Collection companies are buying up old debts – often called “Zombie Debts” – in huge volumes right now and turning them over to their collection agents.  But before you enter into any sort of agreement to repay that old debt, be aware you just might not legally owe it anymore.

The Federal Trade Commission and the State Regulators have agreements in place called “Statutes of Limitations” that set specific time frames for how long you are legally obligated to repay your old debts.  The confusing part of all this is that different types of debts are treated differently, and each State has set their own rules for time frames.

States have different time frames

So an old credit card debt in Nebraska, for example, will be treated differently than that same debt in the state of Washington.  Making it even more confusing is that if you have moved from one state to another since you opened that account, the creditor gets to choose which State’s law to use.

Still, it is worth checking out the Statutes of Limitations for your State before you repay something you don’t have to.  A real good sign that your old debt is beyond the time limit is the way your collector is handling your account.  Of course they’ll try to get the whole amount out of you first.  And then they’ll start offering you discounted settlement amounts.  But the final step is where they get very aggressive:  “Could you just make a small payment as a show of good faith?  Even $5.00 will do it.”

Why do they want you to make such a small payment so badly? 

Don’t they have better things to do with their time than try to collect $5.00 from you?  The answer is that ANY payment that you make towards these old debts will reset the time limit.

If you make even a $5.00 payment towards an old account – your Statute of Limitations starts over again.  Why?  Because the time limit starts from the date of your last activity on that account.  If you make a small payment, you are acknowledging that the debt is yours and are agreeing to repay it.

When dealing with phone collectors, I have two rules for you to follow:

• Never admit over the phone that the debt is actually yours – even if it is.  Just ask them to send you proof that the account is yours and a summary of what you owe.  Once you get that, you can decide to deal with them or not.  But (and remember that all these phone calls are being recorded) once you admit that account is yours, you are making it that much easier for them to get a court judgment against you.  
• Never pay a collection over the phone.  ALWAYS ask for a settlement letter by mail before you send any money in.  And while they are sending you the settlement letter, make sure the debt is yours and that the Statutes of Limitations haven’t expired.

In my State (Washington), the Statute of Limitations on a credit card debt is a surprisingly low 3 ½  years.  No payment in the past 3 ½ years?  No more legal obligation to repay the debt.

Want to find out more or find out your State’s limits?  Just search “Statutes of Limitations __Your State__” and you’ll find charts a-plenty.

In all likelihood, you have a bad credit report. All the information in your report is statistically collected into a score, and this score was uncomfortably low for the loan officer. What do you do, and what the heck is on your report to warrant such a rejection?

Your Credit Report and the Law

By law, you are allowed to order a copy of your credit report for free, once per year, from each of the three main credit bureaus. These bureaus are in the business of collecting all the financial information about you and sell this information to institutions and people who wish to know your financial history. These people include bankers, insurance companies, potential landlords, potential employers, and anybody else who needs to make sure you are financially reliable. If your credit file is inaccurate, it reflects badly on you. Fortunately, your credit report is not set in stone. By law, you are allowed to dispute any item in your file.

Click to learn how to order your credit reports.

Once You Get Your 3 Credit Reports

You will want to order a copy of all three, since different financial institutions subscribe from different agencies. Each agency collects your credit information a different way. Your information isn’t verified – it’s all collected from creditors, who may not send info to all the credit agencies, but only the one they most often deal with. Thus, all three reports will likely be very different, and are bound to have errors.

Scan through each report, circling each item that is wrong or unfamiliar to you. Information goes back seven to ten years, and inquires on your file (which also negatively affects your score) is kept for two years. Note that if the information is old, ask the particular agency’s report to remove it. Take note of any accounts you may have opened, those you have closed, bankruptcies, unpaid or late bills (did you, in fact, pay them on time?), and any other financial information.

You will very likely find information you can dispute. Once you do, the next step is to begin the dispute process.

Disputing Your Credit Report – Do it Yourself Or Hire a Credit Repair Service

You can easily do this yourself, however, there are reputable credit repair services who have attorneys to make your case on your behalf. If you decide to do it yourself, it will take some work, letter-writing skills, and a trip to the post office.

Document each item you think is in error, and be prepared to dispute it with backing documents. If you do not have the necessary documents, you can still dispute the item. The credit bureau must then prove the item with their own supporting documentation, and if they do not have it – which they won’t, if it is a genuine error – then they must by law remove it.

If you have a negative item on your report that is accurate, such as a late payment or a loan default, nothing but time will repair your report. Contrary to some “too good to be true” advertisements from credit repair services promising to erase your bad credit, “GUARANTEED!”, there is no way to remove accurate, negative information in a credit report. Such strategies to erase bad credit are ill-advised, may be illegal, and could even be an outright scam to get your hard-earned money. A strong financial plan, debt reduction strategy and paying your bills on time is the best way to improve your score.

Once you have documented all the information on your reports that you believe are either inaccurate or just plain wrong, you can either write a letter to the appropriate credit agency who sent you the report, or order a dispute form through them.

Once you order your reports from the credit bureaus, you scan and note any items that you wish to dispute. These can either be inaccurate, misleading, untimely or completely erroneous items that contribute to a bad credit rating. Legally, you can dispute any item, as it is up to the credit agency to prove the transaction. In practice, this is bad advice and is rife with abuse. Accurate but bad credit can only be fixed with time and good financial practices that will eventually improve your score. Examples of items to dispute include loans you know you paid on time but are reported as being late, and transactions or creditor queries you did not authorize.

A credit repair service can then dispute these items on your behalf. Legitimate companies will have attorneys and legal professionals on staff who have extensive knowledge of credit laws and practise time-proven strategies to dispute your items.

Unfortunately, the credit repair industry is full of unscrupulous companies who often give you bad and even illegal advice. Beware of scams promising to legally fix any and all of your bad credit, guaranteed. If it seems to good to be true, it is.

A Checklist to Spot The Professional Credit Report Agencies From the Bad

• Do a search online to find reviews and feedback, and check with the Better Business Bureau where they are located.
• You have a three-day period in which to cancel the service, without penalty.
• No fee should be collected before work has been done.
• Review their business history and number of satisfied clients.
• They should know legal issues, current consumer laws, and apply these laws.
• You have a right to fix your credit yourself. The credit repair company must disclose this information.
• Having a privacy policy is pertinent, as well as confidentiality protection.

A Credit Repair Service Versus a Law Firm

Many companies provide credit repair services – however, they may not have the legal muscle, connections or expertise to adequately represent your interests. A law firm specializing in credit repair should have attorneys and paralegals with experience in dealing with bankruptcies, tax liens, collections, judgements, and other scenarios that contribute to bad credit.

Lexington Law

Lexington Law is one such firm with a dedicated team of attorneys and paralegals who specialize in credit repair. Founded in 1991, they have represented over 400,000 people and removed over 2 million items from their clients’ credit reports, six hundred thousand of them in 2006 alone. You pay a low flat fee per month (starting at $39) for disputing an unlimited number of questionable items on your reports.

The only authorized website where you can order your credit reports for free is at Annual Credit Report (www.annualcreditreport.com). This site is operated by the three major credit agencies and is the central hub where orders are placed. You can also order them by phone through each of the three credit bureaus.

The Major Credit Bureaus

These are the three main credit bureau agencies operating in the United States:

Founded in 1899, Equifax serves customers in the financial services sector, retail, healthcare, telecommunications, insurance and government industries. They have offices in 13 countries. They provide your financial information to potential creditors, and empower consumers to manage and protect their financial health through monitoring services.

• Toll-free: 1-800-685-1111
  

Experian serves more than 40,000 clients in 60 countries, with offices in 12 countries. They maintain credit information on about 300 million consumers and 15 million businesses. Through a variety of partner companies, Experian assists consumers with viewing and monitoring their credit reports, along with offering a variety of financial and debt-servicing services.

• Toll-free: 1-888-397-3742

TransUnion, with partnerships in 30 countries, provides businesses with an accurate and unbiased picture of their financial capabilities. From its founding in 1968, they have been at the forefront of technology, being the first to offer on-line data systems to speed up reporting times to lenders. They were also the first to offer a department dedicated to consumer fraud.

• Toll-free: 1-877-322-8228

Make sure you order straight from the credit bureaus, as they will format the reports to be consumer-friendly. Credit reports are formatted differently based on who asks for the information – for instance, your credit report ordered by your bank will have specific business jargon applicable only to the banking industry.

Possibly my perspective is affected by my advancing years and the fact that the memory was placed in my brain using my elementary-school-size brain, but I swear that those 3 side-by-side teeter totters had to be 45-50 feet in length.  I mean, if the kid on the other side tried to yell a challenge or taunt at you, he was so far away that you’d see his lips move long before the sound ever reached you.  Yup, those were some big teeter totters.

Having one person on each side – gently teetering and tottering back and forth?  Nah!  (Well, sometimes the “girls” would do it that way.  But not us “BOYS!”)  It might start with one kid on each side, but the fun began when others started piling on. 

If a big kid had a little kid pinned to the sky, you’d see 2-3 other kids come to the rescue – rushing to add enough weight to the little kid’s side to send that big kid up to the sky himself.  And if they could do it fast enough, and they lifted their legs up so the end of the board smacked into the ground, they could sometimes make the big kid go flying off the end as the impact vibrated through the fulcrum and slammed full force into his unsuspecting bottom.  Oh the fun of that Oh No look in his eyes and the subsequent flat on his back splat! 

And then you’d move to the next stage where each side of the teeter totter was rushed by “teams” of boys.  Having 10-20 kids on each side (and again, maybe it’s possible the memory might have added a few kid’s bodies over the years) became a contest of wills and strategy.  Pretty soon, you’d have the manly boys standing towards the center of the teeter totter, trying to push each other off to reduce the weight of the opposing side in order to give their own side an advantage.

The winning strategy came down to two ideas:  1)  Increase the weight on your side while 2) Reducing the weight on the other side.  That’s how you won – make your side heavier AND make the other side lighter.  All at the same time.  Both strategies going at the same time.

And that’s how credit scoring works! 

Over the years, I’ve helped hundreds and hundred of folks improve their credit scores so they can qualify for a home loan or get a better interest rate.  There are many tips and tricks I share with them (Check out the many articles here for more ideas), but ALL the strategies are filtered through the Teeter Totter Test.

If the strategy helps reduce the weight on the “Bad Side” of the credit teeter totter, it is a good strategy.  If the strategy helps increase the weight on the “Good Side”, it is a good strategy.  But what is hardest to communicate to these clients is that they must absolutely work on BOTH sides of the teeter totter at the same time!  You cannot just reduce the weight on the bad side and hope the score will go up if you have no weight on the good side.  Teeter totters don’t work that way and neither does credit scoring.

You cannot just reduce the weight on the bad side and hope the score will go up

A potential client with lots of bad credit should start right away building good credit accounts.  Don’t wait until you have all the bad credit taken care of.  Open active good accounts gain momentum and points the longer they have been opened.  Waiting to open them until the bad stuff is gone will delay the credit score improvement.

And if you get enough good credit going – just like suddenly adding several kids to one side of a teeter totter – you can create enough momentum to “bump” some of the bad credit off the other side.  It may not actually go away, but it will be so outweighed by the good stuff that its impact will be diminished to the point it doesn’t really hurt all that bad anymore. 

OKAY, BEFORE YOU CALL ME IN A PANIC – THIS IS NOT TRUE!!!

But are you one of the lucky credit card owners who have received such a notice recently from your credit card company? With so many banks in trouble because of their poor lending practices – many have decided that the best way to generate some extra revenue is to target their credit card borrowers – even their BEST credit card borrowers.

Forget the fact that you’ve been a good client for YEARS and never been late. Forget the fact that they promised you that low interest rate on that balance transfer “for life”. Forget that your credit score is 800 and you’ve never missed a payment in your life! They have decided that YOU are their solution to all the other stupid lending choices they’ve made.

So, you’ll get the letter that says “We’re changing your terms – tripling your interest rate (or more) and increasing your minimum payment calculation too!” If you don’t accept these changes, your account is immediately closed. Faced with this choice, many of you decided to pay the higher interest rate rather than closing your account – because closing your account would hurt your credit score. Ouch! Rock / Hard Place!

Is there hope in sight?

Maybe. If you follow the financial markets at all, you’ve no doubt noticed that many banking stocks have stabilized and are starting to recover. The news coming out lately suggests that the stimulus money pouring in to these financial institutions is having a positive affect on bank balance sheets. Money is starting to flow through credit markets again.

But if you did get hit with those increased credit card rates, please realize that your credit card company is NOT going to send you one of them letters saying, “Whew! Crisis is over! We’re lowering your rate again!” If you accepted the higher rate – they are happy to let you keep it.

Did you Opt-Out?

Over the past few years, fears of identity theft have prompted many of you to use www.OptOutPreScreen.com to eliminate those pre-approved credit card offers from filling your mailbox. IF you’ve done this, and IF you just got whammied by your credit card company, may I suggest that you remove your name from the Opt-Out list?

Credit card business is VERY profitable to banks – so it won’t be long, as the bank balance sheets improve, before they start mass-mailing low-interest balance transfer offers again. If your name is on the Opt-Out list, you won’t be getting these offers – essentially Opting Out of Better Options.

What do you do Now?

If you did put your name on the Opt Out list at some point, it is very easy to “opt out” of the opt out list again.  On the www.OptOutPreScreen.com website, it is simple to “Opt Out” or “Opt In”.  Enter your info, and couple mouse clicks, and you’re back on the marketing lists again.  Soon, your lonely mailbox will start filling with offers again. 

No one likes junk mail, but when good credit card offers start coming out again, you’ll be glad you took this simple step.

Time For Plain English

Okay, here you go: In simple language, your credit score is based on four things:

1) How long have you had credit? (Depth of Credit factor)

2) How well have you managed your credit in the past? (Risk factor)

3) How well do you pay your current bills and accounts? (Current Habits factor)

And the one that most people don’t understand:

4) How likely are you going to be able to manage your credit in the future? (Safety Net factor)

Have You Had Past Problems With Credit?

Many people, especially those that have had credit difficulties in the past, try to avoid using credit – thinking that this will help their credit rating. Or they believe that they should concentrate on paying off old debts before attempting to get any new credit established. These approaches are wrong, because approx. two-thirds of your credit score is based on how well you manage your current accounts.

Some of the hardest resistance I ever receive from my mortgage applicants who have past credit challenges is when I advise them to open some new credit accounts. It just doesn’t seem like the right approach to them: “If I already have a bunch of bad credit accounts, how could it possibly benefit me to open more credit accounts?” The answer lies in #3 – Current Habits, and #4 – Safety Net.

More specifically, if you have unpaid bad accounts on your credit report, you are a “bad creditor”. If you work hard to pay off these bad accounts, they don’t become good accounts. They only become paid off bad accounts. And if all you have on your credit report is paid off bad accounts, you’re still a bad creditor and you’ll still have a lousy credit score.

You MUST Open Up Some Good Accounts

So if you want to improve your credit score, you MUST open up some good credit accounts and keep them good. Make the payments on time and keep the outstanding balances under 30% of the credit limit (If you have a $1,000 limit, NEVER charge more than $300 on the card and ALWAYS pay the bill in full each month). Two-thirds or your credit score is bases on how well you pay your current bills and your balances to limits ratio.

Can You Measure The Depth Of Something That Doesn’t Exist?

Then, once you get these accounts open, your “depth of credit” scoring factor will get you even more points the longer you have these accounts open. But “depth of credit” cannot help you until you actually get some good accounts open. You can’t measure the depth of something that doesn’t exist.

You can’t sit on the sideline and hope your credit score will improve by itself. You must actively pursue good credit. Yes, you want to take care of your past bad credit in order to reach the highest credit score levels, but your score won’t move up at all unless you add good credit accounts to your report.

Now, before you go out and start applying for all kinds of new credit accounts, let’s discuss the proper approach and get some perspective here . . .

Before you direct your anger at the wrong place, you need to understand that the credit reporting agencies rarely make errors. The report you have in your hand is from a credit reporting agency. They don’t make up stuff and put it on your credit report – they just report what is reported to them. If there is an error on your report, it didn’t come from the reporting agency.

But sadly, credit reports are often full of reporting errors! And the fact is that many of these reporting “errors” are done deliberately! That’s right – these “errors” are often put there ON PURPOSE! They’re rarely the result of the credit reporting agency making a “mistake” and “accidentally” reporting incorrect information on your report.

Why would someone purposely report incorrect information to the credit bureaus? There are a number of reasons why, and it often surprises people to learn that any creditor who is registered with the credit bureaus can report any information about you that they want. And as soon as they do, the credit reporting agencies will add this information to your report without question.

Any Creditor Can Report Anything They Want!

So why would a creditor report incorrect information about you to the credit bureaus? Well, in a word, MONEY! It’s profitable to report incorrect information, and where there is profit, there is somebody seeking it.

Common Examples of Deliberate Misreporting:

Your bankruptcy becomes final and your creditor is notified by your attorney that you have been released from your obligation to them. After awhile, your creditor “somehow forgets” about this and reports your old account as past due again. “Oops!”

• Your bankruptcy attorney gets busy and “forgets” to notify your creditors, and all that bad reporting stays on your report. “Oops!”
• During your divorce, certain accounts are assigned by the judge to be the sole responsibility of your ex-spouse. But when the creditor can’t collect from your “ex” they “accidentally” report this bad account to the bureaus under your name. “Oops!”
• You have a common name “Joe Smith” and there is a “Joe Smith” in your State who is bouncing checks. The collection agency can’t locate the check-bouncing “Joe Smith”, so they “accidentally” report every “Joe Smith” in the State as the check bouncer. “Oops!”
• You have a past due account with a creditor. After some time, you finally manage to pay them back what you owe them, and they agree to report your payment to the credit bureaus. But after you leave, this creditor figures that since it took you so long to pay up, that they don’t need to be in a hurry to report the new info to the bureaus. “Oops!”

Granted, some of these “mistakes” really are just careless errors on the creditors’ part. But many of these “mistakes” are deliberate attempts to hurt your chances of ever borrowing money again, or worse yet, are blatant attempts to collect from you again!

BUT THAT’S NOT FAIR! DOESN’T THE LAW PROTECT ME?

Yes, the law does protect you. If these creditors are caught doing these things against you deliberately, they could be fined and punished by the government. But this rarely happens, because you – the consumer – would have to push the issue (costs money for lawyers and to file complaints) and then you’d have to “prove” that they did this to you on purpose. Good luck “proving” that. A good, convincing “Oops!” and an apology, and the creditor is off the hook, and you’re out all those attorney fees.

The government sometimes goes after these predator-creditors themselves, but they usually only take action against overtly blatant consumer fraud, involving large dollar amounts, and they rarely take on those little “pukey” creditors who do an occasional “Oops!” with relatively small dollar amounts involved.

So, it’s really going to be up to you to proactively take charge of your credit report and get things corrected yourself. There’s lots of articles on this website to help you with your disputes.

Keep It In Your File Forever!

One thing to keep in mind whenever you’re dealing with credit reporting. Whenever you get an agreement with a creditor – maybe you’re settling an account, paying off an old debt, having someone remove an error for you – make sure you get the agreement in writing from the creditor, and KEEP THAT WRITTEN AGREEMENT IN YOUR PERMANENT FILE FOREVER! The chance of that “oops” showing up again are very high, especially if the “oops” was done by that creditor on purpose in the first place.

The best place to start when trying to add a new credit account is your bank. Go in and talk to a new accounts manager. Yes, physically walk in to the bank and talk face-to-face with a person. If you have a copy of your credit report already, take that with you. Explain that you are trying to get your credit back on track and you would like some help.

They’ll Try to Push You Off

Ask if they will let you open a new credit card account with a small credit limit. Show them your credit report (so you won’t get the “You’ll need to fill out an application and wait a week to find out” run-around). They’ll try to push you off and not give you a decision, but try to get an answer on the spot. Not an iron-clad guarantee, just an “opinion – based on what you see” answer.

To improve your chances, pull out the bribe. No, I’m not talking about small bills in an unmarked envelope. Your “bribe” is your paystub. “If” the bank is willing to give you a new credit card, you would be willing to set up a direct deposit checking account with your paystub.

Do NOT Under-Estimate The Value Of Your Paystub!

Banks need deposits right now. In this economy, banks are failing because they are running out of money. Even if you only make a few thousand a month, that is a huge amount of money to them for a couple reasons.

• Reserve Requirements – Banks have to keep a certain amount of assets on hand at all times. They can count a certain percentage of their real estate holdings as part of their reserve requirements, but with the value of these holding eroding lately, they are scrambling to keep enough assets on hand. Your measly little paycheck just became far more valuable to them.
• Leverage – Banks are allowed to lend out more money than they actually have, based on their liquid asset base (they acquire extra money through the FED based on how much cash they have on hand). Your little $2,000 deposit could mean the bank can lend out an additional $10,000 or more – earning interest on all that extra loan volume. The bigger your paycheck, the more they can lend, the more profit they earn.

Offering to have your paycheck automatically deposited into your checking account every payday is huge to them – especially in this uncertain economy. Letting you have a little $300 limit credit card in exchange is something they really can afford to do.

The “Threat”

The “threat” in our above article title is the idea that if that bank won’t help you, you’ll have to go find another bank who will. You may have had an account at that bank for years, and the thought of losing you – even if you’re a lousy customer – is not something they want to think about. Don’t immediately close your account. Don’t get nasty. Don’t call the poor new accounts manager dirty names. Be nice. But let him/her know that you are serious about wanting to get your credit back on track and how disappointed you are that they won’t help you.

Can You Suggest Someplace That WILL Help Me?

Then ask for suggestions on where you should go try next. Which bank or credit union would they recommend who would value your direct deposit business in exchange for a little credit card? They might back-peddle on the spot and “see what they can do”. But if they can’t or won’t help you, go find some place that will.

This Bribe & Threat routine really does work. And when you do get your new account, don’t make them sorry they gave it to you. Use it wisely and pay off your bill in full each month. After a few months, you’ll be able to use this good account to help you get more good accounts.

So, your credit score reflects an estimate of how well you’ll be able to manage your credit in the future. Your past credit usage and mistakes factor into this score of course, but most people don’t realize that approx. two-thirds of your credit score is based on your current situation.

Your “current situation” means:

1. Are you paying your current bills on time?
2. Do you have a good “safety net”?

What Is A Safety Net?

So what is a credit “safety net” and why can’t you find this term mentioned anywhere else? If a “safety net” is so important, why hasn’t any other “credit improvement” website or article ever mentioned it to you before?

The reason is because “safety net” is my own term that I like to use to describe what a significant portion of the credit bureau score is based on. To me, it breaks down some difficult concepts into an understandable idea. You see, when you’re trying to figure out how to raise your credit score and people start talking about “Debt Ratios”, “High Credit Limits vs. Available Balances exceeding 30%”, or “Installment Trade Lines vs. Revolving Trade Lines”, it can get a bit confusing. I like simple terms and concepts, and thinking about these concepts in terms of a “safety net” makes it simple and easy to understand.

Just what is a “safety net”? Usually, you associate a safety net with a circus acrobat or tight-rope walker. The safety net is strung out under them in case something unexpected happens. If everything in their routine goes according to plan, the acrobat will never have to use the safety net. It’s only there – JUST IN CASE!

Your Credit Score Reflects Your Safety Net

It’s the same thing with your credit. If you have available credit that you can fall back on JUST IN CASE, then if something unexpected happens you will be in much better position to handle it. And your credit bureau score will reflect whether or not you have such a credit safety net. Here’s an example:

You have a credit card with a $1,000 high credit limit that you use wisely and sparingly which you faithfully pay off the balance in full every month on. One day, your dog Fluffy jumps off your apartment balcony and breaks two legs. You rush poor Fluffy to the vet who can fix up ol’ Fluffy in a hurry for only $600. Of course, you want to take care of Fluffy, but $600 is more than you have in your rainy-day fund.

Poor Ol’ Fluffy! But you have a safety net in the form of a credit limit you can use.

Without having that credit card spending option available, your only choice is to write the vet a check using the money you were going to pay your other monthly bills with, which means you won’t be able to make those payments on time – or at all that month. But because you have this available credit to fall back on, you can take care of Fluffy AND keep paying your other bills on time. That’s the kind of thing we’re talking about.