debt is reset. Should this happen? No, does it happen? Every single day. Unless you catch it and know how to fight it your scores will be negatively impacted far longer than 7 years.

In addition, many people don’t realize that the older a trade line is on your credit report, the less it affects you. So with that in mind, don’t be surprised if you pay off an old debt and your score goes down because you have reset the date of late activity on the account, making that old debt suddenly appear fresh again to scoring models.

Myth #7: Your checking and savings accounts in good standing will help your score.

Depository account information is not reported to credit bureaus… usually. Keep in mind if you have overdrafts that go to collections those can be reported or your credit report, but that’s typically rare.

Myth #8: Paying cash for everything will ensure a good credit score.

Completely untrue. You must have and use credit to have a credit score, and you must have ample credit used properly to have a good score. This is why a college student wanting to buy his first car usually needs mom and dad to cosign.

Myth #9: Library fines, unpaid parking tickets and utility bills don’t affect your credit score.

Any bill that is unpaid can end up with a collection company, so even if the original creditor doesn’t report to the credit bureaus that doesn’t mean the collection agency they pass it to when you fail to pay doesn’t.

Myth #10: Debit cards and pre-paid credit cards can help you build credit.

Your credit report reflects your management of debt, debit cards and pre-paid cards are not considered debt, you’re just drawing from a fund you’ve already set aside to be spent. To build credit you need a good mix of secured and unsecured debt, i.e. credit cards, car loans, mortgage loans, etc.

By the way, if you’re wondering why there’s a red griffon on the page, it’s because this is an article about myths… and griffons are mythological creatures.

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!