A failing credit account is absolutely bad news for your fundability in the long run. Just one mistake can cause your account to fall into a continuous state of degradation, accumulating points you could have avoided. Merill Chandler discusses what having a failing credit account means and how you can ultimately avoid it. Don’t let one mistake dictate your fundability forever! Make sure you’re rectifying any errors that can be fixed while you still have time.
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The Life And Times Of A Failing Credit Account
In this episode, I was in training with my team members at CreditSense and these advisors are amazing when it comes to coaching individuals on how to not just become fundable, but then how to leverage that fundability in taking down credit lines, business loans, etc. I pulled out one of the training videos because we brought on a new advisor. I’ve got to tell you, this thing was amazing. I forgot how amazing it was. If it’s true, it’s not bragging. This was a presentation about the degradation of an account, how a tradeline, revolving account or an installment loan and the process it goes through to become negative. What are the ramifications and some of the things that end up on your credit profile as a result of this downgrading of the account from paid-as-agreed to 30, 60, 90, to charge-off, etc.? I decided that I’m going to share it with you. It was a blast.
We’re going to drop right into this training video about how these accounts show up on your profile and what are the rules of engagement? What’s FICO versus reporting? For all of you bootcampers out there, my Funding Hackers, you know that there’s a difference between credit reporting and credit scoring. We go through all that in looking at different accounts. First and foremost, we’re going to talk about credit accounts. Credit accounts are both revolving accounts and installment loans. Everything we’re talking about is about that tradeline experience. What the credit account is, it doesn’t matter if it’s revolving and installment.
Let’s take a look at the big picture here. In an account life cycle, there is an internal and an external to the creditor. In the internal experience, when an account is with or resides with the creditor, with the lender, then these are the different statuses. These are the different conditions that the account can be in. We’re going to go through each one of these in detail. For all of you with good credit, you know as well as I do, current or paid-as-agreed, never late, that’s our objective. That’s what we want. For some of us where we had a late pay in the past, it will say current was late. That is a negative indicator that shows that wallet is current. Now, it has had a derogatory or negative indicator in the past.
There are currently late 30, 60, 90, 120, 150 and 180 days. That’s up to six months. We’ll explore some of those and why they’re different at different times. There’s an in-house collection status where you are in collections but it’s not outside. Finally, the worst-case scenario for an account status inside of the lender, inside of the creditor is the charge-off. After the charge-off, it can go to third-party collections. If that collection company refers it to an in-house or outhouse attorney, then it can end up as a judgment or a public record. Current paid-as-agreed is the most important designation. It’s the most high-yield point designation. What we need to understand is that FICO measures paid-as-agreed as a scoring function whereas the credit bureau says that it’s current, pays-as-agreed.
As we all know, a positive account can count 50 points for you or only five points for you and still say current, still say paid-as-agreed. The scoring process is different than the credit reporting process. Next is that the current was late and it depends how late it was is a significant contributor to your fundability. As long as we’ve brought it current, think of late, think of derogatory or negative notations as getting a speeding ticket and getting a plea in abeyance. A plea in abeyance says as long as you don’t do it again, this is not going to count against you soon. It will count 30, 60, 90, but after 24 months, it counts less against you. After 48 months, it counts less. Think of being late as a plea in abeyance. As long as you don’t do it again, then the negative drag is going to lessen.
The bad news is if you do get another late, then you get the old late added back on like the plea in abeyance. That’s an important distinction between those. For some of you who were not caught back up, we’re still late and those notations will be 30, 60, 90, 120, 150 or 180. Different creditors go out different lengths of time in reporting you late before it goes to internal collections or before it goes to charge-off, etc. Internal collections can go as soon as 30 days. American Express is notorious for giving out collection calls. If you’re fifteen days late on your payment, not 30 days late and get a bad notation, it’s in collections within fifteen days.
Internal collections can occur 30, 60 or 90 days out. That internal collection, the next level is being charged-off. A charge-off occurs once an account has not received payment never less than 90 days, but it can be as late as 180 days so they may keep it in collections for 4 or 5 months and then finally charge it off if they charge it off at 180 days. Let’s get serious about charge-offs. A number of you have had experiences with this and I’m going to show you what we’re up against. First and foremost, it can’t be charged-off by a creditor and be collected internally. Why? The reason is that if it’s charged-off, the word charge-off means it has been charged-off against the creditor’s taxes. That means they’re writing it off as a loss. You borrowed $5,000 and you didn’t pay your $5,000 back. They lost $5,000 so they write it off. That’s what a charge-off means.
If they’re trying to collect it internally and it’s charged-off, that’s against the law. You cannot try to collect a debt that is in charged-off mode. It can’t be charged-off and collected internally within the creditor. You can have a charge-off and get a 1099 tax form sent to you because if they gave you $5,000 and you received and spent that $5,000 and then didn’t pay that $5,000 back, that’s income for you. They have the right to be able to send you a 1099-MISC tax form for $5,000 of income and you have to claim it on your taxes.In an account life cycle, there is an internal and an external to the creditor. Click To Tweet
It was notorious back in 2008 through 2011, all the banks who were getting their foreclosures, short sales and all that, they were writing it off to be spiteful because they already get the write-off. You don’t have to do a 1099-MISC form to claim the write-off but they would send a write off to the borrower saying, “You owe $280,000 to add to your income on your tax return.” They do have the right to send 1099 form for any money that they did not receive from me. If they gave you $5,000 and you only spent $2,500, they can give you a $2,500 1099 for you to add towards your income on your taxes. The next one is you can’t be charged-off, especially rolling late. This is what I mean and some of you have had this and they’re not necessarily easy to fix but we’ve not been able to fix it.
First of all, a charge-off. Here’s a perfect example of an account that’s been said it’s been charged-off. Across the status, all three of them say charged-off or unpaid balance reported as a loss by credit grantor. Experian has to use way more words of the word charge-off. Up under condition, Equifax and Experian show it as still open because if it’s late, it’s still open. If it’s charged-off, it has to be closed. We have a discrepancy there and then down in the 90 days plus, those are what we call rolling late. That means somewhere in their records, they’re showing it not as charged-off at Experian and Equifax, but TransUnion got it right.
It’s closed at TransUnion. It’s charged-off at bad debt but it’s showing as a rolling late inside of Experian and Equifax. We have to correct this. Notice, one is in July and one is in May. As of now, that is within three months. That means you have a brand new 30 or 90-day late and as we’ll discuss, a serious collection is to find us anything that is 90 days or more. Serious delinquency is 90 days or more. Here, we’ve got repetitive 90-day lates, month after month, that goes July, June, May, April and March. That is a rolling late and it is horribly bad juju. We want to make sure that we correct this so that it looks exactly like TransUnion or your scores will never ever grow because that rolling late continues to give brand new fresh derogatory accounts. The newest one counts against you the most.
Once we go from charge-off, let’s go to what happens next. An account can be sold to an external third-party collection agency. This is external to the original lender. It can be sold to collections at 90, 120, 150, 180 days. Rarely I have ever seen a collection be sold after six months. If it’s not within that 180 days, its dead in some file or on some drive and it’s not part of any of the collection activities that have been sold to external third parties. After collections, the next level of degradation or the next level of failure goes to a public record because a lawsuit is filed attempting to collect this debt. Let’s take a look at these and we’ll cover each one of these in greater detail.
The negative indicator is serious delinquency is anything that is 90 days or more late. You dodge a bullet if it’s only 30 days late or only 60 days late but you only get once. Remember the plea in abeyance. If you have a 30-day late or negative 30 days late is going to age and you’re going to recuperate the points. The problem is if you get another 30-day late, you’re technically 60 days late aggregated. If you do it a third time, this is over any seven-year period, you’re at 90 days late and it’s counting as serious delinquency, 130, 160, 190, they can accumulate three 30 is a 90, 30 and a 60 is a 90. Remember, that’s how FICO scores it. FICO scoring is different than credit reporting. You and I think, “I had a 30-day late once a year for the last three years. There is no big deal.”
FICO scores that’s a 90 will give it the most recent date. It’s like a plea in abeyance. The other negative indicator of this is that a tradeline will remain on your credit report. A credit account, a revolving or installment, will remain on your account seven years plus six months from the date of last delinquency. I watched a video because I’m always looking for people who know more than I do. You should be the same way. I never want to be the smartest person in the room because then there’s nowhere to go. I want to learn as much as possible. I’m googling different people in preparing for this to see what else is out there. I’ve got to tell you, I hate to say it, but I didn’t find anything where they know more yet than I do. That’s sad.
Here’s the problem, all the videos that I watched said that it’s only seven years and it’s from the date of the last activity. It is not true. The statute says that it’s seven years and six months from the date of the last delinquency that led to the charge-off or collection. Let’s look at what that means. Here’s our payment timeline. You were aware of this from your myFICO credit reports. We have delinquency. January 1st of 2013 says, “I was delinquent,” but then we start making payments again. We make another nine payments in a row and we think we’re awesome. Then we have another delinquency, but this delinquency leads ultimately to the charge-off. This client couldn’t do it anymore. It goes to collections, charge-off, etc.
When’s the terminus date? Meaning when is the deletion date that this would fall off if we didn’t get involved? Terminus date is seven years plus six months from the date of last delinquency. If you take this November of 2013 and you add 90 months, you end up in May of 2021. That is when the statute says it must be deleted. The good news is, all three of the credit bureaus are a little more generous. Sometimes they only calculate a full seven years. They don’t include the six months. That seven-year starts from the date of last delinquency. The statute says seven years plus six months from the date of last delinquency that led to the charge-off.If you know the rules of the game, you can play the game to win. Click To Tweet
Let’s look at another function of the negative indicators. Every number that we’re doing in here, I’m doing my little caveat. I’m doing my little disclaimer. Everything is on a scale. FICO, all the credit score measurements, all the metrics, all of the underwriting metrics are on a scale. I’m using estimates based on generalities. Given certain circumstances, the vast majority of you will find that 40% of the negative drawdown that you had as a result of a negative account will pop back after 24 months and 30% more points will be added back for a total of 70% of the lost points will come back after 48 months. That is the FICO credit score recovery period. I have FICO documents on all of these numbers. When we were back there in 2019, these are one of the questions that we asked to be confirmed. We got total confirmation that there was a graduated recovery of the point over time, 24 and 48 months.
Let’s look at what the point loss metrics are. This is powerful because this is all credit accounts, open, closed, everything. The total negative months that you had 30, 60, 90, whatever it is from different accounts. If you went 30 days late on three accounts, that is 90 days. That’s a total of three months. Total negative months divided by the total positive month equal the point loss quotient. That means the more positive months you have, the less negative impact you’re going to have if and when you have a 30-day late or a 60-day late. Let’s say it goes down X, 30 points or 40 points. If you have 1,000 positive months and trust me, many of your clients have 1,000 because it’s the number of accounts times the age.
You have 10 or 15 open accounts and that includes the old mortgages that you had for five years each. That’s 60 months all by itself. Your five mortgages at five years, 60 months is 300 months. Let’s say you have 1,000 positive months, if you have that same 30-day late, it’s not going to hit you as hard because you’ve proven that you can pay all of these positive months for all of these tradelines over time and you happen to have a 30. It doubles at 60 at two negative accounts or negative 30 days. It doubles again at 90 days. If you have this negative drawdown, it’s logarithmic, you’re going to start taking a hit faster and faster.
Let me show you what it means what the point loss schedule looks like. Let’s say an account is counting 100 points towards you. These are estimates. These could be twice these numbers and it could be half these numbers. If you go late 30 days once, you’re going to, let’s say, take a 50 point hit. You go to 60 days late and it gets worse, this is a straight line to horrible. You’re going to lose another ten points. Once you hit a late 90, it goes up because that means you have serious delinquency. By definition of FICO, that goes from late 90 gets charged-off is another twenty points and then it’s sold to collection and the collection agency files that you’re getting another twenty point loss and then it turns into a public record, a judgment. It turns into judgment and you receive another 30 points.
If this happens over the course of six months because 30, 60, 90, 120, 150 and 160, within six months, you’ve lost approximately in this model 150 points. I’m going to tell you a story about a client that when you know the rules of the game, you can win the game. Let’s go back to our original scenario. An account is worth 100 points. He came to me and he said, “Merrill, I was arrested for controlled substances and I am going to jail for a long time. What do I do?” I coached him on using the degradation process. When you go through that entire process, you’re accumulating points. It is an aggregation of points. I told him that if you call up your creditors and say this is what has happened, “Will you please charge this off? You’re not going to be able to collect anything from me. No point in getting a judgment, none of this stuff, can you charge this off?”
Most of the creditors agreed because they’d be wasting time and money. He had a total point loss of twenty points for those accounts. Instead of ending up in the high 500 because he was in the 750, 760s he ended up with a 672 to a 680-credit score with every single account being charged-off. If you know the rules of the game, you can play the game to win because the degradation of his accounts didn’t go through the domino effect of collecting points for every domino that fell. He only got the charge-off points because they went into their computer and clicked the charge-off button. That’s the summary or the in-depth of the life of a tradeline going from a positive to a negative charged-off account.
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