Having some experience in the credit card collections and recovery business, I thought it might be time to address the collections business. Most of the impetus for this comes from reading comments on the Tax Collections grabs by the State of Virginia. Apparently the post hit a nerve with people who lived in or were associated with the State of Virginia. Collections agencies are, for the most part, douchebags.

[Overheard conversation in a collections department]
Collector: You owe us $5,450.00. You are delinquent 90 days. We need to see some cash.
Consumer: Yes, but my mother just died, and I have to pay her funeral bill.
Collector: Did your mother have a car?
Consumer: Yes, Why?
Collector: Well then. Sell the car and send the money to us.

Once your account goes into collections there are consequences. Collections becomes a derogatory event or “derog” in the parlance of the industry. Derogs on your file incease your card interest rate; make it difficult to borrow money for houses, cars, and those sundries of life; and will remain there for as long as the file exists — essentially forever or until the sun novas.

It’s even worse now. The card issuers have all pretty much adopted “dynamic risk based pricing”. The classic underwriting process was to pull a set of credit scores based on some criteria, send some mail, repull the scores after you responded to the offer, and then assign a fixed price — interest rate — based on the score. This is the “as low as…” offer. Now however, scores are routinely monitored. Your 11% card rate may be raised to 22% on the basis of a missed payment on another account not even related to your issuing bank — say you missed a payment on your car loan. This just illustrates the importance of your credit history.

A brief diversion here. While scores and your credit file are important, and you should review them periodically, there is no need to sucumb to the fear tactics that marketing groups practice with their catchy pirate and ice tea commercials, identity theft horror stories, and peace of mind come-ons.

When you apply for a loan, the originating loan officer will check your credit score. To do so however, he will need your permission and you will have to sign something. If this occurs, simply say that “I wish to see and review the information which you are using to approve my loan.” If you ask to see the information, they are required by law to show it to you. Same thing if a credit report is pulled when leasing an apartment. Ask to see the report. Same thing for any “instant” credit approvals.

If you aren’t involved in transactions like this, you can go to the FreeCreditReport.com or other like sites and actually get your reports. Just click NO on all the offers they attempt to sign you up for, no matter how enticing they sound. The FACTA law requires that they provide this to you free. (They use the opportunity to scare you into signing up for crap you don’t need.) Note that they ARE NOT required by law to provide your FICO score and for that they make you pay. If you want to see your FICO score, you can get this by reading your file when you apply for a loan — they do provide the scores to merchants and underwriters; pay to see it; or estimate it using an on-line calculator.

The problem with the free credit report nonsense is that they offer no assistance when you really need it, i.e., you have a derog on your file and can’t get rid of it. There are three, really four, credit bureaus (data accumulators) in the United States. Currently these are Experian, Trans-Union, Equifax, and Innovis. I say currently because they get absorbed, changed and renamed periodically. Traditionally, each bureau had a geographic concentration and you could obtain better data from the one in your region. That has largely gone by the wayside.

The important thing to remember is that a credit bureau is an aggregator of information and does not source or generate the information. Issuing banks and other loan underwriters send information on you to these bureaus. Why do they do this? It’s essentially blackmail. If banks don’t report to them, they can’t use their services, i.e., banks and credit issuers can’t do “pulls” to obtain a marketing list. The reporting process occurs fairly automatically. Underwriters generate reporting files on their book, including delinquencies, payments, and other evaluatory data. These files have specific formats for each bureau — for example, Trans-Union uses the TU-4 format, Equifax the Metro-2 format which was standardized by the Consumer Data Industry Association (CDIA). These files are cut to tape and shipped or just secure FTP’d to the bureaus.

So if you have a derog on your file which you believe to be invalid, it doesn’t do much good to bitch to the bureaus. If a bureau manually deletes your derog, the next monthly update will restore it. So you have to go to the source to get the problem fixed. Because of the persistance of data in the bureau files, the government has implemented some procedures to protect citizens. If you believe that your file is in error, you can file a dispute. Disputes appear simply as a note on the derog that indicates that the consumer has disputed the item’s validity. The item still remains on the file. Dispute procedures are available on all the major bureau sites. Disputes are added by running a dispute file against the master file after it has been updated. If the derog is not valid, file disputes with all three bureaus in order to document and support your position as soon as possible.

So let’s say that a merchant believes incorrectly that you owe him money. He will try to collect it himself if at all possible, and if he has the wherewithall to do so — that is to say a dedicated group of collections people. If he can’t, then he will engage a collection agency to either collect on his behalf or sell the account at a steep discount to an agency, which will then attempt to collect. An attorney or agency will generally collect for 50 cents on the dollar. Third party sale of bad paper goes for as little as 10 cents on the dollar. Clearly, if a merchant can collect, then it is to his financial benefit. Here is the catch: as many as 60% of the people that go delinquent and reach charge-off status are not locatable. They have moved and not left a forwarding address and disappeared. These are called “skips”. In a group of accounts, the skips are filtered out and placed in collection agencies almost immediately. It takes a lot of time and energy to resolve these cases and identify a new contact channel with the consumer. If initial attempts to resolve the skips fail, then the paper is usually identified for sale at a discount. (As another aside — it is getting more and more difficult to completely skip with the prevalence of databases and on-line activities. They WILL find you eventually.) The reason I mention this at all is that once the account has been sold, then access to the merchant who originally placed the report is limited. The merchant may have even purged the account completely. Getting to the source is the fastest way to correct bad information on your bureau file.

The way to get started is to utilize a system which was developed collaboratively by the four mentioned credit bureaus called e-OSCAR. This is the Online Solution for Complete and Accurate Reporting. It allows you to pursue corrections to your file and hit all four bureaus simultaneously. Since all reported data has a source identifier, e-OSCAR allows queries to be issued to the data source. In addition, since it is real-time, updates to the bureau files can be made independently of the source reporting cycle.

This simplifies the process, but you still have to have supporting data to make your case. Just wishing the derog will go away seldom works. If you are dealing with a collections agency, remember that they don’t source the data. Your position has to be that the source data was incorrect and the file is invalid — through, of course, no fault of your own. The real threat you want to convey here is that dealing with you is going to consume so much time and energy that it won’t be worth the miniscule amount they might collect. If you are aware of the system and how it works, they are less free to intimidate you. It’s also a good thing to attempt to find out whether they are working the account on behalf of the merchant or whether they have purchased the paper. This fact affects how they will behave in response to your inquiries.

To that end, the Fair Debt Collection Practices Act sets some limitations on collections agencies and what they may or may not do. For those who can’t read Congressionalese, other sites are available to translate. To mention a couple, if you tell them that the account is disputed — remember me mentioning that you should dispute the derog — then they cannot legally continute to attempt to collect. Additionally, they can only collect during reasonable times. If they call you after 9:00 PM local time, then the call is illegal. Ask for and obtain the name of the collector, the supervisor and the name of the agency. (You should also keep all correspondence with a collections agency.) Many collections agencies, in their letters or calls, do not give out telephone numbers or addresses. This makes it difficult to contact them — which is exactly what they want. They want to be the one doing the harrassing.

Ask them for their NCRA subscriber code. This can be backtracked via a bureau to a contact. Find out where they are located. Then contact the state and obtain the contact information from the business license. Much of this is online. The object here is to identify a person, preferrably a company officer or manager with which you can have a conversation. The object of the conversation is to identify contacts at the merchant with which you may continue the conversation. The ultimate objective is to get the merchant who sourced the derog to approve its deletion. (e-OSCAR will email the source requesting approval of the purge.) Once approved, e-OSCAR updates all of the bureaus and you are clear.

You should of course verify that the derog has been cleared and continue to check for several months to insure that all of the source files have been purged. Backup files restored for whatever reason at an agency may have old reporting data and the derog may magically reappear. Vigilence is necessary.

So in recap:

  1. Monitor your credit data
  2. File a dispute with all bureaus on an invalid item immediately
  3. Register with e-OSCAR to work the dispute
  4. Identify the reporting source, obtain the address and contact information
  5. Contact the reporting source and advocate approval for the e-OSCAR purge
  6. Check afterwards to insure that the derog does not reappear

In the above I have tacitly assumed that the derog was in fact, invalid. If the item is valid and the result of a slip of some kind on the part of the reader, you can still use this procedure. Your goal is to negotiate with the collections agency or with the merchant. The best strategy is to identify whether they are collecting on behalf of the merchant, or on paper they have purchased. Knowing the percentages, you know what they paid for the right to collect and what they expect to collect. You can offer some partial payment in consideration of approving the e-OSCAR item purge. Remember to discuss this only with the manager or officer. The collections agents manning the telephones are paid incentives on the amount they collect and have no reason to work with you. You are more likely to get the kind of discussion overheard at the start of this post.