Ask Liz Weston

Get smart with your money

Credit Scores

How to fight a medical collection

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Dear Liz: My credit score just dropped more than 100 points within 45 days. The only thing I can think of that might have caused it is a $46 medical bill that was paid by my flexible spending account. I have a confirmation that the bill was paid, but for some reason the bill went to a collection agency. How do I get my credit score back to 828? I just recently moved and need a good credit rating for numerous reasons, especially purchasing a home and a new car. I was just turned down for a credit card from the bank that holds my mortgage. I tried dealing with the original medical office that received my payment, but they said I have to talk to the collection agency.

Answer: Check first to see if the collection account is actually on your credit reports. Go to http://www.annualcreditreport.com, the only site that offers you free, federally mandated annual access to your credit files at the three major credit bureaus. Other sites may advertise “free” credit reports, but they often come with strings attached such as requirements that you sign up for credit monitoring. Sites that offer free scores typically aren’t providing the FICO scores that most lenders use.

If the collection account isn’t on your reports, something else may have caused the score plunge. Consider buying at least one of your FICO scores from MyFico.com, which will give you an explanation of why your score isn’t higher.

If you find the collection account on your records, however, you need to go back to the medical billing office and insist that someone fix this, said Gerri Detweiler, a credit expert for Credit.com.

“The bill did not magically turn up in collections,” Detweiler said. “Someone made a mistake and since it is their office that was the source of the mistake, they need to fix it.”

Detweiler recommends sending a certified letter explaining that the office has damaged your credit reports and that if someone doesn’t fix the mistake immediately, you will be talking to an attorney about a credit damage lawsuit.

“If the medical office placed it for collections, they can pull it back from collections,” Detweiler said. “It sounds like they are being lazy by refusing to help.”

If the office balks for any reason, you can follow up with an attorney (you can get referrals from the National Assn. of Consumer Advocates at http://www.naca.net). You also can send a certified letter to the collection agency explaining the mistake and insisting it be removed from your credit reports.

You should mention in the letter that you’re trying to get a mortgage and a car loan and that if you’re unsuccessful because of this error, you’ll be talking with a consumer law attorney. It would be helpful to include proof of the mistake, Detweiler said. In many cases, the collection agency will simply delete the erroneous information rather than face getting sued.

“They may not want to bother with it since it’s such a small amount and not worth risking a lawsuit over,” Detweiler said.

Now available: My new book!

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Do you have questions about money? Here’s a secret: we all do, and sometimes finding the right answers can be tough. My new book, “There Are No Dumb Questions About Money,” can make it easier for you to figure out your financial world.

I’ve taken your toughest questions about money and answered them in a clear, easy-to-read format. This book can help you manage your spending, improve your credit and find the best way to pay off debt. It can help you make the right choices when you’re investing, paying for your children’s education and prioritizing your financial goals. I’ve also tackled the difficult, emotional side of money: how to get on the same page with your partner, cope with spendthrift children (or parents!) and talk about end-of-life issues that can be so difficult to discuss. (And if you think your family is dysfunctional about money, read Chapter 5…you’ll either find answers to your problems, or be grateful that your situation isn’t as bad as some of the ones described there!)

Interested? You can buy this ebook on iTunes or on Amazon.

Cash-only lifestyle can complicate getting credit

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Dear Liz: My brother is 63, living on Social Security only and needs to obtain a credit card. He is old school and pays cash for virtually everything, but realizes he needs a credit card for some basics (renting a car, for example). If he has only $17,000 income a year, would that be enough to qualify him for a basic credit card from any provider? If not, do you have any suggestions for emergencies where a credit card would normally be required?

Answer: Some people use debit cards or prepaid cards in situations where credit cards are typically accepted. But gas stations, hotels and some other merchants can put a “block” or hold on an account for more than the amount being charged. That can limit the user’s access to the rest of the money in their checking account or on their prepaid card for several hours or even days. Also, debit and prepaid cards have fewer consumer protections than credit cards.

The biggest problem your brother faces in getting a regular credit card is his habit of paying with cash. He may not have enough of a credit history to generate a credit score, and most card issuers rely heavily on scores in evaluating applications. He should consider visiting MyFico.com and see if he can buy one of his FICO scores for $20. If he doesn’t have FICOs, he may want to consider a secured credit card.

A secured card gives him a credit line equal to a deposit he makes at the issuing bank. NerdWallet, an online financial site that evaluates credit cards, recommends the U.S. Bank Secured Visa Card, which has a low $35 annual fee and security deposits ranging from $300 to a respectable $5,000. Another option is the Capital One Secured Card, which has a lower annual fee of $25 but a credit limit of just $200.

Using a secured card lightly but regularly, and paying off the balance in full every month, can help your brother build credit scores that eventually will be high enough to qualify for a regular card.

Why high credit scores take longer to heal

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Dear Liz: I am confused about your recent article about a person who did a short sale and questioned its effect on her credit. You said that if she started with a score of 680, it would take about three years for her FICO numbers to return to normal. You then said, “If your scores were high, say 780, it would take about seven years to restore them to their old peaks.” This doesn’t make sense to me. Why would it take longer to recover if you started with better credit?

Answer: Think of credit scores as a mountain that gets steeper the higher you climb. Not only does it take longer to achieve the lofty peaks, but if you tumble down the mountain, it will take you longer to return to those peaks than to achieve some intermediate stage.

The FICO formula is designed to reflect your likelihood of default. If you’ve recently missed a payment, had a bill go to collections or had a foreclosure or short sale, the formula assumes you’re much more likely to default on another bill than someone who doesn’t have those black marks on his or her record, and your scores fall to reflect that higher risk of default. As time passes and you handle credit responsibly, your scores will begin to slowly rise, but it will take more time to regain your peak scores if they were high.

Something else to understand is that the penalty for most negative credit events is greater for people with high scores than those with lower scores. Missing a single payment can knock up to 110 points off a 780 score but might deduct just 60 points from a 680 score. That’s because a higher risk of default is already “baked in” to the lower score. The higher score presumes you’re less likely to default. If you do miss a payment, the formula is set up to punish you more. In most cases, though, you won’t “fall down the mountain” as far as someone who started with a lower score. After the missed payment, the 780 score could be 670, while the 680 score could be 620.

Will her bad credit prevent him from getting a mortgage?

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Dear Liz: Is it possible for me to buy a home without having my wife on the mortgage? She lost her business because of the recession. I do not want to deal with her creditors.

 Answer: You can apply for a mortgage based solely on your own income, credit scores and debt-to-income ratio, if those are sufficient to buy the house you want. Your wife’s income and credit does not have to be considered.

If you can’t swing the purchase without her income, though, you’ll both need to spend some time improving her credit scores. That might include adding her as an authorized user to your credit cards. Another option is to negotiate settlements with her creditors in return for their deleting the collection accounts from her credit reports. You’d want to be cautious in these negotiations, especially if the statute of limitations on the debts hasn’t expired and your wife could be sued. Consider visiting DebtCollectionAnswers.com for help in negotiating with creditors.

Short sales, foreclosures have similar effect on credit scores

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Dear Liz: I went through a divorce in the last year after being separated for two years. During our separation, we closed credit cards with high balances to make sure neither party would spend more on credit. We also had to short sell our home. So, as a single woman in her mid-30s, I have credit that’s somewhat shot for now. How many months should I expect the short sale to affect my credit scores? And was closing the credit card accounts good or bad for my credit?

Answer: Closing credit accounts can’t help your credit scores and may hurt them. In a divorce, however, it’s usually wise to close all joint accounts. Otherwise, your credit rating is in the hands of your ex-spouse, who could trash your scores by paying accounts late or maxing out credit lines.

In any case, the short sale probably had a much greater effect on your credit than the account closures. Short sales typically damage your credit as much as a foreclosure, according to the company that created the leading FICO credit score. Recovery times are measured in years, not months. If your scores weren’t that high to begin with — say 680 in the 300-to-850 FICO scale — it would take about three years for your numbers to return to their old levels. If your scores were high, say 780, it would take about seven years to restore them to their old peaks.

These recovery times assume you handle credit responsibly from now on. That means having and lightly using a credit card or two, making all payments on time and ensuring no account goes to collections.